This Article identifies and examines the principal-agent problem as it arises in the context of contract preparation. The economic agency relationship, as it may be understood to exist for contract drafting, provides a superior framework for understanding and reforming the inability of the non-drafting party (the principal) to control the drafting party (the agent). As an economic agent, the drafting party faces a moral hazard when preparing the contract because of the differing interests of the parties as well as the information and control asymmetries that exists. For example, the use of standard form contracts in consumer transactions is an example of the drafting party being motivated and able to act in the drafting party’s favor without detection or resistance by the non-drafting party. To date, contract law reforms typically have focused on the non-drafting party’s ability to monitor and attempted to alleviate information and control asymmetries, with suboptimal results. Economic theory, however, not only helps explain these failures but also suggests superior reforms. Reforms should be focused on realigning the interests of the two parties instead of remedying the problems that emanate from such misalignment. More specifically, reforms should incentivize drafting parties to devote resources to determining how to make effective disclosure of contract terms and penalize drafting parties when they do not.
Eric A. Zacks,
The Moral Hazard of Contract Drafting,
42 Fla. St. U. L. Rev.