The Role of Information Deficiencies in Contract Enforcement

Information deficiencies play an important role in contract enforcement. Courts frequently refuse to enforce contractual terms when one of the parties lacks information. The difficult question is where the line is drawn (or should be drawn) between information deficiencies of which the law will take account and those which it will disregard. This article sets out the economic framework for determining when it is appropriate to shift responsibility for information deficiencies from one contracting party to the other. The overriding objective from an economic perspective is to ensure that the party who can produce and reveal information at least cost produces the optimal amount of honest information in society. The economic duty-to-inform doctrine provides simple rules to achieve that purpose. Greater intervention on the basis of information deficiency is warranted in cases where a special relationship of trust exists between contracting parties. The reason for this is that an adviser (agent) in a trust relationship is contractually bound by a greater duty to inform the principal, including a duty to provide information and advice about the principal’s needs. The economic theory on which judicial control and regulation of contract terms rests (and which also limits its scope of applicability) is that people tend to sign contracts without reading them.