Inequality of bargaining power
Encyclopedia
Inequality of bargaining power is a concept used in social sciences
and humanities
, particularly law
and economics
to denote the situation where freedom of contract
ceases to be real and markets fail
.
The concept denotes the situation where one party to a "bargain", or some kind of contract or agreement, has more and better alternatives than the other party. This results in one party having greater "power" than the other to choose not to take the deal and makes it more likely that this party will gain more favourable terms.
Where bargaining power is persistently unequal, the concept of inequality of bargaining power serves as a justification for the implication of mandatory terms into contracts by law, or the non-enforcement of a contract by the courts.
wrote,
The phrase "inequality of bargaining power" was, however, first used by Beatrice Webb
and Sidney Webb in their treatise Industrial Democracy
. This two volume critique of 19th century labour conditions and advocacy of a comprehensive system of labour law
contained a chapter called, "The Higgling of the Market". They argued that the labour market was dominated by employers, and therefore "monopsonistic". Labour is a perishable service that needs to be sold each day or is lost, while most goods can be stored. Workers generally are more under pressure to sell their labour than an employer is under to buy it. An employer can hold out longer, because typically he will have greater financial reserves. This means that much labour is supplied merely out of necessity, than free choice (shifting the supply curve to the right) and it is a false kind of competitive environment. The Webbs also pointed out that discrimination can decrease job opportunities for women or minorities, and that the legal institutions underpinning the market were skewed in favour of employers. Most importantly, they believed that a large pool of unemployed people was a constant downward drag on the ability of workers to bargain for better conditions.
The Webbs felt that these factors all added up to systemic inequality of bargaining power between workers and employers.
Social sciences
Social science is the field of study concerned with society. "Social science" is commonly used as an umbrella term to refer to a plurality of fields outside of the natural sciences usually exclusive of the administrative or managerial sciences...
and humanities
Humanities
The humanities are academic disciplines that study the human condition, using methods that are primarily analytical, critical, or speculative, as distinguished from the mainly empirical approaches of the natural sciences....
, particularly law
Law
Law is a system of rules and guidelines which are enforced through social institutions to govern behavior, wherever possible. It shapes politics, economics and society in numerous ways and serves as a social mediator of relations between people. Contract law regulates everything from buying a bus...
and economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
to denote the situation where freedom of contract
Freedom of contract
Freedom of contract is the freedom of individuals and corporations to form contracts without government restrictions. This is opposed to government restrictions such as minimum wage, competition law, or price fixing...
ceases to be real and markets fail
Market failure
Market failure is a concept within economic theory wherein the allocation of goods and services by a free market is not efficient. That is, there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off...
.
The concept denotes the situation where one party to a "bargain", or some kind of contract or agreement, has more and better alternatives than the other party. This results in one party having greater "power" than the other to choose not to take the deal and makes it more likely that this party will gain more favourable terms.
Where bargaining power is persistently unequal, the concept of inequality of bargaining power serves as a justification for the implication of mandatory terms into contracts by law, or the non-enforcement of a contract by the courts.
Historical development
The concept of inequality of bargaining power was long recognised, particularly with regard to workers. In the Wealth of Nations Adam SmithAdam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
wrote,
"It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily; and the law, besides, authorizes, or at least does not prohibit their combinations, while it prohibits those of the workmen. We have no acts of parliament against combining to lower the price of work; but many against combining to raise it. In all such disputes the masters can hold out much longer. A landlord, a farmer, a master manufacturer, a merchant, though they did not employ a single workman, could generally live a year or two upon the stocks which they have already acquired. Many workmen could not subsist a week, few could subsist a month, and scarce any a year without employment. In the long run the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate."
The phrase "inequality of bargaining power" was, however, first used by Beatrice Webb
Beatrice Webb
Martha Beatrice Webb, Lady Passfield was an English sociologist, economist, socialist and social reformer. Although her husband became Baron Passfield in 1929, she refused to be known as Lady Passfield...
and Sidney Webb in their treatise Industrial Democracy
Industrial Democracy
Industrial Democracy is a book written by British socialist reformers Sidney Webb and Beatrice Webb, concerning the organisation of trade unions and collective bargaining...
