California Business Lawyer Blog

Every business should protect proprietary information when dealing with independent contractors, vendors and other businesses. The best way to do this is to use a non-disclosure agreement, often referred to as an "NDA."

What is an NDA?

An NDA is an agreement between two parties to protect confidential information disclosed in a business transaction. The proprietary information can include business methods, finances, client lists, and anything that isn't already readily available in the public arena. If a party subsequently breaches the NDA, the injured party can sue for damages, an injunction against further disclosure and attorney's fees.

Directional NDA

In many situations, only one party requires the protection provided by an NDA. If you invent a new product, you are going to need an NDA from manufacturers, distributors, etc., before you discuss the product with them. While this may seem like common sense, most businesses fail to carry the thought through to their daily activities.

Practically every business hires independent contractors, but they rarely obtain NDAs prior to disclosing information to the contractors. For example, do you use third parties to create or maintain your websites? Did you obtain NDAs from any of them? If not, what's to keep that party from using your business methods on other sites? A directional NDA can keep this from occurring.

Mutual NDA

As the name suggest, a mutual NDA allows two parties to protect confidential information. The mutual NDA is typically used when two businesses are negotiating a joint venture. Each party must disclose enough information to make the negotiations viable, but neither wants that information made public if the negotiations fail. If negotiations go well, additional non-disclosure information will be incorporated into the joint venture agreement to protect additional information revealed during the joint venture.

Refusing to Sign an NDA

Alarms and warning lights should go off if a party refuses to sign your NDA. Unless they can provide a very compelling reason for the refusal, you should walk away from the business relationship.

When an NDA isn't really an NDA

Just because a document is titled, "Non-Disclosure Agreement", does not mean it provides you with protection. You should ALWAYS read the language of an NDA because the document may establish that you are WAIVING all confidentiality rights. The waiver might be very direct and read something like, "The disclosure of information pursuant to this Agreement shall not be considered confidential." Alternatively, the language may be more indirect and read, "The parties acknowledge and agree that all information exchanged pursuant to this agreement has previously been established in public forums." Regardless, the "reverse NDAs" strip you of protection and should not be signed.

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Whether you're starting a business from home or opening a large-scale operation, you'll need to decide on the best legal structure for your new company. Don't underestimate the importance of your choice, as the legal entity you choose will affect how much personal liability you face, how much you pay in taxes and how in- depth your new company's record keeping will need to be. Your business structure can take one of five basic forms: the sole proprietorship, the partnership, the regular or C corporation, the S corporation, and the increasingly popular limited liability company or LLC.

The best entity for you will depend on the type of business you'll run, your potential exposure to lawsuits, the number of owners and whether you want the ability to raise capital or transfer shares. It's smart, and in many cases necessary, to consult a lawyer or accountant when making your choice.

Sole Proprietorships
The vast majority of small businesses start off as sole proprietorships, which are the simplest and least expensive vehicles to create and operate, according to the SBA. With a sole proprietorship, the owner and the business are essentially one and the same, meaning you have complete control, you can make decisions as you see fit and the profits from the business flow through to your personal tax return as Schedule C income. (If you don't have profits, you may be entitled to a business loss that can help offset other income.) To launch a sole proprietorship, you don't need to file legal forms or paperwork, such as articles of incorporation, but you might have to obtain a business license, or file a fictitious name document, depending on your state law. A sole proprietorship can only be used by an individual who owns the company, unless it's a husband- and- wife team, in which case it can be shared.

The main drawback of setting up a sole proprietorship is that you have unlimited personal responsibility for all debts or judgments related to the business. That liability, in turn, may make it difficult to attract investors or raise funds for your business.

As a sole proprietor, you'll also be responsible for paying the full burden of Social Security and Medicare taxes-- a cost normally split between employer and employee. For 2010, the first $106,800 of self- employment income is taxed at 12.4 percent for Social Security and 2.9 percent for Medicare. Any amount over $106,800 continues to be taxed at 2.9 percent for Medicare only

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Bailment is the delivery of property from one person (bailor) to another person (bailee) who holds the property for a specific period of time under an express or implied-in-fact contract. To be distinguished from a contract of sale or a gift of property, bailment only involves the transfer of possession and not of ownership. An example of a bailment is taking your car to a parking garage and leaving the car and the keys in the possession of the parking garage attendant states California Business Attorney Steven C. Peck.

