Mobile Phones, Airlines, and Long-Term Contracts

Contracts are an essential part of modern business. Contracts make business partners more reliable, fostering trust beyond the limits of basic human trustworthiness and a firm handshake. Indeed, one of the main ways in which all modern economies treat corporations as ‘persons‘ under the law is evidenced by the fact that corporations can sign, and be bound by the terms of, contracts. Contracts provide uniformity and security. Contracts can also be contentious, hence the evolution of an entire branch of law known as Contract Law.

Sometimes, one party or another comes to regret signing a contract, especially long-term contracts. Two such cases have been in the news recently.

One story involves consumers regretting signing contracts, in particular mobile phone contracts. Here in Ontario, a bill has been introduced that attempts to improve mobile phone contracts for consumers, including making it easier for consumers to end contracts without massive penalties. It turns out that consumers like the low, low phone prices made possible by long-term contracts, but aren’t so fond of actually paying the full price of such contracts. And most people, I suspect, sympathize with the consumer here rather than with the phone companies who want to see their contracts honoured.

The other story about contracts flips that one on its head. It’s a story about frequent fliers who bought tickets — essentially, signed contracts — giving them unlimited first-class flying on American Airlines. But this time, it’s not the consumer who came to regret the deal, but rather the company. You see, American, when they sold these tickets years back (for prices in the quarter-million dollar range) didn’t foresee the ways in which some customers would use — and perhaps abuse — the privileges those tickets embodied. A handful of super-frequent fliers are using their lifetime tickets so intensively that they’re each costing the airline something like a million dollars a year.

Of course, this story is unlikely to generate much sympathy. Most people dislike big corporations like American Airlines, and almost everyone has reason to gripe about airlines in particular. Tough luck, suckers! And after all, a big corporation like that can afford it, right? Well, no, as it turns out profit margins in that industry are vanishingly thin, and even negative in some years. (In related news American recently asked a bankruptcy court to nullify its contracts with various labour unions.)

The more general question here has to do with whether we should protect people (and companies) from the results of their poor decisions. One set of reasons has to do with protecting the interests of persons: as a society, we have duty to protect each other at least to some extent. And in the commercial domain the consequences of certain choices can be unclear. This is a reason for laws encouraging clarity of contract, if not provisions for voiding them altogether.

Another set of reasons has to do with the social benefits, both of contracts and of occasionally voiding them. Contracts are designed to reduce the risk of doing business; but the act of signing a contract also involves taking a risk, namely the risk that things will turn out differently than you had expected, and that holding up your end of the bargain will end up being disadvantageous. And we want people, and companies, to take those kinds of risks; without them, commerce (and hence our standard of living) would return to stone age levels. So we may in some situations want to provide safety nets to make such risk-taking reasonable. Whether we have the moral imagination needed to see the full range of costs and benefits to the full range of relevant parties is another matter.

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