Limits of Mandatory Rules in Contract Law: An example in Agency Law

• Autor: Qi Zhou
• Cargo: Chinese University of Politics (LLB), University of Bournemouth (LLM) University of Manchester (PhD). Associate Professor of Law, University of Leeds (United Kingdom). Distinguish Visiting Fellow in Law and Economics at The Rotterdam Institute of Law and Economics, Erasmus University of Rotterdam (Netherlands), Visiting Professor at Xi An Jiao ...
• Páginas: 5-18

LIMITS OF MANDATORY RULES IN CONTRACT LAW:

AN EXAMPLE IN AGENCY LAW1

Qi Zhou2

Summary: 1. Introduction. 2. Mandatory Termination Fees in Article 17.

3. Compliance Costs and the Principal’s Responses. 4. Effects on Informa-

tion Problems. 5. Regulatory limits of Mandatory Rules.

Abstract: This paper illustrates the regulatory limits of the mandatory rule in con-

tract law by undertaking an economic analysis of Article 17 of the Commercial Agent

(Council Directive) Regulation 1993, which aims to benet the commercial agent by

forcing the principal to make a mandatory end payment to the agent on termination of

the contract. It is suggested that Article 17 cannot benet the commercial agent. Rather,

it makes both the agent and the principal worse off. Based on the analysis, the paper

provides four general implications for understanding the limits of the mandatory rule

in policing abuse of bargaining power. Firstly, the mandatory rule will generate a new

compliance cost for the stronger party, who can pass on it to the weaker party. Secondly,

the mandatory rule cannot benet all of the parties it aims to protect. It inevitably makes

some better off and others worse off. Thirdly, the mandatory rule cannot be used to force

the stronger party to make a direct payment of money to the weaker party. Fourthly,

the mandatory rule may exacerbate the information problem.

1. Introduction

Freedom of Contract is the cornerstone of contract law3. One manifestation of this

principle is the legal control of abuse of bargaining power. Since at least the 20th century,

the phenomenon of unequal bargaining power has been recognised in many types of

transactions such as consumer contracts, employment contracts, and franchise contracts.4

Where the abuse generates a risk of signicant losses to society or a large group of indi-

viduals, strong regulatory interventions, such as competition law, oradministrative law

will be deployed5. These techniques belong to the domain of public law, the enforcement

1 El presente es el documento distribuido por el Prof. Zhou para el Seminario que dictara el 21 de

agosto de 2013 en la Facultad de Derecho de la Universidad de la República en Montevideo, en el marco

del Ciclo Derecho y Actualidad 2013 del Decanato de dicha Facultad en coorganización con la Sociedad de

Análisis Jurídico.

2 Chinese University of Politics (LLB), University of Bournemouth (LLM) University of Manchester

(PhD). Associate Professor of Law, University of Leeds (United Kingdom). Distinguish Visiting Fellow in

Law and Economics at The Rotterdam Institute of Law and Economics, Erasmus University of Rotterdam

(Netherlands), Visiting Professor at Xi An Jiao Tong University, China.

3 P. S. Atiyah, The Rise and Fall of Freedom of Contract (Oxford: Oxford University Press, 1985) Ch. 22.

4 M. J. Trebilcock, The Limits of Freedom of Contract (Boston: Harvard University Press, 1994) Ch. 1.

5 A. Ogus, Regulation: Legal Form and Economic Theory (Oxford: Hart Publishing, 2004) Ch. 3; R.

Baldwin, M. Cave and M. Lodge, Understanding Regulation: Theory, Strategy, and Practice (Oxford: Oxford

University Press, 3rd ed, 2011) Ch. 2; R. Van Den Bergh and P. D. Camesasca, European Competition Law and

Economics, A Comparative Perspective (London: Sweet & Maxwell, 2nd ed, 2006) Ch. 1.