Why Corporate Lawyers Get "Confused" When You Try To Escape Contract Over Material Adverse Changes

Now we know why cellphone companies have been giving customers such a hassle when they try to cancel over material changes to the contract: there’s two possible definitions. Ken Adams, an experienced corporate lawyer who drafts a lot of contracts, says:

According to Black’s Law Dictionary, one meaning of material is “of such a nature that knowledge of the item would affect a person’s decision-making process.”

Another meaning of material is “significant,” in other words “important enough to merit attention.”

Price, for one, is historically know to affect a person’s mind when buying.

Sometimes a cellphone company will try, for instance, to argue that changing a text message rate from .10 to .15 isn’t a big deal, especially if you haven’t used “a lot” of that particular kind of text message. Adams suggests that lawyers use “non-trivial” if they intend the second meaning.

We agree. The more precisely legal definition should be used when lawyers draft a legal contract.

Otherwise, why not use definition 11 (dictionary.com), “pertaining to or characterized by an undue interest in corporeal things; unspiritual,” and argue that there’s no voiding, as the contract is still a celibate? — BEN POPKEN

Rethinking “Material” and “Material Adverse Change” [AdamsDrafting] (Thanks to Peter!)

UPDATE: Scans of Black’s Law Dictionary definition for “material,” inside…


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Comments

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  1. Hmmm… I think that if you want to argue that material in the first sense, you enter in a subjective area where what is important to one is not important to another, like the text message rates. However, I would argue that it does affect your decision making process, you merely give it a lesser weight if you don’t care about the rate, but it still matters (would you sign a contract if the text message rate was $1293812931?). I see a non-material change as one where you change the name of something, like calling text messages another name like TxT messages in the contract.

    This is all a joke to get people not to try to cancel the contract.

  2. mac-phisto says:

    if they don’t want ppl to cancel w/o etf, they simply need to only enforce changes on new contracts. that’s typically what is known as “grandfathering”. it’s not a new concept.

  3. bluwapadoo says:

    Who said that “significant” isn’t a LEGAL definition? I bet I can look at any Black’s Law Dictionary and find “material” meaning “significant”. And if they are both legal definitions, then what other criteria do you use to choose between the two?

    Plus, the definitions still beg the question. They only define “material”, but not “materially adverse”, so that while increasing text message rates may “affect the person’s decision making process” but they might not do so in an “adverse” way. Or if text message rates are “significant” but not “significantly adverse” then it still seems they have the same loophole.

    It seems much more subjective to say “this change affected my decision process adversly” (after all , anything could do this) than to say it was a significantly adverse change (which you could do in monetary terms, i.e., if you don’t use text messaging then your argument is B.S.).

  4. slapstick says:

    Ladies and gentlemen of the jury, I’m just a caveman. I fell on some ice and later got thawed out by some of your scientists. Your world frightens and confuses me!

  5. Buran says:

    The correct answer is: because it’s easier for them to lie on the side of “you owe us” so they can get money they don’t deserve. They’re not confused — they just want your money.

  6. Ben Popken says:

    @bluwapadoo: So go ahead and quote it, then. Otherwise your bet is a bluff.

  7. B says:

    Phil Hartman, the world needs your humor now more than ever. Why did you have to have a crazy wife?

  8. jaredharley says:

    If they wanted to avoid any confusion, all they would have to do is define the meaning of “material” in the definitions section of the contract. Not stating which definition of “material” they are using, they are effectively giving themselves more leeway – if a customer cites one, say “we meant the other.”

  9. not_seth_brundle says:

    Black’s dictionary is not precedent.

  10. Cap'n Jack says:

    But isn’t the word “significant” itself left open to interpretation? Increasing text messages from $.10 to $.15 is a 50% increase, which I would call significant even though the actual monetary amount is small.

  11. crayonshinobi says:

    Whatever happened to the basic tenet of honoring the terms of a contract?

    From my caveman-esque understanding of contract law, any change to a contract by one party must be accepted by the other party or the contract is void.

    Why then, must we define what constitutes a “change” at all? Material or not, its a change!

