Abusive contract terms: Is unenforceability a deterrent sanction?

We are thankful to the participants in the Law and Economics Workshop at Tel Aviv University and in particular Shay Lavie, Avraham Tabbach and Alan Miller for their suggestions and comments. We would also like to thank the participants in the 2020 AFED Conference and the 2020 EALE Conference.International audienceWe investigate the impact of sanctions in the presence of abusive contract terms in a litigation model under asymmetric information on consumers’ ability to litigate. A firm may decide to write an abusive clause to extract part of a consumer’s surplus. Facing such a clause, consumers can seek compensation at a cost, but only a fraction of them are ready to go to court to obtain this compensation. If the case is brought to court, the abusive clause is unenforceable. We then explore the consequences of introducing an additional sanction to this unenforceability. Our results show that the mere non-enforcement of abusive clauses has no deterrent effect. However, the introduction of an additional sanction has to be done carefully because under certain conditions, it leads to more deterrence but may also worsen the utilities of some consumers and generate mixed effects on welfare