Friday, July 27, 2007


What is the penalty for a train or airline passenger who's late? Often $50 or more. What is the penalty for a company when a train or airplane is late? Nothing. How can that be fair? It's not. But this imbalance, and many others you can probably recite by heart, can be blamed in part on the proliferation of one-sided contractual relationships called "contracts of adhesion."

Every one of us finds ourselves in contracts of adhesion every day, with virtually every consumer product we buy. Contracts of adhesion are pacts between two entities that are not equal, a David and Goliath agreement, where Goliath offers the deal on take-it-or-leave-it terms. Nothing can be negotiated, so everything can be unfair. Buying a car? You have to sign a piece of paper that says you'll never sue the dealer. Won't sign the paper? You can't buy a car. And since all auto dealers require these one-sided terms, consumers don't really have a choice -- either abdicate your right to sue, or don’t drive.

In general, contracts in the United States are only valid when they are negotiated between two equal parties. That makes sense: Only people on equal footing can engage in fair, arm's-length negotiations.

Take-it-or-leave-it Consumer contracts don't fit this bill, however. They are almost always take-it-or-leave-it, non-negotiated contracts. When you purchase a cell phone, you agree to never join a class-action lawsuit against the cell phone provider. When you get a credit card, you agree that the terms and conditions for that card can change at any time. If you don't agree to these things, you can't get a cell phone or a credit card. That's just how it is. Take it or leave it. It's all on those pieces of paper you sign, or somewhere on the firm's Web site, in very, very small print.

To prevent abuses, courts have held repeatedly that contracts of adhesion fall into a special category. Despite what you might have heard, unfair provisions inserted into such contracts are not legally enforceable -– even if you signed the piece of paper. Such provisions are given the drastic legal term "unconscionable." A judge who finds a provision of a contract of adhesion to be unconscionable will void that provision.

There is a problem, however: Absent activist government intervention, everything is legal until someone sues. Long ago, companies noticed this and began pushing the boundaries on contracts of adhesion. As long as no one drags them to court, anything goes.

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