When it is wise not to review a contract
I recently commented on a ‘spoof’ version of the Apple terms and conditions supplied to consumers. The economist John Kay picked up on this theme in an article “Why I ignore Apple’s silly reams of terms and conditions“.
Mr Kay’s article is a rejoinder to all the experts who castigate people that fail to read contracts. He suggests that, far from being stupid or ignorant, people who do not spend their time perusing terms and conditions are in fact wise. This is based on several factors:
1) Major providers rely on their market reputation and therefore cannot afford to mistreat customers;
2) The key decision made by a buyer is whether or not they want the product or service; the ability to negotiate terms with major suppliers is largely non-existent;
3) Many of the terms and conditions are simply industry posturing – for example, to safeguard against major court battles over IP rights.
He observes that the real problem with ‘unreasonable’ terms and lengthy contracts is because of weaknesses in public policy, which assumes that agreements are negotiated “between informed and consenting parties, and enforced through adherence to the contract provisions, if necessary through the courts”. As the article goes on to say, these assumptions are illusory – “The reality is that the terms of exchange in a market economy are defined by social expectations and enforced by the mutual need of the parties to go on doing business”.
So does this imply that contracts are in many ways an irrelevance, or that smaller parties should simply sign and move on? Are they essentially just a way for large corporations and public sector bodies to protect their selfish interests? I think we all know there is a degree to which that is true, but it is not the only consideration. While Mr Kay’s observations are applicable to global brands such as Apple, they are not valid in situations where there is greater balance in the power of the parties and where public interest considerations are unlikely to protect the disadvantaged party. And in fact, even powerful entities need to have evidence that their contracting process had integrity, or they are increasingly liable for substantial fines and possible compensation (for example, the big banks and mis-selling of insurance products). In addition, as one respondent to John Kay’s article points out, if you do not read the contract you may miss important options or areas where you may wish to mitigate your risks.
In the end, I think the issue is one of balance. I agree with John Kay’s observations and reasons for suggesting contracts are not always worth reading – but we have to consider the nature of the supplier, the nature of the product or service and the extent to which these shift the balance of risk.