  12. RulesLawyer says:

    The following language, from a footnote of a draft of the Uniform Commercial Code, may help to explain why defining “material change” or “material breach” is so difficult. In short, a lot of it depends on the motivation of the person/company making the change. This relates to breach of contract, but the only reason that the cell phone companies’ changes aren’t “breach” is that their contract allows termination in the event of material change. The definition would likely be the same. From http://www.law.berkeley.edu/institutes/bclt/events/ucc2b/d… (some citations omitted)

    4. What constitutes a material breach? A statute cannot define materiality in detail any more than one can define concepts such as negligence, reasonable care, merchantability, or the like. The key lies in defining an appropriate reference point. “[Breach] is material if it is so substantial as to defeat the purpose of the transaction or so severe as to justify the other party’s suspension of performance”

    The Restatement (Second) of Contracts [§ 241] lists five significant circumstances:

    1) the extent to which the injured party will be deprived of the benefit he or she reasonably expected;

    2) the extent to which the injured party can be adequately compensated for the benefit of which he will be deprived;

    3) the extent to which the party failing to perform or to offer to perform will suffer forfeiture;

    4) the likelihood that the party failing to perform or to offer to perform will cure the failure, taking into account all the circumstances, including any reasonable assurances; and

    5) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing.

    [These five factors] are not exclusive. Courts should draw on common law cases. For example, the concept incorporates questions about the motivation of the breaching party. A series of minor breaches may constitute a material breach where the motivation for this conduct involves a bad faith effort to reduce the value of the deal to the other party or to force that party into a position from which it will be forced to relinquish either the entire deal or, through re-negotiation, aspects of the deal that are otherwise important to it.
    I’d weigh the five factors as follows:

    1) The injured party – the customer – is being deprived of 5¢ per message. If they haven’t used a lot of messages in the past, then it’s unlikely that the extent of future costs will be significant. Cell phone company wins this one.

    2) The injured party can be easily compensated – don’t increase the rate. Consumer wins this one.

    3) Doesn’t really apply to this situation. It’s a wash.

    4) This implies that the cell phone company would be expected to not make the rate increase if the customer objects. If they refuse to keep it at the lower rate, this seems like a clear win for the consumer.

    5) The cell phone company alerted its customers of the rate increase ahead of time, but didn’t give them an option to opt out of the rate increase (unlike T-Mobile has done). This is mildly on the side of the consumer.

    And as to motivation, it seems clear that the motivation for the increase is profit, or to force customers to re-negotiate into a text message package. Another clear consumer win.

    If this were to go to court, I think it’s a tough case for cell phone companies to defend. I’m surprised there’s not been a class action filed yet.

  13. bluwapadoo says:

    @Ben Popken:

    Black’s Law Dictionary, 8th Edition, Bryan A. Garner, Editor in Chief, 2004:

    material, adj. 1.Of or relating to matter; physical . 2. Having some logical connection with the conequential facts . 3. Of such a nature that knowledge fo the item woudl affect a person’s decisionmaking; SIGNIFICANT; essential . (Emphasis mine).

    Seems that significant is part of the definition that Mr. Adams is quoting from Black’s Law Dictionary.

    I will scan it for you, if you would like. Just give me an email address.

    What do I win?

  14. Ben Popken says:

    send it to ben@consumerist.com. you win a hug!

  15. keith4298 says:

    2 items:
    1) When I tried the same argument with Verizon regarding the increase to the FUSC fee, they answered that they would refund the increase in perpetuity. That was a $.30 increase. This is potentially much greater per month, so let them keep the rate as it was for existing contracts or admit it was materially adverse and let you cancel.
    and
    2) I called Verizon a few times until I got a reporesentative that cancelled the accont without the ETF. It appeared as a $175 credit on the account. Her number is 410-694-6501, ext. 2510. I would encourage you to try a few times before calling her as a) she’s very nice and if you’re anything like me – you’re ready to scream at this point having talked to 6 Verizon managers that act as if they are doing you a favor coming out of a meeting to speak with you and b) once too many people call her, Verizon will make sure she stops doing it.

  16. algorythmic says:

    While it’s by all means cool to try to cancel based on this change, I’m surprised that everyone thinks Verizon is being unreasonable by not letting everyone do it. I think that, outside of this context, anyone would find it rather strange to call an increase of 50 cents on an 80 dollar monthly bill “materially adverse”. When you sign a contract you certainly hope that the other party won’t try to do anything like this to you. In fact, legally valid but unresonable acts by corporations receive a great deal of the attention here.