. This two volume critique of 19th century labour conditions and advocacy of a comprehensive system of labour law
Labour law
Labour law is the body of laws, administrative rulings, and precedents which address the legal rights of, and restrictions on, working people and their organizations. As such, it mediates many aspects of the relationship between trade unions, employers and employees...
contained a chapter called, "The Higgling of the Market". They argued that the labour market was dominated by employers, and therefore "monopsonistic". Labour is a perishable service that needs to be sold each day or is lost, while most goods can be stored. Workers generally are more under pressure to sell their labour than an employer is under to buy it. An employer can hold out longer, because typically he will have greater financial reserves. This means that much labour is supplied merely out of necessity, than free choice (shifting the supply curve to the right) and it is a false kind of competitive environment. The Webbs also pointed out that discrimination can decrease job opportunities for women or minorities, and that the legal institutions underpinning the market were skewed in favour of employers. Most importantly, they believed that a large pool of unemployed people was a constant downward drag on the ability of workers to bargain for better conditions.
“When the unemployed are crowding round the factory gates every morning, it is plain to each man that, unless he can induce the foreman to select him rather than another, his chance of subsistence for weeks to come may be irretrievably lost. Under these circumstances bargaining, in the case of the individual isolated workmen, becomes absolutely impossible.”
The Webbs felt that these factors all added up to systemic inequality of bargaining power between workers and employers.
- John Beattie Crozier, The Wheel of Wealth; Being a Reconstruction of the Science and Art of Political Economy on the Lines (1906) Part III, ch 2, ‘On the tendency to inequality’, 377, ‘There must always be an inequality of bargaining power between masters and men in every contract, until that day shall arrive when the sacrifices of each master in a strike or lock out will affect his present comfort and future destiny as seriously, in its way, as it does that of each of his workmen.’
- Max WeberMax WeberKarl Emil Maximilian "Max" Weber was a German sociologist and political economist who profoundly influenced social theory, social research, and the discipline of sociology itself...
, The Theory of Social and Economic Organization (1915, translated 1947) 152, ‘Power is the probability that one actor within a social relationship will be in a position to carry out his own will, despite resistance, regardless of the basis on which this probability rests.’
- JR Commons, JR Andrews, American Bureau of Industrial Research, Principles of Labor Legislation (1916) 28, 30, 245
- JR Commons, History of Labour in the United States (1918) 34
- AC Pigou, The Economics of Welfare (1920)
- MJ TrebilcockMichael TrebilcockMichael J. Trebilcock, LL.B. 1961, LL.M. 1962, called to the Bar of New Zealand in 1964 and the Bar of Ontario in 1975 is a Distinguished University Professor and Professor of Law at the University of Toronto, specializing in law and economics.Professor Trebilcock taught at the University of...
, ‘An Economic Approach to the Doctrine of Unconscionability’ in BJ Reiter and J Swan (eds) Studies in Contract (1980)
"The real measure of market power is not whether a supplier presents his terms on a take-it-or-leave basis but whether the consumer, if he decides to ‘leave it’ has available to him a workably competitive range of alternative sources of supply. Whether this is or is not so simply cannot be derived intuitively from the fact that a particular supplier is offering non-negotiable standard-form terms. It is a matter for independent inquiry. If the market is workably competitive, any supplier offering uncompetitive standard form terms will have to reformulate his total package of price and non-price terms to prevent consumers (at least consumers at the margin, which are the decisive consideration in such a market) from switching their business to other competitors....
Non-economists often overlook the importance of marginal analysis in this context. For example, if only 10 per cent of the buyers of insurance policies or dry-cleaning services studied all terms scrupulously before contracting an were influence in their choice of policy by their evaluation of the so-called fine print clauses, and if no supplier of insurance or dry-cleaning services was able to ‘term discriminate’ between these consumers and other consumers in the market, there would be strong competitive pressures on each supplier to adjust the terms of his contracts so as to avoid losing this potential business....
When one asks why, many consumers probably rely in part on the constraints imposed by other consumers at the margin (ie, they let the market shop for them)."
- H Beale, ‘Inequality of bargaining power’ (1986) 6(1) OJLS 123, 127
"The point is obvious but worth making because it affects the conditions under which relief should be given: whereas advice as to value will normally save the contract with the ‘poor and ignorant person’, the master of the ship drifting onto the rocks would still have been open to exploitation even if he had had the entire House of Lords on board to advise him."
Consumer laws
- F KesslerFriedrich KesslerFriedrich Kessler was an American law professor who taught at Yale Law School , University of Chicago Law School, and University of California, Berkeley School of Law. He was a contract law scholar, but also wrote of trade regulation law...
