The Dangers of Hidden Contractual Language in Vendor Contracts
In the last decade, the Consumer Financial Protection Bureau (CFPB) has become more focused on protecting consumers from harm. This has resulted in increased scrutiny of Unfair, Deceptive, or Abusive Acts or Practices (UDAAP).
UDAAPs are a key aspect of consumer compliance and continue to be a regulatory focal point. This regulation targets businesses that offer financial products or services to consumers.
One crucial requirement of UDAAP says contracts must clearly inform customers of provisions that permit changes in terms and conditions of the product or service. Unfortunately, some vendors sneak hidden clauses into their contract’s terms and conditions.
What could be unfair and deceptive in your vendor’s terms and conditions? Knowing the regulations is the first step!
The difference between unfair and deceptive?
Under the Dodd-Frank Act, a business practice is unfair if three elements apply:
- It either causes or is likely to cause substantial injury to customers (monetary or non-monetary)
- The customer cannot reasonably avoid the injury
- No other benefits to consumers or competition exist that justify the act or practice
For a business practice to be deceptive, these three elements must apply:
- A representation or omission of facts that either misleads or is likely to mislead a customer, whether or not it was made with good intentions or without malice
- The customer’s interpretation is reasonable under the circumstances
- The misleading representation, omission, act, or practice is “material”
Federal law protects business-to-consumer businesses (B2C) by having provisions about the nature of the language on terms and conditions. These protections, however, are not enforced for business-to-business (B2B) contracts. The CFPB only considers abusive practices in relation to consumers.
Read the fine print
Not reading the fine print is a mistake. Some vendors include a hyperlink to a terms and conditions page on their website as a part of their contract execution process. It’s simply a page that clients don’t typically read. If they do, they often do not read it closely enough.
Obviously, this is a dangerous oversight. Failing to thoroughly review a legally-binding document could lead to missed loopholes, last-minute revisions, automatic-renewal clauses, and financial obligations.
For example? A contract may contain language forbidding the customer from terminating for cause. Under such circumstances, your business must still pay even if a vendor doesn’t provide the services they promised.
Clearly, such a clause is unfair and deceptive. It can cause substantial monetary injury. It’s also deceptive for a vendor to downplay the importance of the terms and conditions page on their website. However, the loose definitions of unfair and deceptive in UDAAP regulation represent a challenge. Ultimately, possible violations are interpreted on a case-by-case basis.
Without the guarantee of regulatory protections — either because of your B2B relationship or the broad definitions — when starting a vendor relationship, remember to dig deep for any hidden clauses. Go over the terms and conditions page with a fine-toothed comb so you can protect your organization.
Protect your business
Another measure an organization should take, especially as risk environments become more complex, and so do supplier networks? Employ a vendor risk management (VRM) solution you can rely on to review contracts when onboarding a vendor. Utilize the solution’s expertise for:
- Contract negotiation
- Identifying contract terms that should be included or excluded
- Sourcing alternative vendors when needed
A VRM solution can simplify and reduce risk within your contract management process. With automated workflows, extensive consulting, and outsourcing expertise, you’ll have a full understanding of vendor contacts.
Don’t fall victim to an unclear contract. Stay vigilant, and read – and re-read – the document.
Defend yourself against vendor and enterprise risk
Learn about our best-in-class VRM/ERM solutions.
