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!