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Inclusive Contract Law - Poverty in Common and Civil Law (Hamburg/New York 2000) (90 p)

"Inclusive Contracts" open individual contracts to a social dimension which apparent in collective agreements in labour law increasingly appears also in general contract law where ethical principles, unilateral declarations and general clauses are used to frame individual contracts and fill their general values of good faith with social and legally binding contents.

Inclusive Contracts describes a theoretical approach to traditional contract law to explain its embeddedness into the social environment. While traditional contract law under conditions of a globalised service and credit society become more and more socially discriminatory a wider approach could help to prevent the increase of poverty in society created through the formal application of qual treatment to unequal interests and unequal power.

The paper written during a stay at New York University demonstrate in its second part the additional insight and tools an inclusive view of individual contracts could bring especially to a modern credit contract theory and consumer protection.


1. Globalization will approach American and European societies. Mergers and acquisitions create transnational corporations. Internet and free trade as well as an international capital market guarantee a world-wide competition in which the advantages of the most efficient economies become a world-wide currency. National policies narrow down to common issues like a lean state, balanced budgets, bigger currency areas, and emphasis on self-help instead of redistribution through the state, privatization of former public services as well as private risk allocation. Home country control and mutual recognition are the legal mechanisms, which exercise legislative pressure on those national transaction cost which represent the classical welfare state.

The economic success of the USA with such policies cannot hide one big problem that this new policy has not solved but even accentuated: the gap between rich and poor and the rise of poverty in the advanced societies. Continental Europe and Japan are necessarily on the same path.

The three most advanced economic centers of the world should in their own interest collaborate to find an answer to poverty. This answer can neither be a return to an inefficient welfare state or state socialism nor a mere expectation that the market will finally solve all problems of poverty by itself.

2. Inequality stems from the fact that only such labour is deemed to be productive, which meets and is allowed to meet demand on the marketplace. Labour for consumption, family education, self-help and altruism is excluded.

These effects do not necessarily cause structural poverty if they are temporary and evenly distributed to all members of society. Handicapped, single parents, young people without their family’s support or from poor families are unjustly disfavoured. This “poverty by birth” born can be described as status poverty.

Deregulation of markets has created an important new form of poverty: poverty that creates more poverty. Because a person is poor its credit rating, its profit expectation and its risk expectation are worse than others are and irrespective of its true individual risk and future will cause additional cost, lower quality or exclusion. Such procedural poverty increases with the information-, service- and credit-society. Credit and information are on one hand also a magnificent tool to overcome traditional status poverty because you can pay yourself out of it by using future income, future information and long term relations. But this will not abolish but replace it with an even more dangerous form of poverty that deteriorates the conditions of the poor even more.

3. Law has to be concerned with unequal opportunities in society. Nobody should be prevented from gaining wealth only because he or she is poor. Procedural poverty is inadmissible. Contract law shelters those procedures that create poverty out of poverty. It is also the realm of its solution in which common and civil law can collaborate. Both have different strengths and weaknesses: the opportunity driven common law approach and the minimum standard approach in civil law can be summoned up in its effects on the poor in “access to nothing” and “no access to everything”.

4. Civil law and Common Law lack a vision on poverty law in a globalized market economy.
Civil law is about to loose its poverty protection. Its protective law adheres still to a form of status law highly dependent on compensation by the state for those who due to the higher cost are not served adequately by private economy. With the reduction of the welfare state insurmountable obstacles arise and lead to the gradual abolishment of such rights. As modern poverty is procedural it cannot be combated efficiently through status law.

The common law system has developed different procedural answers to poverty which have had limited effects.

• Anti-discrimination law most accentuated in affirmative action and equal opportunity law redistributes poverty at best more evenly. Identifying poverty as black even creates inescapable status poverty, which is a basis for, increased procedural poverty. Coloured people are not threatened by poverty because they are black but because they were poor. The historic roots of this poverty in slavery and discrimination provide no tools to combat poverty today effectively.

• Public interest law does not address poverty as such but only access of poor people to the legal system. Access to justice is a formal democratic right inherent in the idea of the law itself. It is the admission of state enforced private property and freely convened contracts, which requires a non-market access to the legal system. But as long as contract law itself accepts and enforces the effects of procedural poverty access to the legal system cannot solve the problem of procedural poverty alone.

