Thursday, 10 October 2013

Why Consumer Terms Aren't "Silly"

A strange article in the FT yesterday from the usually reliable John Kay, explaining why he 'ignored' the consumer terms related to his smart TV and Apple's new operating system. Of course, we're all free to decline a reasonable opportunity to read and agree consumer terms. But it's wrong to suggest they're 'silly', as the Carbolic Smoke Ball Company discovered long ago. While consumers rarely read them, certainty as to what consumer terms apply is fundamental to the efficient operation of retail markets. Allow me to take each of John's pronouncements in turn:
"Samsung and Apple are plainly in business for the long term, and their continued success depends on maintaining their reputation with their customers. It is unlikely that these agreements contain anything seriously damaging to my interests, and if they did I am reasonably confident that the combined forces of judges, legislators, regulators and the press would protect me."
Putting aside the misplaced trust that a major corporation's long term aspirations are aligned with their customers' interests (think retail banks), this misses the point of consumer agreements - particularly in the context of supplying a 'smart' device that operates in multiple jurisdictions. Apple's end-user agreement helps set the rules of the Apple ecosystem, just as Facebook's privacy policy does. Such services would rapidly break down if suppliers, customers, regulators and other 'stakeholders' did not understand the detailed rules that underpin them. How does John think that Apple gets paid for selling other people's Apps? Ironically, numerous regulations insist on very prescribed sets of consumer terms, which often provide the basis for the very action by the 'combined forces' on whom John relies for protection (although they can also be hijacked, as we saw when the US government effectively deputised PayPal and others as private sheriffs, relying on violations of their terms of service to 'shut down' Wikileaks).
"On the odd occasion when I have troubled to read similar agreements, I have found they are generally riddled with ambiguities and with conditions that are unenforceable in practice and probably unenforceable in law. The attorneys who draft these documents are mostly unimaginative hacks rather than hotshots of the profession. And complex contract specifications do not so much define the obligations of the parties as identify the point at which legal argument will start. Ask the people who thought they knew where they stood with Lehman Brothers."
Let's unpack this. John rarely reads consumer terms, so his experience here is unreliable. He's not a lawyer, so he's no guide to the enforceability of contractual terms. He clearly has no friends in this area, which is a shame, but he's unwise to underestimate the scale or calibre of the legal resources Apple devotes to the customer terms that underpin its position as one of Earth's most valuable corporations. And Lehman Brothers? Being an investment bank it simply never dealt with 'consumers' at all, however, (ironically, John) the banks had no idea of who owned which assets after trading with Lehman Brothers because they ignored the small print.
"...To the extent that the user agreement has relevance at all, that relevance is to the battles these large technology companies conduct with one another and with their various regulators."
As explained, this ignores the role of end user agreements in determining how the entire retail ecosystem works - in this case, the rules that make John's TV 'smart'.
"...If there is a problem, it is not the laziness of consumers but the use of inappropriate models in the formulation of public policy. These too often espouse a legal and economic view of human behaviour in which agreements are negotiated between informed and consenting parties, and enforced through adherence to the contract provisions, if necessary through the courts. 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."
I agree that 'laziness of consumers' is not an issue - again, we are all free to decline the reasonable opportunity to read consumer terms upon which the law insists. But if by 'inappropriate models' John is referring to the common law system, then he should compare it to the joys of the civil law system. In common law countries, we are free to act unless the law restricts us - the law follows commerce. In the absence of Parliamentary edicts, contracts provide the rails on which commerce runs. Meanwhile the citizens of civil law countries wait for their lawmakers to define how they may act, so European commerce, for example, follows the law. Thus, our EU colleagues regard entrepreneurship as rather dodgy, and believe that contracts should rarely be needed to supplement civil law codes.

I know which system I prefer.

But, critically, John is also choosing to gloss over the need to record what he calls the 'terms of exchange' so that people have enough certainty 'to go on doing business'. That is the role of the contract in a common law country. And the enforceability of such terms - the 'rule of law' - is what distinguishes a (reasonably) efficient market economy from, say, corrupt dictatorships or centrally planned economies.

In other words, Apple's lengthy terms - and John's freedom to decline the opportunity to read them - not only facilitates the collaborative ecosystem that creates John's 'smart' TV, but they also help everyone keep Apple and its suppliers honest.

Image from CloudPro.

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