Discrimination in Contractual Performance: Theory, Evidence, and Preliminary Policy Prescriptions

This Article examines the often-overlooked practice of “selective performance” of standard form consumer contracts—where sellers permit employees to exercise discretion by waiving or modifying contractual terms to maintain customer satisfaction. While such flexibility can benefit consumers, it raises serious concerns about discrimination. Through both theoretical analysis and empirical evidence, this Article demonstrates that discretionary performance can disproportionately favor certain consumer groups, particularly along racial and gender lines, leading to biased and inequitable outcomes. Drawing on examples from diverse sectors, including retail, insurance, and mortgage services, the Article highlights how marginalized communities, especially Black consumers, frequently face harsher treatment and greater obstacles in the enforcement of contractual rights. In response, the Article proposes actionable strategies to mitigate bias in the performance of consumer contracts. These strategies include debiasing training, the implementation of more objective decision-making criteria, increased monitoring and accountability, diversifying personnel, and leveraging artificial intelligence to detect and prevent discriminatory patterns. Additionally, the Article explores how regulators can incentivize sellers to adopt these bias-reducing measures through a “safe harbor” framework. By integrating insights from psychology and institutional design, this Article offers a roadmap for promoting fairness and reducing discrimination in the performance of consumer contracts, ultimately advocating for a more equitable marketplace

Racial Discrimination in Retailers\u27 Willingness to Accept Returns: A Field Study

Black Americans have long faced discriminatory treatment while shopping in retail establishments, including, most notably, being subjected to increased surveillance, inconsistent pricing, and inferior customer service. Little attention, however, has been paid to other post-purchase aspects of retail transactions. Specifically, do Black Americans receive the same treatment as white customers when it comes to performing sellers’ formal policies or contracts? While it is understood that salespeople are often given discretion to deviate from standard form contracts, sometimes departing from the literal terms to satisfy consumers, there has been a notable absence of systematic exploration into how salespeople exercise this authority and whether racial disparities manifest in the exercise of such discretion. This Article reports on an original audit study that involved sending testers who were matched on all observable characteristics other than gender and race into downtown Chicago stores to return prepurchased items. All of the audited stores had official policies that required a receipt as a prerequisite to a return, but the testers did not present receipts for the items. The findings revealed stark racial disparities: Black shoppers, both women and men, encountered more frequent denials and were less likely to be offered refunds than their white counterparts, with white women receiving the most favorable treatment. These disparities persisted and became even more pronounced after the testers asked to speak to management. Insights gleaned from novel interviews with store clerks suggest that these discrepancies stem from ingrained biases that associate race with social status and expected behavior. In response, this Article outlines several recommendations that would reform the legal landscape to more robustly combat retail race discrimination in contractual performance. These include broadening the reach of existing legislation to explicitly outlaw racially discriminatory practices in the execution of seller contracts and incentivizing sellers to implement strategies that have been shown to reduce bias in other decision-making environments

Consumer Psychology and the Problem of Fine Print Fraud

This Article investigates consumers\u27 beliefs about contracts that are formed as a result of fraud. Across four studies, we asked lay survey respondents to judge scenarios in which sellers use false representations to induce consumers to buy products or services. In each case, the false representations are directly contradicted by the written terms of the contract, which the consumers sign without reading. Our findings reveal that lay respondents, unlike legally trained respondents, believe that such agreements are consented to and will be enforced as written, despite the seller\u27s material deception. Importantly, fine print discourages consumers from wanting to take legal action, initiate complaints, or damage the deceptive firm\u27s reputation by telling others what happened. We find that the presence of deception during the contract formation process has little effect on consumers\u27 beliefs about whether the contract will be or should be enforced as written. While informing consumers about anti deception consumer protection laws can alter their perceptions of fine-print fraud, we find that such information does not completely counteract the psychological effect of the fine print

Taxing Contractual Complexity

Consumers rarely understand contracts offered by sellers. It does not make sense for consumers to invest in understanding these contracts because they are typically complex, time and attention are limited, and the value at stake is often low. Because consumers don’t understand contracts and information sharing among consumers is costly, sellers can profit by drafting contracts that harm consumers more than they benefit sellers. Sellers who would like to offer efficient contracts face competitive pressures not to do so because consumers who do not understand contracts cannot appreciate the benefits. Ideally, contracts would be simpler and easier to understand, but regulators don’t know the optimal complexity for each contract. Sellers know the value of the contract, but do not internalize the costs of complexity. To the contrary, sellers can benefit from making contracts more complex than necessary to obscure anti-consumer terms. This article proposes a new solution to this famous problem: a tax that sellers would pay to present a contract to consumers, coupled with a subsidy to consumers who comprehend contracts and share information. The tax would be proportionate to the cost consumers would incur if they invested in comprehending the contract. It would be assessed whenever sellers presented a contract, regardless of whether or not consumers signed. We show that this tax and subsidy solution would cause sellers to make their contracts simpler to reduce their own tax burdens. Thus, sellers would internalize the comprehension costs that they can currently impose on consumers. We demonstrate that sellers can be compelled to forego strategic obfuscation if this tax is paired with a subsidy to encourage consumer comprehension and information sharing. This tax and subsidy pairing would penalize inefficient contracts while minimizing the burden on efficient contracts. Inefficient contracts would thereby become financially unsustainable

Toxic Promises

Sellers often make manipulative and dishonest claims about their products and services. Such claims, which are more likely to be present in oral interactions, substantially influence consumers’ choices. We term these claims “toxic promises.” This Article argues that the law currently underestimates, and does not properly respond to, the social harms that toxic promises generate. Insights from behavioral ethics suggest that even ordinary, law-abiding sellers can frequently make such manipulative assertions. At the same time, contracting realities might lead consumers to rely heavily on these toxic promises. When consumers discover that they have been manipulated, it is often too late: precontractual oral representations are either dismissed by courts as puffery, qualified by sellers in the unread fine print, or extremely challenging to prove. Against this background, we call for tighter scrutiny of sellers’ oral promises. We propose a spectrum of ex ante measures that regulators can utilize to monitor firms’ sales personnel training. We also suggest various means to make firms liable for oral misrepresentations made by their employees. Next, we recommend that courts adopt new analytical frameworks to mitigate toxic oral promises and restrict the enforceability of merger and integration clauses that purport to disclaim them. In making these recommendations, we illustrate how a clever mix of ex ante prevention tools and ex post liability measures may yield a more honest and efficient market environment