Bear with us - we'd like to tell a story....
A man walks into an auto dealership, having decided to buy a new vehicle.
The dealer and the customer agree terms, after which the dealer hands the customer the purchase contract to sign.
"Wow", says the customer. "This document is thicker than the last time I bought a car”.
"Ah", says the dealer. "Our attorneys continuously update our purchase agreement so that it reflects auto industy best practice."
The dealer is surprised when our customer asks to read the document – apparently many customers don’t bother to read the 72 pages of fine print.
Settling down, the customer turns to the first section, "Purpose of the Vehicle". Page 1 states "you have purchased a compact sedan, which is designed to provide efficient, trouble free motoring." There is a two page description of the specifications of the vehicle, including the bios of the chief designers, which all sounds pretty good. However, the final paragraph of the section states "while it is anticipated that the vehicle will focus on high fuel economy, efficient transportation, the Manufacturer will retain a broad and flexible manufacturing mandate. As such, the vehicle may also be lighter, heavier, bigger, smaller, more fuel efficient, use more fuel, have fewer or more seats, be a different color or otherwise differ in specification. Nothing in this document shall in any way limit the Manufacturer’s ability to change the specifications, performance or characteristics of the vehicle, and such changes may be made at the sole discretion of the Manufacturer without notice to the Customer."
"Hang on a minute" says the Customer. "It says here that, in the sole discretion of the Manufacturer, you can make the vehicle different in pretty much any way – don’t you have any responsibility to stick to what you originally sold me?"
"Oh don’t worry about that" responds the dealer. "That’s just some standard language put in by our lawyers and we have no intention of doing anything different. Don’t worry, you’ll be getting a great compact sedan."
The customer is a bit uneasy, particularly when he realizes that the phrase "in the sole discretion of the Manufacturer" turns up pretty regularly throughout the document. It’s also noticeable that nothing can be decided "in the sole discretion of the Customer."
A few pages later in the contract, the Customer gets to a section called "Manufacturing Errors". It says "vehicle manufacturing is a complex and sophisticated process. The Manufacturer will not be liable for any loss arising from errors or actions taken (or omitted to be taken) by it, howsoever arising, except to the extent that any such error is due to the gross negligence, willful default or fraud of the Manufacturer. As such, the Customer should be aware that bad fitting panels, incorrectly installed trim details, faulty electrics and similar items (collectively, "errors") are a normal part of the manufacturing process and will not represent gross negligence, willful default or fraud. Moreover, the customer should expect such errors to occur."
"Great" thinks the investor. "Pity I can’t say that sort of thing to my customers in my own business – they’d laugh me out of town if I tried that one."
The next section deals with disposal of the vehicle. The Customer wants to lease the car, so turns to the section which outlines how he can return the vehicle to the dealer: this is possible after a two year initial period, and thereafter every quarter with 45 days’ notice. There is also a section which allows him to return the vehicle early on payment of a 5% fee – all sounds fair enough.
There are a couple of extra sections, however. One says that the Manufacturer can elect to suspend the Customer’s ability to return the vehicle during any period in which, in the sole opinion of the Manufacturer, an emergency exists as a result of which the repurchase of the vehicle would not be "practically feasible". The Manufacturer also has the ability to create a "Repurchase Trust" at which time the vehicle will be transferred to the Trust and the Manufacturer will repay the customer over such time period as the Manufacturer, in its sole discretion, believes to be reasonable and appropriate. The Customer will, however, continue to pay the regular lease costs on the vehicle until the Manufacturer finally decides to sell.
The final pages deal with "risk factors". The list is pretty long, describing that motoring and usage of a car are hazardous activities. The many pages of risk disclosures remind the Customer, for example, that the car cannot be guaranteed to protect its occupants in any form of accident, that driving on rough roads could break the suspension, that the stability control can’t be guaranteed to work in wet weather and that wear and tear could impede any of the car’s capabilities and functions. The contract concludes that the Customer recognizes that he or she is a "sophisticated consumer" and that he or she will only purchase the car if they could afford to lose the entire vehicle and its purchase price.
The Customer has now taken more than an hour to read all this legalese and has a nasty headache. He calls over the salesman, who is still looking pretty confident.
"I have to say" says the Customer, "I really don’t like this contract. It’s a lot different to the one I signed a few years ago when I bought my last car, and there are so many terms in here which protect you in case something goes wrong. I really don’t understand – I’m giving you guys a lot of money and you are, you have to admit, a pretty wealthy and well-resourced company. It just seems like you don’t want to stand behind your product."
As it happens, the dealership’s manager is passing and overhears the Customer’s comments. "I appreciate your concerns" says the manager, fiddling with his Rolex. "However, this contract is based on the legal principle of ‘caveat emptor’, or ‘buyer beware’. We just want to be clear that we have told you what could happen after you have purchased the vehicle. In that way there are no surprises."
"Yes, but", replies the Customer. "Your risk factors, for example, outline virtually every possible eventuality. You guys are meant to be experts at manufacturing cars so I’m expecting you to build a good one that I can rely on. That’s certainly why I’m giving you quite a lot of my money. It seems very unreasonable that you are telling me that all sorts of bad things could happen and, pretty much no matter what happens, it’s not your fault."
The dealership’s manager thought for a moment and then looked back at the Customer. "Well, I hear what you’re saying but, unfortunately, I have no room to manoeuvre as this contract was drafted by our lawyers. You might also want to know that all the other car manufacturers use the same legal firm. As a result, all the car firms have the same sort of contract nowadays. Basically, it’s not possible for you to buy a vehicle at all unless you agree to these terms."
The Customer is very annoyed but realizes that, at the end of the day, he doesn’t have a choice. He’d like to argue about all these points but, if he wants to drive any sort of car, irrespective of the manufacturer, it seems that he’s going to be stuck with exactly the same legal shenanigans.
"OK, I’ll sign" he says, upon which the salesman produces the final invoice with a flourish. "Here you are" the salesman says. "You can see the purchase price, the destination and delivery charges, the taxes, and the legal and professional fees."
"I’m sorry" responds the Customer, surprised once more. "Legal and professional fees?"
"Oh yes" replies the salesman. "The costs of the attorneys we hire to prepare our purchase contracts are an out of pocket expense and are billed to our customers as part of the purchase price."
"Do you mean to say…." starts the Customer, as he begins to realizes how all this works….
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