Contract of Adhesion

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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.

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.

Problems

No less a person than Adam Smith understood the potential evils of unbridled capitalism. So I think we can safely say that the problem is not “Capitalism” per se, but use of the legal systems by large corporations. For example, there is no particular historical reason that the Contract of Adhesion needed to be codified into common law. Things certainly could have gone the other way.

I don’t disagree with you that the people who run corporations exercise power that is incompatible with the ideals of liberal democracy and the free market. That’s been true for nearly 200 years since the rise of the modern corporation. Marxists have lots of insightful things to say about these issues:

“The ruling class organizes its power in the state.” Douglas Hay, Marxist English historian

But that’s a different issue than the one we were discussing about electronic signatures, which is also a different issue than adhesion contracts. I don’t think that it is possible to resolve the problem of unfair standard form contracts by litigation, I think the European unfair contract terms legislation that has been widely adopted outside the US is a much better approach, it permits the consumer protection administrative agency to create standards for business to follow (see attached discussion of the Australian legislation)

If you think my interpretation is wrong, you should look at the process the banking industry used to allow “electronic” checks. In the first case this meant use of a digital image of the check as a replacement for the check itself, which bound the user, under draconian law, from reneging on the “contract” to pay a bill. When Congress enabled electronic checks, they added a presumption clause that was entirely in the favor of the banks. Basically consumers had very tough road to cross to prove that the bank should not honor their “contract” and be absolved of any liability for their actions. Electronic signature are headed in exactly the same path. Heads the corporation wins, tails the consumer loses.

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.[1] 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).[2]

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 equitable 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."

References

  1. Patterson, E., The Delivery of a Life-Insurance Policy, 33 Harvard Law Review, 198 (1919); see also Friedrich Kessler, Contracts of Adhesion — Some Thoughts About Freedom of Contract, 43 Colum. L. Rev. 629 (1943).
  2. Steven v. Fidelity & Casualty Co. (1962) 58 C2d 862