To Sign or Not To Sign
Ever think about how many contracts or agreements you enter into every year? Certainly, you take the time to read each one before you sign or “click” your assent, right? Be honest, do you have even a clue as to what’s in that 60-page software or user agreement that you just clicked “I Agree” to?
The truth is that most people sign contracts and click away with reckless abandon. And most of the time it doesn’t matter because everything goes as planned. The supplier provides the product or service as agreed, and the consumer pays or otherwise meets the terms that were agreed to. In fact, except for the few times when something goes wrong, or one or both of the parties don’t perform as agreed, the contract is meaningless and can gather dust. So in contract law, we say that it doesn’t matter until it matters – but then when it does matter, it can really matter.
The question arises as to how one can remain protected without having to hire an attorney every time he or she enters into a routine transaction. That answer includes several steps.
It’s first important to determine the significance of the contemplated transaction. For example, you can be justifiably less concerned when clicking your assent to the terms of your latest iPhone app than you should be when signing a loan agreement for the purchase of a car or a home. Loan agreements commit you to significant and often long-term obligations for which the ramifications for noncompliance can be substantial and costly. An iPhone app can usually be cancelled at will.
If you’ve determined that the contract/agreement is one that requires more thoughtful consideration, next identify if it is one that is subject to further negotiation, or is an “adhesion” contract. This is an important distinction for several reasons.
An adhesion contract is one that is presented in final form for acceptance and is not subject to further negotiation. It is offered by a party with superior bargaining power on a “take it or leave it” basis. Examples of adhesion contracts include cell phone agreements, insurance policies and the liability disclaimers that are always printed on the back of the claim tickets you receive in a parking garage.
If you determine that the contract you’re contemplating may be subject to further negotiation, then take advantage of the opportunity. Even some agreements that appear to be adhesion contracts, such as leases, may present opportunities for the negotiation of some material terms.
When negotiating, be aware that if a court is ever invoked to enforce your agreement, it will view its job as one of interpretation – to evaluate the legal enforceability of the terms – and rarely the “fairness” of what was agreed to. For example, in a contract for the purchase of a vehicle, it is no defense and, frankly, is a waste of time and good oxygen, to try to convince a court that you should be let off the hook from any further payments because the seller charged you too much for the car in the first place. If you knowingly agreed to the price, and you were of age to contract, sober at the time and there are no allegations of fraud or misrepresentation, you will not be protected from your own ignorance if you agreed to overpay for something.
Because adhesion contracts are not subject to negotiation, sometimes courts will refuse to uphold them if they determine that the unequal bargaining power of the parties resulted in a situation that is so unfair that enforcing the terms would be unconscionable due to the procedural circumstances surrounding the procurement of the agreement, or the substantive terms of the agreement itself.
Realize that it is an extreme case when a court will not enforce an adhesion contract. The mere fact that a contract is one of adhesion will not singularly provide the basis to relieve a party of its obligations under such an agreement.
It’s not possible to address all of the preferred contract terms for inclusion – and exclusion – in one article. However, when negotiating a contract, here are some noteworthy terms to consider:
Term – Every contract should include a defined term for the period during which it is operative and, specifically, when it terminates. Make sure the contract term is one you can live with based on your current and anticipated life circumstances and resources.
Subject Matter – Ensure the product, service or other subject matter of the contract is clearly defined and consistent with your understanding. For example, if you contract for a brand new refrigerator, verify there is no right of the seller to substitute a remanufactured or demonstrator model.
Responsibilities, Liability and Risks of Loss – At its core, the primary intent of a contract is to allocate the duties of the parties in the event that things do go wrong, there is an understanding as to which bears responsibility. Be clear about such things as:
Which party bears the risk of loss if the product is damaged in transit?
What happens if the product fails after a week? A month? A year?
Who is responsible if a third-party is injured by the product?
Who maintains “title” to the property? (Hint: Bet you didn’t know you probably don’t “own” the rights to your wedding photos.)
Are there use, resale or other restrictions on your ownership? (for example: A friend who purchased a rare breed of cat had to agree it would never be allowed to roam outdoors.)
Venue – Ensure that disputes arising under the contract are heard in your local jurisdiction. In our age of Internet commerce, many companies establish in the contract that disputes must be brought within their local jurisdiction. Do you really want a requirement to bring your small claims case for $400 in West Virginia?
Attorney Fees – In most cases, it makes sense to include a provision allowing for the prevailing party in a lawsuit to recover reasonable costs and attorney fees from the losing party. This type of provision may discourage frivolous lawsuits because there is a certain amount of risk involved when filing. However, with an attorney fee provision also be aware of the following:
You may not want to include an attorney fee provision if the other side does not have sufficient resources to pay your attorney fees. In such a case, if you’re the prevailing party, the provision could only work against you. And …
Be aware that some attorney fee provisions are written in such a manner as to only award attorney fees to one party if that party prevails in litigation. This goes in the “nice try” category. Under Civil Code §1717, a one-way attorney fee provision applies equally to both parties. Therefore, regardless of the contract language, the attorney fees will be granted to whichever party prevails.
Mediation – Mediation is a process whereby a neutral third-party assists disputants in resolving their issues by facilitating communication between the parties, rather than evaluating evidence or rendering a decision. The process is quite successful, and many contracts include a provision whereby the parties agree to attempt to resolve their disputes at mediation prior to the filing of any subsequent lawsuit.
Arbitration Clause – Beware the arbitration clause. Simply put, a binding arbitration clause in a contract allows the parties to bypass the judge, jury and courthouse and go directly to a private arbitrator. There they will receive a judgment (called an award) that, except under very rare circumstances, is final and binding (cannot be appealed), and which, according to the California Supreme Court, does not have to follow the law even if it causes a “substantial injustice to the parties.”
The frequent use of arbitration started innocently enough many decades ago as a voluntary process between contracting parties to solve the problem of lengthy court delays, logistics and rising costs of litigation. It has morphed over the years into a mandatory provision of most employment, banking, consumer, health organization and other agreements. It remains an opt-in provision for most real estate agreements. The simple click of assent, or the stroke of a pen invoking an arbitration provision makes a huge difference in the rights of the parties, and how subsequent disputes under that agreement will be handled.
This is not to say that arbitration is always a bad alternative. But it is important for contracting parties to be aware of the significant decision that is being made, and the rights that are being exchanged, when agreeing to such a provision. Also, on balance, most of us like some predictability. And knowing that an arbitrator is not required to follow the law in rendering a decision may be a bit more of a gamble that most of us are willing to take.
So the next time you decide to click that “I Agree”, or sign away like it doesn’t matter, be informed, because someday – it might matter.
Stephen Gizzi is the Managing Partner of Gizzi & Reep, LLP in Benicia. He is an attorney, mediator and serves on the faculty of the National Judicial College in Reno, NV. The information in this article is intended to be general in nature and does not constitute legal advice. Consult your own legal counsel for your particular circumstances.