Bailments may be of several types: a bailment may be gratuitous when the bailee receives no compensation (as when you borrow your friend's notebook computer to work on an open source online encyclopedia project because he believes in the open source movement and wants to help you out), or a bailment for hire for which the bailee is compensated as in the parking garage example above, another common example is the coatcheck person.

A constructive bailment is a legal obligation that is imposed upon someone who has possession of property to return that property to the rightful owner as when the bailment is involuntary (done without intent or by accident but without negligence). An involuntary bailee may be liable in conversion if they do not return the property on the request of the bailor.

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Arbitration, in the law, is a legal alternative to the courts whereby the parties to a dispute agree to submit their respective positions (through agreement or hearing) to a neutral third party (the arbitrator(s)) for resolution.
Since arbitration is based either upon contract law or, in the case of international arbitration, the law of treaties, the agreement between the parties to submit their dispute to arbitration is usually a legally binding contract. All arbitral decisions are usually considered to be "final and binding." This does not, however, void the requirements of law. Any dispute not excluded from arbitration by virtue of law (e.g. criminal proceedings) may be submitted to arbitration.

Arbitration exists under both domestic and international law, and arbitration can be carried out between private individuals, between states, or between states and private individuals. In the case of arbitration between states, or between states and individuals,
Various bodies of rules have been developed that can be used for arbitration proceedings.

When arbitration occurs under state of federal law, either party to an arbitration may appeal the arbitrator's decision to a court, however the court will generally not change the arbitrator's findings of fact but will decide only whether the arbitrator was guilty of malfeasance, bias, or whether the arbitrator exceeded the limits of his or her authority in the arbitral award. Some jurisdictions have instituted a limited grace period during which an arbitral decision may be appealed, but after which there can be no appeal. In the case of arbitration under international law, a right of appeal does not in general exist, although one may be provided for by the arbitration agreement, provided a court exists capable of hearing the appeal.

Some domestic jurisdictions have stipulated that judges may require either arbitration or mediation of certain disputes as a first step toward resolution, familiy law (particularly child custody) being a prime example.

Arbitrators are not bound by precedent and have great leeway in such matters as: active participation in the proceedings, accepting evidence, questioning witnesses, and deciding appropriate remedies. Arbitrators may visit sites outside the hearing room, call expert witnesses, seek out additional evidence, decide whether or not the parties may be represented by legal counsel, and perform many other actions not normally within the purview of a court. It is this great flexibility of action which, combined with costs usually far below those of traditional litigation, makes arbitration so attractive, although very risky as you are deprived of the constitutional right to Trial by Jury.

No definitive statement can be made concerning the credentials or experience levels of arbitrators, although some jurisdictions have elected to establish standards for arbitrators in certain fields. Several independent organizations offer arbitrator training programs, such as the American Arbitration Association, and thus in effect, credentials. Generally speaking, however, the credibility of an arbitrator rests upon reputation, experience level in arbitrating particular issues, or expertise/experience in a particular field. Arbitrators are generally not required to be members of the legal profession.

A growing trend among employers whose employees are not represented by a labor union is to establish an organizational problem-solving process, the final step of which consists of arbitration of the issue at point by an independent arbitrator. Most collective bargaining agreements in organizations where employees are represented by a labor organization stipulate that the final step of any grievance procedure shall consist of arbitration.

To ensure effective arbitration and to increase the general credibility of the arbitral process, arbitrators will sometimes sit as a panel, usually consisting of three arbitrators. Often the three consist of an expert in the legal area within which the dispute falls (such as contract law in the case of a dispute over the terms and conditions of a contract), an expert in the industry within which the dispute falls (such as the construction industry, in the case of a dispute between a homeowner and his general contractor), and an experienced arbitrator.

Critics of arbitration argue that arbitration can be unfair to the individual when faced with a dispute with a corporation. In these cases, the choice of arbiter may be spelled out in a contract in which the individual has no power to negotiate. The arbitration panel may contain industry experts who may be more sympathetic to the industry than to the individual. Also, some have argued that the fact that an arbitration company may handle many cases for a corporation while an individual rarely goes through arbitration twice may bias the arbitrators in favor of the company. The fact that most arbitral procedures are not public, and that there may be no provision for an individual to be represented by counsel, may also work to the disadvantage of the individual. These potential disadvantages make the ethics and professionalism of arbitrators even more important.

