It happens all the time. You want or need something. You may need medical care at a hospital. You may need phone service. You may need a loan or a credit card to make ends meet. You decide to build a home.
To get what you need or want, the seller requires you to sign a contract. You try to take the time to read it, but the seller insists on rushing you or distracting you. Perhaps you can’t understand the document as it’s full of legal jargon, or the type is so small, you can’t read it. Later, you discover that the seller, formerly Mr. Friendly, is now running off with your life savings and that there’s nothing you can do about it.
This law letter is the first of a series that identifies some of the contract clauses that will cause you BIG trouble.
Arbitration
Generally, you have a right to a jury trial before an unbiased judge in North Carolina. You may find a clause in your contract requiring you to submit any dispute to binding arbitration. Sign that contract and you have given up your right to get help from the courts. You will often see these clauses in construction contracts and in the admitting papers for some hospitals.
The North Carolina Supreme Court, in the Tillman case from 2008, described some of the problems with arbitration. If your case involves at least $10,000, the filing fee with the American Arbitration Association is currently $1275 plus the cost of renting the hearing room. Court filing fees in North Carolina are less than $200.00. In 2005, arbitrators with the American Arbitration Association charged as much as $2380 per day. In North Carolina, judges are free. The Court, in its 2008 ruling, noted that in many cases, the “high arbitration costs” were “prohibitive.”
Some have also argued that arbitration has the potential for bias against the consumer. They note that while one bank, hospital, or builder may present numerous cases to a particular arbitrator, the consumer is likely to face the arbitrator only once. They claim that the arbitrator is biased in favor of the party who is likely to bring repeat business.
You Pay Our Attorney
Under North Carolina law, as a general rule, each side pays his own attorney fees. Look out for the contract that says you will pay the Seller’s attorney fees and/or costs. A typical attorney fee for litigation ranges anywhere from $300.00 per hour to $500.00 per hour. Do the math. You can be facing thousands of dollars in attorney fees from the other side.
Typically the contract will require you to pay attorney fees for the other side only if you lose your case. I just received a proposed debit card agreement from my bank. It states that I will pay their attorney fees even if I win my case unless I can prove that the bank was “grossly negligent” or committed “willful misconduct.” Essentially, I can’t afford to fight back if a dispute arises between me and the bank.
In addition to attorney fees, the “costs” in any case can be prohibitive. Paying a court reporter to attend a deposition and transcribe it can run into thousands of dollars. Bring a witness in from out of town, and you can get stuck with airfare, hotel bills, and meals. If that witness is an expert, you can be required to pay an hourly rate. The last time I hired a plastic surgeon in a case, his hourly rate was $500.00. He also required a $2000 deposit each time the case was put on the court calendar. That can happen several times in any given case. Plaintiff’s expert witness fees in my last medical malpractice case exceeded $100,000.00. Can you imagine the expense if we had lost and had to pay defense costs and attorney fees as well as our own costs?
Security Interest in Other Property
Another feature you may find in your mortgage agreement or other bank contract is the clause giving the bank a right to any money in any account you may have at the bank as well as in any of your personal property the bank can access. So, assume you have a safety deposit box, a business account, a personal account, and a retirement account at your bank. Then, because you lose your job or become sick, you can’t pay your mortgage. According to the contract, the bank can seize your retirement money. Retirement accounts would otherwise be protected from creditors under North Carolina law. And if Grandma’s diamond rings are in your safety deposit box, the Bank can take them as well. If you want to fight the bank over the seizure of your assets, you’d better win. Otherwise, you’ll be facing thousands of dollars in attorney fees and court costs.
In Short . . .
Banks and others have figured out that they can make millions by slipping the above clauses in their contracts. You can be cheated out of thousands of dollars if you sign a contract with these provisions. And the North Carolina courts will generally not help you out. The 2008 case I mentioned above was the first case in the history of North Carolina in which the Courts threw out an oppressive or “unconscionable” agreement. The general rule is that once you sign an agreement you are stuck with it. So be careful. Be sure you read contracts and understand them before you sign them. Good luck. You are swimming with sharks.
Tuesday, December 7, 2010
Bound Man, Part 2
Last month’s newsletter warned about damaging clauses that are showing up in many contracts. They lurk in sales contracts and in agreements from banks, credit card companies, professionals (architects, contractors, etc.), and hospitals. They include arbitration provisions, contracts requiring you to pay the other party’s attorney fees and court costs, and agreements in which you are tricked into giving up your property rights. This month’s newsletter alerts you to other sneaky clauses to avoid.
Limits on Liability
The courts usually determine the amount of damages in cases where a litigant has been wronged. For example, assume you hire an architect to build your new home. If the architect’s plans have a design flaw and your $500,000 house falls apart, you can recover the $500,000 and damages for any injuries sustained by persons in the house when it collapses. However, the architect may have a clause in his contract limiting his liability to the amount of his fee. Assume the architect charged you $60,000 for his services in connection with your house. In that event, if the house falls down, you are out $440,000. If you were in your house when it fell down, you’d better hope you have good health insurance and a good disability insurance policy. You won’t get any help from the architect.
Warranty Disclaimer
The law imposes warranty obligations on the Sellers of most products. For example, a contractor who builds your home warrants that it is “habitable,” or suitable to be lived in. He also warrants that it is “merchantable,” or that you should be able to sell it for a reasonable price. If a company sells you a device that it claims will emit sounds that frighten away vicious dogs, it has warranted or guaranteed you that it will do that. Courts refer to this as a “warranty for a particular purpose.”