• Community reinvestment law is the most effective private approach in America to combat poverty. It addresses and tries to impede the economic incentives of redlining and exclusion directly. But it fails to aboard the question of minimum standards. It leaves improved communities to the exploitation practices of suppliers of poverty products (predatory lending, prepaid services, secured credit cards etc.). In effect “no access” has sometimes turned into “access to nothing”. Only if community reinvestment influences the standards of individual contract directly it can reach sustainable development in low-income areas.

5. The basic mechanisms, which produce procedural poverty economically, are reflected in the structure of mutual contracts. Its abstraction from time, parties, strategies and social effects allow to define what is equal. Without external influence on the inherent justice of contracts in the frame of an access enhancing system such contracts are infectable by the germ of procedural poverty.

6. The adjustment of individual contracts through general norms and values is not new. In the name of efficiency and commercial security the individual will and consent has been interpreted in the light of customs, habits or the rational observer. Quasi-contracts, implied contracts, contracts out of socially typical behaviour (“sozialtypisches Verhalten”), the clausula rebus sic stantibus, factual contracts or culpa in contrahendo are additional legal constructions, which all create “contracts out of contacts” where society wants to imply them. Contracts of adhesion are treated as unilateral contracts reviewed in the light of good faith. Good morals, good faith, unconscionability, usury and other general clauses further empower the judge to interfere with contract terms. These methods all refer to a value system behind the contract, to guide the decision of the judge and the jury. I call this contract behind the contract “social contract”.

7. Individual contracts are embedded in social contracts. According to the contractarian approach individual contracts and “the social contract” in the sense of Hobbes, Hume, Rousseau and Kant form a unity. But unlike the contractarian efficiency approach social contracts are richer in social information and norms than the individual contract. Law and economics err if they assume that the law in general can be measured against the standards of efficiency inherent in individual contracts. The underlying concept of “economy” is far too small. While the whole (social) economy consists of non-money production, money transfer but non-market production, non-for profit market production and for profit market production this approach narrows economy to the last part and uses its respective notion of efficiency alone. Law embraces all economies of society. Legal economics therefore have to decide first which form and part of the social economy a whole is concerned. Social contracts contain social and collective goals, which are the necessary basis on which individual contracts are so legitimate that the state can enforce them.

8. In line with modern theories about an equal and socially just society like Rawls, Etzioni and Sen the social contract should contain a general obligation to inhibit procedural poverty. This duty comes from the constitutional obligation to let people create individual wealth which become operable only as a right not be to be dragged into poverty because one belongs to a class which is assumed to be poor. In the civil law system this is achieved through the so-called “Drittwirkung der Grundrechte” (third party effect of constitutional rights). The “Sozialstaat” principle in the German Constitution requires minimum standards also in private market relations for all people alike irrespective of their income and wealth as well as the protection of the weak in contract law.

9. Social contracts for each area of market exchange like especially credit, but also services of first necessity, housing and labour or the creation of small businesses have to be developed. They are inclusive social contracts if they balance access to services with the need for minimum standards under reliable mechanisms of enforcement.
Collective agreements are a historical form of such social contracts but neither a necessary model nor even desirable because their organizational background makes them often exclusive in itself.

10.Inclusive contract law therefore have three distinct elements:

(a) Social contracts where access and minimum standards of quality and affordability are balanced in a system which gives as much individual freedom and information for rational choice as possible but also mechanisms of enforcing objective standards of access on well-being as much as necessary. The community reinvestment movement in the USA has produced a number of social agreements that concern access to credit and bank services, which could serve as a model for social contracts in this area.

(b) Individual contracts which include basic values of the social contract, which relate to their different stages of performance.

(c) A link between social contracts and individual contracts which may be construed differently either through the legislator (protective law), or organizational power (collective agreements) or through the power of the judge to interpret contracts in the spirit of the relevant social contract.
11. Inclusive contract law has to be developed with different tools.

Common law procedures in contract law like punitive damages, class action and contingency fees as well as jury trials further a global perspective in contract law. But a closer look shows that these important tools are mostly unavailable where procedural poverty could best be defeated.

Civil law with its social minimum standards will contribute to this development the knowledge of effects of minimum standards on the market as well as the areas where such standards are mostly needed to prevent poverty.
12. Consumer credit law is perhaps the most developed and interesting example. Its outline of principles in the paper can demonstrate who inclusive contract law principles may be used to evaluate existing principles of protective contract law in the light of legal economics and a broader approach to efficiency.