Continue reading "Arbitration: A Practical Overview" »

Fiduciary duty is one of the duties that corporate directors and officers have towards a corporation, as well as the duties that partners have to a partnership and trustees have to a trust.
Broadly speaking, fiduciary duties can be grouped into three categories:

Duty of Loyalty. A fiduciary must act in accordance with the interests of the beneficiary, and not his own interests.

Duty of Candor. A fiduciary must not withhold information from the beneficiary, particularly with respect to the fiduciary's dealings with the beneficiary.

Duty of Care. A fiduciary must act with some degree of care with respect to the beneficiary. This is usually formulated as a duty to take the care that an ordinarily prudent person would in similar circumstances.

A variety of other duties, and legal doctrines, are subsumed in these three duties. For example, the duty of care includes a duty of confidentiality, i.e. that the fiduciary will not disclose the beneficiary's information. The duty of loyalty includes the corporate opportunity doctrine. Fiduciary duties take into account the nature of the relationship in which they are formed, and, in some circumstances (such as in limited liability companies) may be modified by contract.
Also related is the Business Judgement Rule which provides that the decisions of a corporation's board of directors will not be second-guessed unless a decision is self-interested (a violation of the duty of loyalty) or (more rarely) the board acted in an imprudent manner (a violation of the duty of care).

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Something interesting is happening in California. Anthem Insurance Company is delaying its massive insurance rate increase. Anthem insurance company has been under fire this week because they are going to invoke an average price increase of 25 percent on about 700,000 insurance customers who purchase their own coverage. For some it would be as high as 39 percent. Anthem is getting grief all the way up to the White House.

Anthem has agreed to delay implementing their rate increase from March 1 to May 1.

Insurance Commissioner of California Steve Poizner has been working with Anthem Insurance to determine if they are living up to a law that was passed in 2006. This says that an insurance company must spend 70 cents of every premium dollar on medical care.

I personally think that is whimsical says Los Angeles Business Attorney Steven C. Peck. That means your expenses and administration come out of 30 cents on the dollar. Companies can do that if the expenses go down after the first year but I sincerely doubt that 70 cents on the dollar is realistic. And that can cause this type of problem.

The commissioner has brought in an outside firm to examine the summations of Anthem. He is skeptical that they have come to the right conclusions.

If they did not live up to the law then the Commissioner can make the company reduce the rates at risk of losing their license to sell in the state.
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Reliance-based estoppels--These involve one party relying on something the other party has done or said. The party who did/said the act is the one who is estopped. Under English law, this class includes estoppel by representation of fact, promissory estoppel and proprietary estoppel Although some authorities have used language to suggest reliance-based estoppels are mere rules of evidence, they are rules of substantive law.

Equitable Estoppels:

Estoppel by record--This frequently arises as issue/cause of action estoppel or judicial estoppel where the orders or judgments made in previous legal proceedings prevent the parties from relitigating the same issues or causes of action,
Estoppel by deed (often regarded as technical or formal estoppels)--Where rules of evidence prevent a litigant from denying the truth of what was said or done
Estoppel by silence--Estoppel that prevents a person from asserting something when he had the right and opportunity to do so earlier, and such silence put another person at a disadvantage.
Laches--estoppel in equity by delay. Laches has been considered both a reliance-based estoppel, and a sui generis estoppel.

Reliance-based estoppels

Reliance-based estoppels by representation of fact, where one person asserts the truth of a set of facts to another;promissory estoppel, where one person makes a promise to another, but there is no enforceable contract; and
proprietary estoppel, where the parties are litigating the title to land.
These three estoppels collectively known as estoppels by representation. More simply, one party must say or do something and see the other party rely on what is said or done to change behavior.

