Dealing with risk in focal interactions

Knowledge of how companies deal with risk at the focal level of network interaction is particularly limited. Analysing focal interactions requires examination of all relevant direct and indirect business relationships from the perspective of a single company. This view requires moving our attention beyond direct relationships to considering how companies deal with risk in direct and indirect relationships.

A promising, yet often neglected stream of research focuses on the use of General Terms and Conditions (GTC). GTC are a form of contract, which “one of the contracting parties has defined in advance with the intention to incorporate them into future transactions” (Mouzas & Furmston, 2008, p.42). Typically, GTC are the result of a continuous “rationalisation and adaptation process to the evolving needs of commercial practice” (ibid.). GTC provide a powerful tool for:

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(2) Fast and constant adaption of terms and conditionsin response to the “evolving needs of commercial practice” (Mouzas & Furmston, 2008, p.42); and

(3) Enhancing efficiency, predictability and reliability in multiple interactions across geographic boundaries and legislatures by standardizing the GTC.

Although GTC have facilitated repeated business transactions since ancient times, research in the context of business-to-business relationships remains scarce (Blois, 1972; Blois, 2003; Mouzas & Furmston, 2008). Yet, without GTC, business transactions would either require individually negotiated contracts, or, alternatively, result in complete reliance on informal agreements. The limitations of both alternatives highlight GTC’s significance.

GTC’s efficiency has contributed to their ubiquitous use in business transactions since ancient Roman times. Roman jurist Marcus Labeo, for example, reported a storehouse landlord who nailed liability exemption terms at his entrance (Hellwege, 2010). A similar practice is reported from medieval Scotland by Bankton (1751, in Hellwege, 2010, p.3), where a stable owner fixed a “placard …on the door of a stable, … declaring the stabler not liable for hazards, [as] the persons interested are presumed to consent to the terms of it”. With the inception of industrialization, to date, GTC has proliferated in almost every industry, including banking, insurance, transportation and retailing.

Consider the recent case of General Mills, who amended their GTC to the effect that consumers “give up their right to sue the company if they download coupons, ‘join’ in online communities like Facebook, enter a company-sponsored sweepstake … or interact with it in a variety of other ways” (New York Times, 2014). General Mills’ GTC state that the company has “new legal terms which require all disputes related to the purchase or use of any General Mills product or service to be resolved through binding arbitration” (General Mills GTC, April 14, 2014). The U.S. chain ‘Whataburger’ practises a similar move by hanging a placard at its entrances “warning customers that simply by entering the premises, they have agreed to settle disputes through arbitration” (New York Times, 2014). The parsimony of unilaterally created and – at least in principle - globally applicable agreements, and the power of GTC to address legal loopholes or ambiguities, secures GTC a key role in business interactions (Hellwege, 2010; Hörnicke, 2012).

Yet, in contrast to other contract forms, GTC are subject to surprisingly limited regulatory intervention.

In most jurisdictions, including the U.S., the United Kingdom or Germany, GTC became subject to regulation only in the 1960s and ’70s, and in Australia as late as 2003. Moreover, these regulations focused predominantly on the use of GTC business-consumer, not business-to- business interactions. In German law, for example, it is sufficient for business actors to demonstrate a ‘silent concurrence of wills’ (‘stillschweigende Willensübereinstimmung’) (IHK

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Stuttgart, 2010) for GTC to become a binding basis for business interactions.7 _Another implication of the GTC’s legal state is that business actors reserve significant freedom in the content, scope and reach of the terms, while warranting the document’s full legal enforceability.

While research on umbrella agreements facilitates our understanding of how companies deal with idiosyncratic risks in direct dyadic relationships, research on GTC may shed light on how companies deal with risk at a higher level of network aggregation: focal networks. Blois (1972, 2003, 2006) offers some pioneering work examining the use of GTC in the focal network of the British retailer Marks and Spencer. While his work focuses on the phenomenon of vertical ‘quasi-integration’, he provides one of the few analyses of the retailer’s use of GTC in addressing risk emerging from quality deficiencies, cost fluctuation or competitor ‘copy- catting’.

However, apart from this glimpse into Marks and Spencer’s use of GTC, there is limited research supported by empirical evidence on the: (a) contemporary content and use of GTC for dealing with risk; (b) the distribution of GTC across a focal network; and (c) the relation between the content and use of GTC and other contracts.

The notion that “it is obvious that General Terms and Conditions are used to pass on risks and liabilities to other contractual parties” (Mouzas & Furmston, 2008, p.42) deserves further research that would investigate GTC-in-use. This endeavour echoes Ehrlich’s (1913/2002) advice, which retains its relevance despite the fact that it is over a century old:

“The living law is the law which dominates life itself … The source of our knowledge of this law is, first, the modern legal document; secondly, direct observation of life, of commerce, of customs and usages […] only the concrete usages, the relations of domination, the dispositions, the contracts…yield the rules according to which men regulate their conduct. The living law must be sought in…contracts of purchase…business partnerships […] In all these contracts, there is, in addition to individual content, which applies only to the particular transaction, a typical, ever recurring content. This typical content is basically the most important thing in the document…” (pp.493-501).