Unintended consequences

While reading the news today, I came across an article talking about credit card companies unilaterally deciding to change their interest rates and or credit limits for certain customers. The unintended consequence of a credit card company changing your credit limit is something known as your “credit utilization ratio” – how much you’re currently borrowing against how much you are allowed to borrow.  So if you’re carrying $4,000 on a $10,000 line of credit and they drop the line to $5,000 to protect themselves, your utilization immediately goes from 40% to 80% – which can negatively affect your FICO score.

I doubt that anyone reads the contract provided by the credit card company when they were applying for (or received) their card, if for no other reason than they realized that they didn’t have any leverage and couldn’t make a change even if they wanted to.  If you want the credit, you sign the agreement and activate your card.  You’re not thinking about all of the potential negative things that could happen in the future… right now, everything is seen through the rose-colored glasses of a new line of credit which will allow you to buy that new computer, pay off a few bills, get your significant other a nice gift.

I urge you, however, to consider the unintended consequences when signing a deal.

This isn’t about contracts as much as it is about logical thinking.  It’s about the process of thinking through each issue and making sure that you’ve turned it around in your head enough to ferret out different situations and consider what may happen in the future.  It’s about looking to see if you can plug potential holes while you still have the ability to walk away.

In particular, I most hate a practice which is becoming more and more common and which I work vigorously to prevent anytime I see it: URL’s in contracts.  If you’ve never heard the term “URL”, it means “Uniform Resource Locator” – a web address (http://www.licensinghandbook.com, for example).  Some organizations are now replacing sections of their agreements with the phrase “as listed and updated from time to time at http://www.xyz.com.”

STOP right there!

There’s an unintended consequence of using URL’s in contracts.  Even if they didn’t say the phrase “updated from time to time” the truth is that a website can be updated at the URL’s owner’s whim.  Or, put another way, the URL owner can change the terms of the agreement whenever they want, with or without notice.  So first, this is drastically different than a reference to a signed, static document, such as a previous contract.

Second, a URL that links to a page that today is harmless doesn’t mean that it always will be.  Remember that the change to the document sitting on that website could have language added to it that has nothing to do with the initially stated purpose of the URL.  For example, the most common URL-linking that I see has to do with security policies and acceptable use policies.  The argument made is that these documents are internal company policies which are then applied to the agreement at hand.  Because they’re policies, though, they’re subject to change by company executives … and of course, these same executives have mandated that all contracts be subject to the current form of these policies.

In the old world, this would require the sending/receiving of dozens of amendments every time a policy was changed.  Then a smart lawyer realized that if you just post the policy on the web and include the URL in the contract, you now have a way to have a constantly-current document attached to the contract.

The problem is that the policy document doesn’t have to remain a policy document.  The owner of the URL can decide, whenever they wish, to change the language of the policy, say, with a single new section that reads: “Section 12:  Limitation of Liability.  Party X shall have no liability for any damages caused as a result of Party Y’s violation of this policy or for any other reason.”

Do you see the problem? (Don’t forget that most agreements also have some sort of document precedence language which puts the policies ahead of the main agreement.)

So, to fix this, I simply recommend asking the other side (which is usually a vendor, but could be a buyer)) to copy the current policy document into a Word file and attach it as a regular exhibit.  When they balk, add in your own URL – linking to an ever-changing payment process on your end, for example (I’ve even considered creating one as a mock-up which mostly unreasonable language just to make my point… like 180 day terms and the ability to not pay anything I find “excessive” or “burdensome”).

Granted, there will be times when you have no leverage and a business owner/sales executive breathing down your neck to “just close the dang deal!”  In those cases, remember to cover your butt and write a memo outlining your concerns.  You might not have the final say on whether a deal is completed, but you sure can show that you were properly trying to protect your company!

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