All reliance-based estoppels require the victimised party to show both inducement and detrimental reliance, i.e.:there must be evidence to show that the representor actually intended the victim to act on the representation or promise, or the victim must satisfy the court that it was reasonable for him or her to act on the relevant representation or promise, andwhat the victim did must either have been reasonable, or the victim did what the representor intended, and the victim would suffer a loss or detriment if the representor was allowed to deny what was said or done -- detriment is measured at the time when the representor proposes to deny the representation or withdraw the promise, not at the time when either was made, and in all the circumstances, the behavior of the representor is such that it would be "unconscionable" to allow him or her to resile.
Estoppel by representation of fact and promissory estoppel are mutually exclusive: the former is based on a representation of existing fact (or of mixed fact and law), while the latter is based on a promise not to enforce some pre-existing right (i.e. it expresses an intention as to the future). A proprietary estoppel operates only between parties who, at the time of the representation, were in an existing relationship, while this is not a requirement for estoppel by representation of fact.

The test for unconscionability takes many factors into account, including the behavior, state of mind and circumstances of the parties. Generally, the following eight factors are determinative says California Business Lawyer Steven C. Peck.

How the promise/representation and reliance upon it were induced;
The content of the promise/representation;
The relative knowledge of the parties;
The parties' relative interest in the relevant activities in reliance;
The nature and context of the parties' relationship;
The steps, if any, taken by the promisor/representor to ensure he has not caused preventable harm.

Continue reading "Estoppel: Definitions" »

When you make a monetary loan, it is always a good idea to have a promissory note setting forth the terms of the loan suggests Los Angeles Business Lawyer Steven C. Peck. A promissory note is also used in real estate transactions.

A personal promissory note for a loan has many parts. It will set forth the full names and addresses of both the lender and the borrower. The amount of the loan will be stated, along with any terms of interest and the length of the loan. Payment terms will give the amount of each month/weekly/yearly payment until the loan is considered paid in full. The promissory note will also spell out remedies and actions should the loan be defaulted upon or if payments are late. Without this type of formal agreement, there is no guarantee that loaned money will be repaid to you on time, or even at all. Promissory notes protect everyone involved. They not only assure the lender a legal recourse if the loan is defaulted upon, but they protect the borrower should the lender decide to change or alter verbal terms throughout the life of the loan. Once this form is completed and endorsed, there should be no questions, confusion and difficulty with the performance of either party. Lastly, as with any other legal forms, all signatures must be notarized and/or witnessed.

Continue reading "Monetary Loan: Have a Promissory Note Drawn Up Setting Forth Its Terms" »

General vs. Limited PartnershipsThere are two types of partnerships: general partnerships and limited partnerships (LPs). In a general partnership, each partner can incur obligations on behalf of the partnership, and each assumes unlimited liability for the partnership's debts. For example, if the partnership owns a truck, and the truck strikes and injures a pedestrian, each partner is personally liable for any damages or judgments says California Business Attorney Steven C. Peck.

This unlimited liability risk makes limited partnerships an attractive alternative to general partnerships. In an LP, there is usually just one general partner (although there can be more). The other partners are called "limited partners." The general partner has full management responsibility runs the day-to-day operations of the business. A limited partner cannot incur obligations on behalf of the partnership and does not participate in the firm's daily operations or management. In fact, a limited partner's role usually involves nothing more than making an initial capital investment in exchange for a share of the firm's profits indicates Los Angeles Business Lawyer Peck.

While the general partner wields most of the power, they also bear the lion's share of the liability. A limited partner's liability, on the other hand, cannot exceed their financial contribution to the partnership. So, if a truck owned by a limited partnership accidentally injures someone, the damaged party could go after the general partner's personal assets but could only go after a limited partner's actual investment in the partnership.

As a result, a limited partnership offers two key advantages: It gives the general partner the freedom to run the business without interference, and it protects the limited partners if something goes wrong. Limited partners may choose to get more involved in a partnership's daily operations, but they do so at their own risk. In the eyes of the law, their involvement may make them a general partner and strip them of their limited liability.

Continue reading "General vs. Limited Partnerships: Types of Business Structure" »

Long-term financing is a tool that most companies use to promote their business and increase their profitability says California Business Lawyer Steven C. Peck.

While several options for business loans are available, most loans are subject to the same volume terms and conditions.

Business loans have two main lengths: intermediate-term and long term. Intermediate-term loans are one to three years, while long-term loans are more than three years. Ten years is a popular choice for long-term loans.

Loan terms include loan amount, repayment options, interest rate and any special requirements such as financial statement updates or balloon payments. These terms have been negotiated by the applicant to ensure they get the best loan for their business.

