Other currencies deal with this problem with trusted third-party services that handle the exchange and reversal of transactions. Eventually bitcoin will likely also have such services.
Actually, other currancies deal with this problem with a legal system in place to offer backup. You can't sue for bitcoins, you can't use them in everyday purchases. With out a physical coin to use in everyday purchases, it will be relegated to be a second class currency. There may be a place for bitcoins as an international exchange currency, but even that is hindered by the simple inability to convert it to other currencies.
Both methods are possible with other currencies. I can make a purchase using my Visa card, and Visa will reverse the charges if I can show that the merchant didn't provide the goods or services.
In addition to that, if two parties are in disagreement about a transaction or contract, there is a court system available to settle the dispute and mechanisms in place to attempt to force payment of funds determined by the court to be owed.
I'm not aware of any settled court cases yet regarding a dispute involving bitcoins, but in theory the courts should treat a contract that requires payment in bitcoins the same way they would any barter contract. If the court finds that the merchant did not deliver on their contractual obligations, the courts should either require them to deliver as promised or require that they compensate the consumer with local currency (U.S. dollars?) an amount equivalent to the court determined value of the obligation.
The sort of protections that Visa supplies are already available in bitcoin through escrow services. In time, I suspect that payment processors and banks will be developed to supply consumer protections.
