Meet Lord Denning. He’s a judge, the kind of guy you need to convince to enforce your startup’s terms and condition when your worst nightmare comes true: someone takes offence to some clause in your terms and conditions and sues you.
Lord Denning could care less about what your business is. He could care even less about how hard you grinded to get your startup off the ground. All he cares about his whether that clause computes with the law. So, it’s really important to make sure your terms and conditions of use and other contracts (licenses, sales agreements, etc.) are onside of the law. If they’re not, Lord Denning can really ruin things for you.
As more and more founders look to hack their legals with online agreement generators like TermsFeed, it’s really important you understand some basic law.
In less than ten minutes, I’ll show you the major things you should be doing and give you practical steps to get there.
What your Startup’s Terms and Conditions Can’t Do
I always talk to founders concerned with legal issues coming from their users. The response is always: “shove something in the T+Cs to deal with it”. The problem is that you can’t include just anything in your T+Cs, or in any contract for that matter. Some clauses Lord Denning will throw out as unenforceable. Let’s talk about what those types of clauses are.
Terms Must be What Someone Would Expect in a T+C
The physical document with agreement written on top is not a contract. It’s evidence of a contract. A contract is a relationship based on a mutual understanding (the deal). In the same way, your signature does not bind you to a contract. It is evidence of your consent to be bound.
With that in mind, Lord Denning will ask “What did these guys actually agree to?”. He knows that most people don’t read consumer T+Cs. They just click “I agree” and move on. So he might not put a ton of weight on what your T+Cs say. But he’ll definitely look at what your customer would have reasonably expected the T+C to say. So you need to keep your T+Cs fairly vanilla. By vanilla, I mean they need to say pretty much what the average consumer would expect it to contain.
The physical agreement document is not a contract. It’s evidence of a contract. A contract is a relationship.
Here’s a real example. I was at a startup drinks meetup in February 2016. I was talking to a founder of a marketplace startup that connects people in real life to learn new activities. Think Udemy in real person. This founder was concerned about liability if someone got hurt doing one of these activities. Could his startup be liable? His reaction was to include a clause in the terms and conditions.
I said to this guy, so if I register for a one-on-one session via your site to learn how to fly a kite in the park and the instructor turns out to be a known robber and mugs me, you want your T+Cs to save you? No way.
Why? Because when I signup on his site to take the kite flying lesson, I expect that this startup has taken some measures to ensure the instructors aren’t known criminals who will harm me. Lord Denning would agree. Any clause saying they aren’t liable for harm caused by an instructor to me would almost certainly be thrown out if I sued.
Why? Because that clause goes against what the average person would expect to be a term of the contract between me and the startup. The average guy would expect that this site isn’t hooking him up with known criminals. Think about it: what am I paying this site for? An enjoyable experience learning how to fly a kite. Not to get mugged. That is almost certainly what Lord Denning would decide. See how the T+Cs quickly become irrelevant if it is entirely disconnected from what the reasonable person would expect the deal to be.
This activities marketplace startup must deal with the risk of criminals in their business process, not just in their T+Cs. To avoid Lord Denning ordering them to pay me a chunk of cash, they need to show that they had taken reasonable precautions to ensure that I wouldn’t be mugged by a known criminal. How do they do that? Require instructors to provide a police check and references. Maybe conduct a background check on their own.
Once these steps have been integrated into this site’s process, their T+Cs should say (overly simplified): “We’ve taken the following measures (x,y,z) to ensure your safety. However, there is a risk that you may become injured or harmed during an activity purchased through our website. If you are so injured or harmed, you cannot sue us.” Lord Denning would likely be ok with that. (In the US, waivers are a tricky thing. See a lawyer.)
Tip: Think about what the silent expectations are of your customers. Prepare for those in your processes. Don’t only deal with them in your T+Cs.
Your T+Cs can’t have unconscionable clauses. An unconscionable clause is a term that is so unusually harsh that it “shocks the conscience”. It is a clause that is so unfair, that a court will never enforce it.
These clauses are typically found in insurance or banking contracts. So fintech startups should pay particular attention to whether their clauses are “so harsh and unfair” that they would never be enforced.
Examples of unconscionable clauses include:
- purchasing assets for significantly undervalued price
- refusing to pay out insurance for an arbitrary or unfair reason
- large charges or fees that are unexpected.
Unconscionable clauses often require other elements, such as an imbalance of power in the relationship. Imbalance of power could be found where the contract is “standard form” (i.e., isn’t negotiable; like a website’s T+Cs) or where the contract was prepared by lawyers hired by a business and the person signing hasn’t had lawyers review it.
Tip: if want to have clauses allowing your startup to charge or withhold large amounts of money, see a lawyer. It’s money well spent. This is a tricky area of law.
Consumer Rights Legislation
Any piece of legislation will defeat any clause in your contract. If you’re contract says A and the legislation says B, B applies. Startups selling to consumers should pay particular attention to consumer rights legislation that provides very clear rules of what you can and can’t do. For example, in California, the Business and Professions Code Section 17602, which deals with automatic or recurring credit/debit card transactions states that:
(c) In the case of a material change in the terms of the automatic renewal or continuous service offer that has been accepted by a consumer in this state, the business shall provide the consumer with a clear and conspicuous notice of the material change and provide information regarding how to cancel in a manner that is capable of being retained by the consumer.
If you’re doing business in California, your T+Cs can’t say (overly simplified) “We reserve the right to change the terms of this contract without notice to you.” Imagine you have 2,000 customers in California. You raise the price of your service by $5/m. Every month that goes by that you’re charging the extra $5m and haven’t complied with the above rule, the collective claim of those 2,000 people grows by $10,000 (2,000 x $5).
Tip: Review consumer legislation to make sure your contracts and business process are compliant.
If you’re going to hack your legals, make sure you’ve reviewed consumer rights legislation in your state or province to make sure you’re compliant. If you’re having a hard time finding it, find your local legal assistance or guidance office. They can point you in the right direction. Most court houses also have libraries with everything you’ll need.
For founders looking to bootstrap their legals, stress testing your T+Cs and other contracts using the above factors is very important. The law is like a programming language. There is “syntax” or technicalities, rules and ways to design your contracts and legal structures efficiently. Unfortunately, you can’t hit “run” and see the bugs immediately. The bugs (such as unenforceable clauses) are usually discovered when it’s too late.