In the text, I dismiss the idea that contracts ought to be viewed with suspicion if the parties had unequal bargaining power, pointing out that even in the extreme case where the seller is a monopoly, it is still in his interest to take account of the interests of the buyer in designing a product or a contract. In this note, I approach the question from a different angle, by sketching a situation in which the argument against enforcing such contracts is arguably correct. I believe the sort of situation I describe is relevant to the intuition in favor of the doctrine, although not necessarily to the real cases to which it is applied. We start with a story:

Unfortunately, you are lost in the desert and dying of thirst. Fortunately, you come across an oasis with an abundant supply of fresh water. Unfortunately, the oasis is owned--by someone who views it, not as an opportunity to save lives, but as a source of income, and is fully capable of defending his ownership.

You ask the owner how much he will charge you for enough water to get out of the desert and back to civilization. He asks to see your wallet. Recognizing the weakness of your bargaining position, you hand it to him. He counts the contents, which come to a total of three hundred and twenty-three dollars and fifty cents, and informs you that, by a curious coincidence, that is precisely the price of the amount of water you require. You pay.

Let us now alter the story a little, by assuming that it occurs under a legal system which takes the principle of freedom of contract seriously--as I have argued, at various points in the book, legal systems shou.d. After examining your wallet, the owner of the oasis asks to see see your check book. After examining the record of receipts, payments, and balances in the back of the check book, he determines that your current balance is two thousand and fifty dollars. Adding that to the amount of cash in your wallet, he informs you that the price of the water is two thousand three hundred and seventy-three dollars and fifty cents.

Finally, we alter the story a little more by assuming a legal system that takes freedom of contract very seriously--more seriously than even I have proposed. After a careful examination of your checkbook, the owner of the oasis concludes that your annual income is about forty thousand dollars. He informs you that the price of the water needed to save your life will be two thousand, three hundred and seventh-three dollars and fifty cents now, plus your signature on a binding contract obliging you to pay him thirty thousand dollars a year for the next forty years.

The outcome of freedom of contract in these stories is not necessarily inefficient--efficiency, after all, deals with the total size of the pie, not how it is sliced. Readers interested in working through the question of whether permitting such contracts results in a net gain or loss, counting gains and benefits to both you and the owner of the oasis, may want to consider the analysis of salvage contracts in this chapter, which deals with the same economic problem in a somewhat different setting--the conclusion is that it might go either way.

But what will strike most readers is that, whether or not the contracts are efficient, permitting them clearly makes the lost traveller worse off. In a world where such contracts--including the contract implied by writing a check--are unenforceable, he gets his water, and his life, at a much lower price than in one where they are enforceable. That corresponds to the usual intuition about contracts formed under conditions of unequal bargaining power--that making them enforceable makes it easier for powerful people to benefit themselves at the expense of less powerful people.

While it is clear that such a situation is logically possible, and plausible, at least to me, that such a situation implicitly underlies the support for the doctrine of considering relative bargaining power in deciding whether to enforce a contract, is much less clear that such situations are of much real world importance.

In the story, the only thing limiting the amount the buyer was willing to pay was how much money he could raise. That was true for two reasons:

1. The good in question--his life--was of such enormous value to him that he was willing to give up anything else that money could buy in order to get it. That is not a situation that most people signing contracts face--not even most poor people. Under most circumstances, what limits how much we are willing to pay is not our ability to borrow against future income but the other uses we have for the money.

2. There was only one seller of the good. If that had not been the case, the amount the buyer was willing to pay to this seller would have been limited by what other sellers were willing to sell it for. While such situations occasionally occur, they are not the norm for most contracts.

Furthermore, in the story, the only constraint on what price the seller would accept was what he thought the buyer could pay, since he had plenty of water. If we change the story by making the seller a second traveller, with an amount of water that would almost certainly get him to safety and might or might suffice for both travelers, the result changes. The amount of money in your wallet may not be enough to make him willing to accept a sizable chance of losing his own life in the process of trying to save yours. Add in your bank account, and he becomes more likely to take the risk--add in a sizable chunk of your future income and he becomes still more likely. In the previous version of the story, freedom of contract may make you poor; in this version, the absence of freedom of contract may make you dead.

More generally, most prices are determined by the producer's cost of production as well as by the good's value to the buyer. So in the case where the refusal of courts to enforce "unequal" contracts reduces the amount the buyer can pay, it may reduce it below the lowest amount the seller will accept--making the buyer worse off, not better off.

For these reasons, I do not think the story I have told provides adequate support for the legal doctrines associated with the idea of unequal bargaining power. But I do think it provides some explanation of why those doctrines exist.