Banks use strict credit assessments to determine the amount of credit to extend to the applicants. Factors such as current outstanding loans, on-hand capital and business credit ratings are important factors used in approving long-term loans.

Some lenders require businesses to provide collateral for the loan amount. This security is surrendered to the bank if the company fails to fulfill any of the loan terms.

Long term Business loans are best used by companies expanding business or buying competitors, which will increase their profitability. These types of long-term profit operations allow companies to build a positive cash flow before repaying their long-term loans.

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The most widely accepted standard of value is "fair market value." This standard applies in all federal and state tax matters and has been adopted for most valuation purposes indicates Los Angeles Business Attorney Steven C. Peck.

In appraisal parlance, it is broadly stated to be the amount that is fair and equitable to the parties to a transaction. The common definition is the amount at which property would change hands between a willing seller and a willing buyer when neither is acting under compulsion and when both have reasonable knowledge of the relevant facts says California Business Attorney Peck.

Fair market value is almost universally accepted as the cash or cash-equivalent, price. The terms "market value", "cash value", and "investment value", often used in statutes and opinions, have usually been interpreted as equivalent to fair market value.

The distinction between fair market value for continued use and fair market value in liquidation (when the seller is under a compulsion to sell) should be considered in an appraisal; each requires its own valuation techniques.

Continue reading "The Concept of Fair Market Value" »

Articles, statutes, and cases dealing with business valuation use a variety of terms for value including "fair market value", "intrinsic value", "fair value", "investment value", and "cash value".

"Fair Market Value" is the term which is most often used by business appraisers and tax statutes says California Business Attorney Steven C. Peck.

In the buy-sell agreement context, "value" is ordinarily equivalent to "price", although the two words are not necesarily synonymous.

Continue reading "Valuation Terminology Applicable to Corporations and Partnerships" »

A contract intends to formalize an agreement between two or more parties, in relation to a particular subject. Contracts can cover an extremely broad range of matters, including the sale of goods or real property, the terms of employment or of an independent contractor relationship, the settlement of a dispute, and ownership of intellectual property developed as part of a work for hire.

The Elements of a Contract
Typically, in order to be enforceable, a contract must involve the following elements says California Business Attorney Steven C. Peck:

A "Meeting of the Minds" (Mutual Consent)
The parties to the contract have a mutual understanding of what the contract covers. For example, in a contract for the sale of a "mustang", the buyer thinks he will obtain a car and the seller believes he is contracting to sell a horse, there is no meeting of the minds and the contract will likely be held unenforceable.

Offer and Acceptance
The contract involves an offer (or more than one offer) to another party, who accepts the offer. For example, in a contract for the sale of a piano, the seller may offer the piano to the buyer for $1,000.00. The buyer's acceptance of that offer is a necessary part of creating a binding contract for the sale of the piano.

Please note that a counter-offer is not an acceptance, and will typically be treated as a rejection of the offer. For example, if the buyer counter-offers to purchase the piano for $800.00, that typically counts as a rejection of the original offer for sale. If the seller accepts the counter-offer, a contract may be completed. However, if the seller rejects the counter-offer, the buyer will not ordinarily be entitled to enforce the prior $1,000.00 price if the seller decides either to raise the price or to sell the piano to somebody else explains California Business Lawyer Steven C. Peck.

Mutual Consideration (The mutual exchange of something of value)
In order to be valid, the parties to a contract must exchange something of value. In the case of the sale of a piano, the buyer receives something of value in the form of the piano, and the seller receives money.

While the validity of consideration may be subject to attack on the basis that it is illusory (e.g., one party receives only what the other party was already obligated to provide), or that there is a failure of consideration (e.g., the consideration received by one party is essentially worthless), these defenses will not let a party to a contract escape the consequences of bad negotiation. For example, if a seller enters into a contract to sell a piano for $100, and later gets an offer from somebody else for $1,000, the seller can't revoke the contract on the basis that the piano was worth a lot more than he bargained to receive.

Performance or Delivery
In order to be enforceable, the action contemplated by the contract must be completed. For example, if the purchaser of a piano pays the $1,000 purchase price, he can enforce the contract to require the delivery of the piano. However, unless the contract provides that delivery will occur before payment, the buyer may not be able to enforce the contract if he does not "perform" by paying the $1,000. Similarly, again depending upon the contract terms, the seller may not be able to enforce the contract without first delivering the piano.

