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Reading the Fine Print

4 contract gotchas you should avoid

Smiling Senior Woman Using Cell Phone --- Image by © Reg Charity/Corbis

Photo by Reg Charity/Corbis

It pays to recognize contract terms that can cause major harm.

Beware of the fine print. You've heard that advice before, but do you really know what to be looking out for?

Companies can use lots of confusing language to limit your options and to angle agreements in their favor. Here are the four most egregious things to smoke out before you sign:

Does that phone really work?

Many consumer agreements include a "no guarantee of suitability" clause in which the company admits that its product or service may not work as advertised. This can include anything from software to cellphones. For example, here's the wording in AT&T's wireless phone contract:

"AT&T makes no warranty, express or implied, of merchantability or fitness for a particular purpose, suitability, accuracy, security, or performance regarding any service, software or goods."

In simple terms, they're saying that your cellphone might not work as a phone, or reliably at any particular time or place — your home, for instance. Companies use these unsuitability clauses to say no when customers want out of a contract. And, such language is often enough to persuade credit card companies to refuse a charge-back request.

The Fix: During the trial period, make sure that you test the product or service in all locations and situations in which you'll need it to perform. If it doesn't work satisfactorily, and the company can't — or won't — fix the problem, run to the return line.

Litigating in Las Vegas?

Even if you've not been sidelined by a suitability disclaimer, you may end up taking a long trip in order to make your case through the legal process. Many agreements require any complaint action to take place in a jurisdiction of the company's choosing, regardless of where you live or where the product was purchased.

Check out the following language from financial guru Robert Kiyosaki's customer contract on his "Rich Dad" website, which sells books, seminars and coaching.

"The sole jurisdiction and venue for any litigation arising out of this Agreement will be an appropriate federal or state court located in Nevada."

Whether you live in Vermont, New Jersey or North Dakota, any dispute with Kiyosaki or his products will have to be won in the West.

The Fix: Before signing the contract, check with your state office of consumer affairs. Even if a contract commands otherwise, many states require cases to be argued in the jurisdiction where the sale was made. If your state isn't one of them, and the company won't agree to amend the contract language, keep your money in your pocket.

The jury is out

"I'll see you in court." Or maybe not. "Arbitration clauses" require you to waive your right to a court trial or class action in favor of binding arbitration. Here's an example from Citibank's credit card agreement:

"Arbitration replaces the right to go to court, including the right to a jury and the right to participate in a class action or similar proceeding .... Either you or we may, without the other's consent, elect mandatory, binding arbitration for any claim, dispute, or controversy between you and us."

At first glance the wording may look fair. But a closer read reveals that the bank can unilaterally force you into arbitration rather than a jury trial. And, if you don't prevail, you could be on the hook for all its expenses (attorneys, expert witnesses and fees). Ouch!

The Fix: Even though court trial and class action lawsuits have been taken off the table, in many jurisdictions you may still have the ability to pursue your case in small claims court, where you can't be helped by an attorney and cases are typically limited to less than $10,000. The little guy really can win here sometimes — just last month, an AT&T customer won a small claims case challenging the telephone giant's billing practices. In February, automaker Honda ended up on the losing side of a small claims verdict regarding lower-than-expected hybrid gas mileage.

The impossible trial period

The lure of a "free trial" period is that you get the chance to test out a product or service before actually risking your hard-earned cash. Some agreements hold out the promise of a trial period, but fall way short in practice. Take a look at this language from alarm company ADT:

"The customer may cancel this transaction at any time prior to midnight of the third business day."

You're given just three business days to learn, evaluate and make a final decision on whether a complex security system will actually perform as promised. If you don't, even after paying for installation, you're on the hook for $1,200 to $1,600 — 75 percent of the entire three-year contract price. (And talk about nerve — the agreement also frees them from responding to alarms during a "familiarization period" that lasts seven days.)

The Fix: Pay attention to the full contract price rather than just the monthly payment. Service providers often advertise their products based on monthly cost, even when your signature actually locks you into a four-figure, multiyear agreement. To make sure you're getting what you were promised, accept nothing less than a 30-day trial on any long-term service. You may have to eat the installation cost if you quit, but that's minor compared with three years of payments for a service that doesn't work for you.

Ron Burley is the author of Unscrewed: The Consumer's Guide to Getting What You Paid For.

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