Seeking to avoid liability for shoddy products, many Sellers insert clauses into their sales contracts providing that the Buyer is giving up his warranty rights. Assume you have signed such an agreement with the Seller of the dog protection device described above. Then assume that the first time you try it out, the beast mauls you because the noise the device has emitted doesn’t frighten the dog. It merely aggravates him. Once more, you are on your own. Good health insurance and disability insurance policies are a must if you insist on signing contracts with warranty disclaimers. You should also be sure your estate papers are in good order and that you know a good bankruptcy attorney.
Forum Clauses
If a California company markets its products to you when you live in North Carolina, you generally have the right to have any problems with that company resolved in a North Carolina court. But if you have signed an agreement giving the California courts jurisdiction over the case, you will have to find a California lawyer and pay the cost of flying yourself and your witnesses to California for court. You will also have the pleasure of paying for hotel and food bills during the several weeks you and your witnesses are in deposition and trial. If the case concerns a defective product, like a car, you may have to pay to have it hauled out to California for the trial.
Contracts with “forum” clauses usually specify that the laws of the foreign state will apply. You can be sure that the laws of that state will be less friendly to consumers than the laws of your home state.
The Right to Amend
Many contracts now provide that one party has the right to amend the contract at any time by simply notifying the other party of the amendment. I recently received a proposed amendment to my banking agreement that had this clause. It would have allowed the bank to unilaterally change the interest rates it was paying or charging me. It would also have allowed it to begin to impose limitless fees for banking services. For example, they could have started charging $100 for every deposit I made to the account. I terminated the banking relationship immediately.
No Class Actions
Most corporate contracts now contain a clause stating that you give up your right to participate in class action litigation. Assume that your bank or credit card company has cheated its thousands of customers, including you, out of $200 each. It may have accumulated billions in the scam. Angry about being hoodwinked, you talk with your lawyer about getting your money back. Imagine your frustration when you find that it will cost you at least $2000.00 to sue the bank. You realize that it would make no economic sense to file suit. Of course your bank already figured that out when it concocted the scam. And if you have signed a bank contract prohibiting class action suits, your bank wins. Such companies have learned that it’s much easier and more profitable to cheat millions of consumers out of a little bit of money than to cheat a couple of consumers out of large amounts of cash.
In Short
Be sure to read each contract before you sign it. And if you see any of the above clauses in the contract, refuse to sign it. A company insisting on such terms is not a company that is going to treat you fairly. Please, don’t sign up to get ripped off!
Limits on Liability
The courts usually determine the amount of damages in cases where a litigant has been wronged. For example, assume you hire an architect to build your new home. If the architect’s plans have a design flaw and your $500,000 house falls apart, you can recover the $500,000 and damages for any injuries sustained by persons in the house when it collapses. However, the architect may have a clause in his contract limiting his liability to the amount of his fee. Assume the architect charged you $60,000 for his services in connection with your house. In that event, if the house falls down, you are out $440,000. If you were in your house when it fell down, you’d better hope you have good health insurance and a good disability insurance policy. You won’t get any help from the architect.
Warranty Disclaimer
The law imposes warranty obligations on the Sellers of most products. For example, a contractor who builds your home warrants that it is “habitable,” or suitable to be lived in. He also warrants that it is “merchantable,” or that you should be able to sell it for a reasonable price. If a company sells you a device that it claims will emit sounds that frighten away vicious dogs, it has warranted or guaranteed you that it will do that. Courts refer to this as a “warranty for a particular purpose.”
Seeking to avoid liability for shoddy products, many Sellers insert clauses into their sales contracts providing that the Buyer is giving up his warranty rights. Assume you have signed such an agreement with the Seller of the dog protection device described above. Then assume that the first time you try it out, the beast mauls you because the noise the device has emitted doesn’t frighten the dog. It merely aggravates him. Once more, you are on your own. Good health insurance and disability insurance policies are a must if you insist on signing contracts with warranty disclaimers. You should also be sure your estate papers are in good order and that you know a good bankruptcy attorney.
Forum Clauses
If a California company markets its products to you when you live in North Carolina, you generally have the right to have any problems with that company resolved in a North Carolina court. But if you have signed an agreement giving the California courts jurisdiction over the case, you will have to find a California lawyer and pay the cost of flying yourself and your witnesses to California for court. You will also have the pleasure of paying for hotel and food bills during the several weeks you and your witnesses are in deposition and trial. If the case concerns a defective product, like a car, you may have to pay to have it hauled out to California for the trial.
Contracts with “forum” clauses usually specify that the laws of the foreign state will apply. You can be sure that the laws of that state will be less friendly to consumers than the laws of your home state.
The Right to Amend
Many contracts now provide that one party has the right to amend the contract at any time by simply notifying the other party of the amendment. I recently received a proposed amendment to my banking agreement that had this clause. It would have allowed the bank to unilaterally change the interest rates it was paying or charging me. It would also have allowed it to begin to impose limitless fees for banking services. For example, they could have started charging $100 for every deposit I made to the account. I terminated the banking relationship immediately.
No Class Actions
Most corporate contracts now contain a clause stating that you give up your right to participate in class action litigation. Assume that your bank or credit card company has cheated its thousands of customers, including you, out of $200 each. It may have accumulated billions in the scam. Angry about being hoodwinked, you talk with your lawyer about getting your money back. Imagine your frustration when you find that it will cost you at least $2000.00 to sue the bank. You realize that it would make no economic sense to file suit. Of course your bank already figured that out when it concocted the scam. And if you have signed a bank contract prohibiting class action suits, your bank wins. Such companies have learned that it’s much easier and more profitable to cheat millions of consumers out of a little bit of money than to cheat a couple of consumers out of large amounts of cash.
In Short
Be sure to read each contract before you sign it. And if you see any of the above clauses in the contract, refuse to sign it. A company insisting on such terms is not a company that is going to treat you fairly. Please, don’t sign up to get ripped off!
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