In a typical "breach of contract" action, the party alleging the breach will recite that it performed all of its duties under the contract, whereas the other party failed to perform its duties or obligations indicates Los Angeles Business Lawyer Steven C. Peck.

Additionally, the following elements may factor into the enforceability of any contract:

Good Faith
It is implicit within all contracts that the parties are acting in good faith. For example, if the seller of a "mustang" knows that the buyer thinks he is purchasing a car, but secretly intends to sell the buyer a horse, the seller is not acting in good faith and the contract will not be enforceable.

No Violation of Public Policy
In order to be enforceable, a contract cannot violate "public policy". For example, if the subject matter of a contract is illegal, you cannot enforce the contract. A contract for the sale of illegal drugs, for example, violates public policy and is not enforceable.

Please note that public policy can shift. Traditionally, many states refused to honor gambling debts incurred in other jurisdictions on public policy grounds. However, as more and more states have permitted gambling within their own borders, that policy has mostly been abandoned and gambling debts from legal enterprises are now typically enforceable. (A "bookie" might not be able to enforce a debt arising from an illegal gambling enterprise, but a legal casino will now typically be able to enforce its debt.) Similarly, it used to be legal to sell "switchblade kits" through the U.S. mail, but that practice is now illegal. Contracts for the interstate sale of such kits were no longer enforceable following that change in the law.

Oral Contracts
There is an old joke that "an oral contract isn't worth the paper it's written on". That's a reference to the fact that it can be very difficult to prove that an oral contract exists. Absent proof of the terms of the contract, a party may be unable to enforce the contract or may be forced to settle for less than the original bargain. Thus, even when there is not an opportunity to draft up a formal contract, it is good practice to always make some sort of writing, signed by both parties, to memorialize the key terms of an agreement.

At the same time, under most circumstances, if the terms of an oral contract can be proved or are admitted by the other party, an oral contract is every bit as enforceable as one that is in writing. There are, however, "statute of fraud" laws which hold that some contracts cannot be enforced unless reduced to writing and signed by both parties. For more information on the Statute of Frauds, please see this associated article.

Please note that, although sometimes an oral contract is referred to as a "verbal contract", the term "oral" means "spoken" while the term "verbal" can also mean" in words". Under that definition, all contracts are technically "verbal". If you mean to refer to a contract that is not written, although most people will recognize what you mean by "verbal contract", for maximum clarity it is helpful to refer to it as an "oral contract

Continue reading "The Essential Elements of Understanding a Business Contract" »

Chrysler Group LLC will notify its 789 shuttered dealers that it is complying with a new federal law requiring arbitration for dealers who want to challenge the closings says California Business Attorney Steven C. Peck.

Chrysler said Sunday that the company is "complying with the law and will continue to do so," spokeswoman Kathy Graham said.

Chrysler sent letters required under the law on Dec. 23 giving Chrysler dealers the contact address for all correspondence during the arbitration process says California Business Lawyer Steven C. Peck.

Starting MondayJanuary 11, 2010, the 789 closed dealers "will receive an additional letter which gives information about the legislation, the arbitration process and criteria used overall to determine what contracts were rejected, as well as how it applied to the dealer individually." Peck Says.

But Chrysler hasn't given up its right to fight the measure in court.

"We have made no decision on whether or not to challenge the law, in the mean time we are complying with the legislation and dealers have been notified where to send correspondence concerning arbitration".

Contact Steven Peck's Premier Legal toll free at 1.866.999.9085 to talk to an experienced Los Angeles, California Business Attorney and visit us on-line at www.premierlegal.org.

