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Unfair Contract Terms Struck Down

August 11, 2008

Are the US courts on the offensive against big business and its contracting practices?

Recent judgments have struck down key clauses in click-through End User License agreements. And now the courts in California have ordered repayment of millions of dollars in early termination fees for mobile phones. There are moves afoot to impose similar limits across the US.

Are these cases indicative of wider movements to change the balance of power in contract terms?

Unfortunately, the answer seems likely to be no. In recent years, anecdotal evidence from IACCM members suggests that companies have been taking a tougher line with their contract terms. This certainly applies to buying practices. But it seems pervasive in any relationship where there is an imbalanceof power – and it is these situations as they relate to consumers that the courts have been addressing.

These findings all relate to consumer contracts in which the supplier clearly has far greater power than their customer. And in may cases, theterms being applied represent something close to industry practice, so customers are not even able to choose suppliers based on differentiated terms.

In those circumstances, thank goodness the courts are standing up for reasonable and fair behavior. However, it is sad that no suppliers seem to understand the competitive advantage that can be gained by differentiation through more imaginative – and friendly – terms and conditions. Burdensome terms simply alienate your trading partners and customers. And those sentiments do not only apply to consumers.

  1. Tim,

    Great post, and while I tend to agree with your assessment, what framework(s) would you suggest for understanding whether contract terms are “reasonable and fair” or “friendly”? How should companies differentiate between thoughtful consideration of risk and “burdensome”?

  2. There are of course well understood legal principles that establish when terms and conditions may overstep a boundary of reasonableness. While these are primarily used to protect consumers, there is always the possibility of their application in business-to-business transactions. In general, these are most likely to apply in the case of standard forms of agreement and where one party has a dominant position. There are good summaries of these principles available from many sources on the internet; this section from Wikipedia dealing with standard form contract is a good example –

    A competent commercial or contracts function should be taking a much more holistic view of the risks posed by their contract terms and policies. The fact that something is legal does not make it desirable. The fact that I can do it does not mean that I should do it. So the key test is to understand likely market impact and whether the results will support broader business goals and strategies.

    A technique that some companies employ is to undertake a holistic stakeholder analysis – how will this term or policy be perceived or acted upon by the various stakeholder groups – customers, competitors, suppliers, stockholders, executive management etc. A technique that can be used (and presumably was not by the companies in the court proceedings cited above) is to imagine the press article that may result.

    In the end, terms and conditions should at the very least not undermine your organization’s core value propositions or market image. If you represent yourself to be ‘easy to do business with’, this has certain implications on your contract standards and policies. If you contend that your company is ethical or operates with integrity, this also suggests standards of fairness and balance in your terms and conditions. Sometimes this is not so much about the terms themselves, but may be in the way they are applied, or the overall governance and appeal systems that are offered.

    Of course, the forward-thinking contracts group goes beyond these simple assessments of ethics and balance and starts to look at ways that differentiated terms may proactively enhance company brand. They imagine the press article (or advertisement) that highlights positive reasons why terms and conditions create a reason to do business. And with unbalanced, risk-averse behaviors on the increase, there is potentially plenty of scope for the creative contracts group to identify areas of potential competitive advantage.

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