, ‘Contracts of Adhesion--Some thoughts about Freedom of Contract’ (1943) 43 Columbia Law ReviewColumbia Law ReviewThe Columbia Law Review is a law review edited and published by students at Columbia Law School. In addition to articles, the journal regularly publishes scholarly essays and student notes. It was founded in 1901 by Joseph E. Corrigan and John M. Woolsey, who served as the review's first...
629, 631-2
"In so far as the reduction of costs of production and distribution thus achieved is reflected in reduced prices, society as a whole ultimately benefits from the use of standard contracts… The use of contracts has, however, another aspect which has become increasingly important. Standard contracts are typically used by enterprises with strong bargaining power. The weaker party, in need of the goods or services, is frequently not in a position to shop around for better terms, either because the author of the standard contract has a monopoly (natural or artificial) or because all competitors use the same clauses. His contractual intention is but a subjection more or less voluntary to terms dictated by the stronger party, terms whose consequences are often understood only in a vague way, if at all."
- Lowe v Lombank [1960] 1 WLR 196, Diplock J talking about ignorant consumers getting hire purchase goods not being of equal bargaining power
- Williams v. Walker-Thomas Furniture Co.Williams v. Walker-Thomas Furniture Co.Williams v. Walker-Thomas Furniture Co., 350 F.2d 445 , was a court opinion, written by Judge J. Skelly Wright, that had a definitive discussion of unconscionability as a defense to enforcement of contracts in American contract law. As a staple of first-year law school contract law courses, it has...
, 350 F.2d 445 (CA DC 1965) a loan agreement made so no furniture bought could be paid off unless the whole lot was. - Rugby Joint Water Board v Footit [1973] AC 202, Lord Simon, landlord and tenant
- Schroeder Music Publishing Co Ltd v MacaulaySchroeder Music Publishing Co Ltd v MacaulaySummary: Restraint of trade; exclusive services agreement; whether unreasonableAbstract: In determining the enforceability of a contract in restraint of trade the court will consider the fairness of the bargain having regard to whether the restrictions are both reasonably necessary for the...
[1974] 1 WLR 1308, 1316, per Lord Diplock: “To be in a position to adopt this [‘take it or leave it’] attitude toward a party desirous of entering into a contract to obtain goods or services provides a classic instance of superior bargaining power.”
- Uniform Commercial CodeUniform Commercial CodeThe Uniform Commercial Code , first published in 1952, is one of a number of uniform acts that have been promulgated in conjunction with efforts to harmonize the law of sales and other commercial transactions in all 50 states within the United States of America.The goal of harmonizing state law is...
§2-302 - Lloyds Bank Ltd v BundyLloyds Bank Ltd v BundyLloyds Bank Ltd v Bundy [1974] is a landmark case in English contract law, on undue influence. It is remarkable for the judgment of Lord Denning MR who advanced that English law should adopt the approach developing in some American jurisdictions that all impairments of autonomy could be collected...
[1975] QB 326 - Law Commission, Second Report on Exemption Clauses in Contracts (No 69)
- Unfair Contract Terms Act 1977Unfair Contract Terms Act 1977The Unfair Contract Terms Act 1977 is an Act of Parliament of the United Kingdom which regulates contracts by restricting the operation and legality of some contract terms. It extends to nearly all forms of contract and one of its most important functions is limiting the applicability of...
Labour laws
- Holden v. HardyHolden v. HardyHolden v. Hardy, 169 U.S. 366 , is a case in which the Supreme Court of the United States upheld a Utah state law limiting the number of work hours for miners and smelters as a legitimate exercise of the police power...
169 US 366 (1898) Utah law limiting work hours upheld, Brown J
"The legislature has also recognized the fact, which the experience of legislators in many states has corroborated, that the proprietors of these establishments and their operatives do not stand upon an equality, and that their interests are, to a certain extent, conflicting. The former naturally desire to obtain as much labor as possible from their employees, while the latter are often induced by the fear of discharge to conform to regulations which their judgment, fairly exercised, would pronounce to be detrimental to their health or strength. In other words, the proprietors lay down the rules, and the laborers are practically constrained to obey them. In such cases self-interest is often an unsafe guide, and the legislature may properly interpose its authority."
- Adair v. United StatesAdair v. United StatesAdair v. United States, , is a United States Supreme Court case which upheld "yellow-dog" contracts that forbade workers from joining labor unions. The decision reaffirmed the doctrine of freedom of contract which was first recognized by the Court in Allgeyer v. Louisiana...
, 209 U.S. 161, 175 (1908) "the employer and the employee have equality of right and any legislation that disturbs that equality is an arbitrary interference with the liberty of contract which no government can legally justify in our free land.”
