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Balanced Recourse – Fundamental To Trade

March 13, 2009

Channel Insider carried an interesting story about eBay, How eBay Is Alienating Selling Allies.

What this article illustrates to me is the challenge organizations face in establishing ‘fair’ trading terms. It highlights that fairness ultimately depends on the fact that both sides will can trust that the other will behave ethically and honestly – either because they want to or because they have to.

What does this story tell us about some core contracting and negotiation principles?

In the case of large b2b transactions, there are intrinsic safeguards that should allow the parties to moderate their need for onerous contract terms and aggressive negotiation style. For example, there is reasonable probability (at least in normal times) that both companies will remain in business and therefore offer a target for redress and recovery. Second, as corporate entities, there is a reasonable probability of fundamentally ethical behavior, if only because of concerns over reputation. 

So part of a risk assessment is to establish whether principles such as these apply in all circumstances. And of course they do not. Smaller business or those that appear financially unstable may not operate to such high codes of practice – and hence they tend to face more onerous terms. Similarly, some markets function with a very different business culture, where the values and principles of one side may not be held or understood by the other (Intellectual Property or Health and Safety would be good examples). Again, this imposes a need not only for more detailed discussion but also for added safeguards in establishing any relationship.

Consumers – as the story in question shows – are yet another breed. It is unattractive for businesses to have to chase consumers. Courts are not intrinsically sympathetic; tracking them down can be difficult; it is costly to pursue them. That is why damage to the consumer’s reputation is one of the few realistic areas of recourse – hitting their credit rating or otherwise limiting their ability to trade.

And that is ultimately the interesting point in this story about eBay. By removing the primary opportunity for business to have recourse, they are making their marketplace an unattractive place to sell. The scales must be balanced in order for trading relationships to flourish.

There is a second interesting aspect to this story and it relates to the mechanism that eBay has at its disposal to enable opnness and transparency. In principle, this is a contract governance dream – the ability to develop consolidated and real-time performance data and feedback to help steer buying and selling decisions. It is the type of data that offers transparent risk assessments which could then be reflected in the nature of the terms and conditions offered. But sadly, if that data becomes one-sided, much of its value is destroyed. It is like gamblers playing in an environment where one side always sees the cards and the other plays blind.

It is a story worth remembering as we consider our approaches to trading relationships and as we seek to develop more sophisticated approaches to contract and relationship management.

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