Contract of Adhesion

Full Title or Meme

For a contract to be treated as a contract of adhesion, it must be presented on a standard form on a "take it or leave it" basis, and give one party no ability to negotiate because of their unequal bargaining position.

Context

Here in the U.S., where unlike many code-based jurisdictions with over-arching pronouncements that contracts must be “reasonable” (we have Sherman Act section 1, previously reflected in Art. 85 of the Treaty of Rome, and now much proscribed), we use the alternative statement of the principle as “freedom of [morphed from “to”] contract” to justify enforceability of adhesion contracts, even with consumers.

It is often helpful to step back to look at the different neighboring contexts in which terminology may have different import.

A current example is “blockchain” or “block chain.” The concept of transaction “blocks” that were “chained” together by one-way hashes of earlier blocks with time stamps was introduced by “Satoshi Nakamoto” a decade ago in a paper entitled, “Bitcoin: A Peer-to-Peer Electronic Cash System,” where “We define an electronic coin as a chain of digital signatures.” Digital signatures and using them to “authenticate” transactions that could form each “row” of an electronic “ledger” long preceded the paper and a decade earlier was part of the consideration of PKI and certification authorities much discussed, but not chosen to be a favored, much less required, technology for the Uniform Electronic Transactions Act (UETA)/Electronic Signatures in Global and National commerce (ESIGN) act. A few years ago, I described “blockchain” to my Uniform Law Commission colleagues as a “distributed electronic ledger. As public excitement over “blockchain” (or really, bitcoin) swelled and pronouncements of internet-like change of the world prevailed, I noted that many applications (including bitcoin itself) did not call for or would even be threatened by wide distribution of the blockchain itself (in the case of bitcoin, currently 100+ GB), and revised my general description of “blockchain” as used, simply a transaction ledger where each transaction is highly “authenticated,” such as by digital signature. My use of this terminology (among other reasons) resulted in my talking past ULC colleagues who understood “authentication” in UCC terms. Those colleagues had wanted to oppose legislation such as the Vermont legislation which purports to regulate “personal information protection companies” which are required to develop, implement, and maintain a comprehensive information security program that contains administrative, technical, and physical safeguards sufficient to protect personal information, and which may include the use of blockchain technology, as defined in 12 V.S.A. § 1913, in some or all of its business activities. 12 V.S.A. § 2453(c)(5) (emphasis added), where “Blockchain” means a mathematically cryptographically secured, chronological, and decentralized consensus ledger or consensus database, whether maintained via Internet interaction, peer-to-peer network, or otherwise other interaction. 12 V.S.A. § 1913(a)(1) (emphasis added). Although this, as adding “blockchain” as an example of UETA “electronic signatures,” would seem harmless, precisely this calling out of “blockchain” for a safe harbor may confuse the public as to the kind of “security” provided by “blockchain”: it is for the integrity/authentication of the transaction chain – not the “protection” against disclosure of the contents of the blocks/ledger. This is more of an issue with a specific application such as “personal information protection” than with UETA, which merely says that electronic signatures would not be ineffective because they were electronic, but may still require proof. Have a good holiday, those who have one. Stephen Y. Chow, Esq., CIPP/US Senior Member, Mass. Bd. of Comm’rs on Uniform State Laws Lecturer, Boston University School of Law Managing Attorney, Hsuanyeh Law Group pc 11 Beacon Street, Suite 900 Boston, MA 02108 O: 617-886-9088 │ D: 617-886-9288 M: 617-549-2791 │ Skype: stephen.y.c.how Stephen.Y.Chow@hsuanyeh.com; SYChow@BU.edu LinkedIn

The autonomy principle – also referred to as “party autonomy” or “variation by agreement” – generally recognizes that parties to a transaction may, as between or among themselves, agree to vary or amend the statutory rules governing the transaction. For example, Article 2 of the Uniform Commercial Code provides a series of default rules governing transactions for the sale of goods (e.g., rules, re delivery, risk of loss, warranties, liability, etc.). But the law recognizes that the parties to a sales transaction may contractually agree between themselves to change those rules. And that is frequently done – e.g., sales agreements often change the warranty and/or liability rules.

Solutions

The concept of the contract of adhesion originated in French civil law, but did not enter American jurisprudence until the Harvard Law Review published an influential article by Edwin W. Patterson in 1919. It was subsequently adopted by the majority of American courts, especially after the Supreme Court of California endorsed adhesion analysis in 1962. See Steven v. Fidelity & Casualty Co., 58 Cal. 2d 862, 882 n.10 (1962) (explaining history of concept).

The special scrutiny given to contracts of adhesion can be performed in a number of ways:

• If the term was outside of the reasonable expectations of the person who did not write the contract, and if the parties were contracting on an unequal basis, then it will not be enforceable. The reasonable expectation is assessed objectively, looking at the prominence of the term, the purpose of the term and the circumstances surrounding acceptance of the contract.
• Section 211 of the American Law Institute's Restatement (Second) of Contracts, which has persuasive though non-binding force in courts, provides:

Where the other party has reason to believe that the party manifesting such assent would not do so if he knew that the writing contained a particular term, the term is not part of the agreement.

This is a subjective test focusing on the mind of the seller and has been adopted by only a few state courts.

• The doctrine of unconscionability is a fact-specific doctrine arising from equitableTemplate:Citation needed principles. Unconscionability in standard form contracts usually arises where there is an "absence of meaningful choice on the part of one party due to one-sided contract provisions, together with terms which are so oppressive that no reasonable person would make them and no fair and honest person would accept them." (Fanning v. Fritz's Pontiac-Cadillac-Buick Inc.)