Table of Contents

A. Status versus Contract Society 1
B. Common Law and Contract Law in a Globalized Economy 3
1. Commercial Law 3
2. “Poverty Law” 5
3. Reconciliation of Commercial and Poverty Law? 8

C. Social Justice 9
1. Social Justice and “Sozialstaat” 9
2. Unproductive Production: Injustice in Market Economy 10


A. Law and Economics – Who is in Charge of Poverty? 14
1. Inefficiency: Economic Analysis of Law: 14
2. Efficiency: Legal Analysis of Economics 15
a) The Normative Assumptions on Profit 15
b) Creation of Wealth as a Legal Goal? 17
c) “Pursuit of Happiness” and the Threat of Poverty 18
3. Exclusion: The Economic Analysis of Its Incentives 19

B. Procedural versus Substantive Rights 21
1. The Contractarian Approach: Procedural Justice 21
a) The Authoritarian “Wohlfahrtsstaat” 21
b) The Contractual Welfare State 22
2. Welfare State and Anti-Discrimination: Outdated Concepts 23
a) Social Discrimination and the “Sozialstaat” 23
b) Anti-Discrimination and Poverty: Towards a More Equal Distribution of Poverty? 23

C. Equal Opportunities and Minimum Standards: Towards Inclusive Contract Law 26


A. Status and Procedural Poverty 27
1. From Status to Opportunities in the Market Economy 27
2. Status Poverty: Poverty as Fate 28
3. Procedural Poverty: Poverty as Exclusion 29
4. Merging of Status into Procedural Poverty 31

B. Procedural Poverty in a Credit Society: A New Door Opened 32

C. Requirements for Inclusive Contract Law 37


A. Inclusive Individual Contracts 38
1. The Contents of Inclusive Contracts 38
2. Enforceability in Common Law and Civil Law? 39
3. Compatibility with Freedom of Contract? 42

B. Beyond the Will of the Parties: The Contract behind the Contract 44
1. Objective Interpretation into Individual Contracts 44
a) The “Will of the Party” – The “Rational Man” or the Judge's Horizon? 45
b) Contractual Changes in long-term Relations – When assent? 46
c) “Implied” Contracts: Who Implies? 47
d) Contracts of Adhesion: An Incomplete Social Contract 49
e) Good Faith: Who knows about it? 51
2. The Historic Form in Labour Law – Individual Labour Contract and Collective Agreement (Tarifvertrag) 52

C. “Social Contracts” 54
1. The Idea of Social Contracts (Gesellschaftsvertrag) 54
2. Specific Social Contracts 55
3. Four Dimensions of Social Contracts 56
4. The Formation of Social Contracts – the Common Law Approach 59


A. Choice: "What You See is What You Get" 64
1. Information in Written: "Proof and Warning" 64
2. Disclosure of Credit Costs: "Complete and exhausting" 65
3. The "cooling-off period": "Time for reflection" 67

B. Access/Termination 68
1. The Provision of Credit to the Poor: "A fair Chance" 68
2. Overindebted Debtors - Socialising losses 69
a) Hazardous debt collection - A Debtor has a constitutional rights to personal integrity 69
b) Repossession - Limitations on private means of self-help 69
c) Life-line limitations - The right to a descent life 70
d) Cheques, Bills of Exchange and Promissory Notes - The judge remains in charge 71
e) Consumer bankruptcy - The right to rehabilitation 71

C. Minimum Standards 73
1. Predatory Lending and Price Discrimination: "The double is enough" 73
a) The Problem: segmented markets with price differentiation 73
b) The legal answer: no more than the double of the average 73
2. Debtors in Default - "Encourage Credit Adjustment, Discourage Credit Break" 76
a) Refunding of unearned interest - "Only Time is Money" 77
b) Anatocism - "No Interest on Interest" 77
c) Default interest and cancellation fees - "Recover no more than your true damages" 78
d) Limitations on refinancing - "Do not profit from others misfortune" 79
3. Combined Credit 79
a) Credit card credit 79
b) Linked transactions - The same rights to seller and creditor 81
c) "No Holder-in-due-course" 82
D. Enforcement 82

ID: 39591
Author(s): Udo Reifner
Publication date: 01/01/00

Created: 02/04/07. Last changed: 02/04/07.
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