- Coppage v. KansasCoppage v. KansasCoppage v. Kansas, 236 U.S. 1 , was a U.S. Supreme Court case that held that employers could make contracts that forbid employees from joining unions. These types of contracts were called yellow-dog contracts...
, 236 U.S. 1 (1915) - United States. Commission on Industrial Relations; Francis Patrick Walsh, Basil Maxwell Manly, ‘Industrial relations: Final report and testimony’ (1916)
- Topeka Laundry Co. v. Court of Int’l Relations, 237 P. 1041, 1044 (Kan. 1925) “Each statute undertook to remedy the mischief [of substandard wages for women and minors] by fixing a standard below which wages might not be depressed . . . because of inequality of bargaining power between employer and employee . . . .”
- France v James Coombes & CoFrance v James Coombes & CoFrance v James Coombes & Co [1929] AC 496 is an old UK labour law case, concerning the definition of ‘employee’ for the purpose of section 8 of the Trade Boards Act 1909 and the Trade Boards Act 1918.-Facts:...
[1929] AC 496, 505-6, in a case restricting the definition of ‘employee’ for the purpose of s 8 Trade Boards Act 1909, 1918, for an order to give a minimum wage to boot workers, where the worker was not working all the time when he was in the shop Lord Atkin said, ‘the presumed necessity for fixing any minimum wage rate at all in any particular trade is due to the apprehension on the part of the Minister that in its absence workmen in that trade may have imposed upon them wages which they ought not to be asked to accept, but which, either as a result of competition in the labour market or deficient bargaining power, they are not in a position to refuse’
- National Labor Relations ActNational Labor Relations ActThe National Labor Relations Act or Wagner Act , is a 1935 United States federal law that limits the means with which employers may react to workers in the private sector who create labor unions , engage in collective bargaining, and take part in strikes and other forms of concerted activity in...
of 1935 Section 1, at 29 U.S.C. §151
"The inequality of bargaining power between employees who do not possess full freedom of association or actual liberty of contract and employers who are organized in the corporate or other forms of ownership association substantially burdens and affects the flow of commerce, and tends to aggravate recurrent business depressions, by depressing wage rates and the purchasing power of wage earners in industry and by preventing the stabilization of competitive wage rates and working conditions within and between industries."
- NLRB v. Mackay Radio & Telegraph Co.NLRB v. Mackay Radio & Telegraph Co.NLRB v. Mackay Radio & Telegraph Co. 304 U.S. 333 is a 7-0 decision by the United States Supreme Court which held that workers who strike remain employees for the purposes of the National Labor Relations Act . The Court granted the relief sought by the National Labor Relations Board, which sought...
304 U.S. 333 (1938) where the US Supreme Court held employers can replace striking workers, though workers remain employees during a strike and can get a reinstatement remedy.
- Radcliffe v Riddle Motor Services Ltd [1939] AC 215, 241, Lord Wright in a judgment restricting common employment notes ‘how little bargaining power a workman possessed’
- Rookes v Barnard [1964] AC 1129, 1219, Lord Hodson,
"It is easy now to see that Parliament in 1906 might have felt that the only way of giving labour an equality of bargaining power with capital was to give it special immunities which the common law did not permit. Even now, when the scales have been redressed, it is easy to see that Parliament might think that a strike, whether reprehensible or not, ought not to be made a ground for litigation and that industrial peace should be sought by other means."
See also
- Freedom of contractFreedom of contractFreedom of contract is the freedom of individuals and corporations to form contracts without government restrictions. This is opposed to government restrictions such as minimum wage, competition law, or price fixing...
- George Mitchell (Chesterhall) Ltd v Finney Lock Seeds LtdGeorge Mitchell (Chesterhall) Ltd v Finney Lock Seeds LtdGeorge Mitchell Ltd v Finney Lock Seeds Ltd [1982] , [1983] 2 AC 803 is a case on the sale of goods and exclusion clauses. It was decided under the Unfair Contract Terms Act 1977 and the Sale of Goods Act 1979.-Facts:...
[1983] QB 284 - Employment Relations Act 2000Employment Relations Act 2000The New Zealand Employment Relations Act 2000 is a statute of the New Zealand Parliament. It was substantially amended by the Employment Relations Amendment Act 2001 and by the ERAA 2004.-Preceding Statutes:The original statute governing employment relations in New Zealand was the...
(New Zealand) - Intra-household bargainingIntra-household bargainingIntra-household bargaining refers to negotiations that occur between members of a household in order to arrive at decisions regarding the household unit....