A standard form contract (sometimes referred to as an adhesion contract or boilerplate contract) is a contract between two parties that does not allow for negotiation, i.e. take it or leave it. It is often a contract that is entered into between unequal bargaining partners, such as when an individual is given a contract by the salesperson of a multinational corporation. The consumer is in no position to negotiate the standard terms of such contracts and the company's representative often does not have the autonomy to do so says California business attorney Steven C. Peck

There is some debate on a theoretical level whether, and to what extent, courts should enforce standard form contracts. On one hand, they undeniably fulfill an important efficiency role in society. Standard form contracting reduces transaction costs substantially by precluding the need for buyers and sellers of goods and services to negotiate the many details of a sale contract each time the product is sold. On the other hand, there is the potential for inefficient, and even unjust, terms to be accepted by those signing these contracts. Such terms might be seen as unjust if they allow the seller to avoid all liability or unilaterally modify terms or terminate the contract says California Business attorney Steven C. Peck.

These terms often come in the form of, but are not limited to, forum selection clauses and mandatory arbitration clauses, which can limit or foreclose a party's access to the courts; and also liquidated damages clauses, which set a limit to the amount that can be recovered or require a party to pay a specific amount. They might be inefficient if they place the risk of a negative outcome, such as defective manufacturing, on the buyer who is not in the best position to take precautions. There are a number of reasons why such terms might be accepted:
Lengthy boilerplate terms are often in fine print and written in complicated legal language which often seems irrelevant. The prospect of a buyer finding any useful information from reading such terms is correspondingly low. Even if such information is discovered, the consumer is in no position to bargain as the contract is presented on a "take it or leave it" basis. Coupled with the often large amount of time needed to read the terms, the expected payoff from reading the contract is low and few people would be expected to read it.
Access to the full terms may be difficult or impossible before acceptance
Often the document being signed is not the full contract; the purchaser is told that the rest of the terms are in another location. This reduces the likelihood of the terms being read and in some situations, such as software license agreements, can only be read after they have been notionally accepted by purchasing the good and opening the box.
Boilerplate terms are not salient
The most important terms to purchasers of a good are generally the price and the quality, which are generally understood before the contract of adhesion is signed. Terms relating to events which have very small probabilities of occurring or which refer to particular statutes or legal rules do not seem important to the purchaser. This further lowers the chance of such terms being read and also means they are likely to be ignored even if they are read.
There may be social pressure to sign
Standard form contracts are signed at a point when the main details of the transaction have either been negotiated or explained. Social pressure to conclude the bargain at that point may come from a number of sources. The salesperson may imply that the purchaser is being unreasonable if they read or question the terms, saying that they are "just something the lawyers want us to do" or that they are wasting their time reading them. If the purchaser is at the front of a queue (for example at an airport car rental desk) there is additional pressure to sign quickly. Finally, if there has been negotiation over price or particular details, then concessions given by the salesperson may be seen as a gift which socially obliges the purchaser to respond by being co-operative and concluding the transaction.
Standard form contracts may exploit unequal power relations
If the good which is being sold using a contract of adhesion is one which is essential or very important for the purchaser to buy (such as a rental property or a needed medical item) then the purchaser might feel they have no choice but to accept the terms. This problem may be mitigated if there are many suppliers of the good who can potentially offer different terms.
Some contend that in a competitive market, consumers have the ability to shop around for the supplier who offers them the most favorable terms and are consequently able to avoid injustice. However, in the case of credit card contracts, for example, the consumer while having the ability to shop around may still have access to only form contracts with like terms and no opportunity for negotiation. Also, as noted, many people do not read or understand the terms so there might be very little incentive for a firm to offer favorable conditions as they would gain only a small amount of business from doing so. Even if this is the case, it is argued by some that only a small percentage of buyers need to actively read standard form contracts for it to be worthwhile for firms to offer better terms if that group is able to influence a larger number of people by affecting the firm's reputation.

Another factor which might mitigate the effects of competition on the content of contracts of adhesion is that, in practice, standard form contracts are usually drafted by lawyers instructed to construct them so as to minimize the firm's liability, not necessarily to implement managers' competitive decisions. Sometimes the contracts are written by an industry body and distributed to firms in that industry, increasing homogeneity of the contracts and reducing consumer's ability to shop around.

As a general rule, the common law treats standard form contracts as any other contract. Signature or some other objective manifestation of intent to be legally bound will bind the signor to the contract whether or not they read or understood the terms. The reality of standard form contracting, however, means that many common law jurisdictions have developed special rules with respect to them. In general, courts will interpret standard form contracts literally 'against the proffering person' but specific treatment varies between jurisdictions.

Continue reading "Adhesion Contracts Beware of the Take It or Leave It" »