§ 1.4 Contracts of Adhesion

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The term ''contract of adhesion'' has become part of the language of contract law. The origin of the term sheds some light on its meaning. It was borrowed from French scholars and was first applied in this country to insurance policies.n1 The French scholar who coined the term likely borrowed it from the language of international law where treaties negotiated by a group of States are sometimes left open for ''adhesion'' by other States who are free to agree to adopt or reject the treaty but frequently have no voice in formulating its provisions.n2

Similarly, much of modern business is done on terms dictated by one contracting party to another who has no voice in its formulation. For example, a would-be borrower from a bank or other financing institution applies for a loan. Once the application is approved, the bank clerk inserts a limited amount of information and terms (name, address, amount, interest rates, etc.) into the blanks of pre-printed forms prepared by the bank, many clauses of which will be identical or similar to those in use by competitive lenders. The borrower may be asked to check the information and terms that have been inserted manually, but an attempt to read the pre-printed provisions of the documents will likely be met with impatience. Indeed, reading the rest of the provisions of the documents might be rather pointless because the borrower has only the choice between taking the offered terms or leaving them. The process of entering into a contract of adhesion ''... is not one of haggle or cooperative process but rather of a fly and flypaper.''n3 The above description of the process of agreement to a retail banking loan can be repeated, with appropriate adaptations, for many of the everyday transactions of life. It is not only the retail transaction that is molded by a standardized form. Even trust indentures, which govern bond issues of hundreds of millions of dollars, and which are negotiated between giant corporate borrowers and cash-rich underwriters or banks, take on a rigidly stylized form, negotiable only as to the basic core (amount of borrowing, interest rate and the like) and various fringe provisions. The rest of the document basically follows the command of a federal statute and deeply ingrained customs.n4 A similar pattern exists in many of the transactions of vast scale that are of great importance to the functioning of the economy. Although the flourishing existence of the contract of adhesion and other standardized contracts is a challenge to much contract theory, the contract of adhesion is part of the fabric of our society. It should neither be praised nor denounced by the legal scholar. It must be analyzed and studied.

Some of the negative facets of this type of contract are that the terms may be drafted with a view to protect to the maximum degree the enterprise that propounds the form, thus minimizing the realization of the reasonable expectations of the adhering party. Frequently, the protection will be in incomprehensible and intentionally obfuscating language.n5 This may be rectified by statutory requirements mandating the use of plain English.n6 Oppressive terms can, however, be expressed in plain English and still remain oppressive. Thus, legislatures have frequently intervened to require substantive fairness in contracts of adhesion. Insurance legislation, for example, has a long history of dictating specific terms of insurance policies. Courts, under the emerging doctrine of unconscionability, also have a role to play in protecting the adhering party from oppression.

Despite the potential that contracts of adhesion have for abuse, there are important advantages to their use. Indeed, they are essential to the functioning of the economy. We live in an era of mass production of standardized goods and services. The movement of goods and services on the scale and rapidity with which they are produced or rendered requires that transactions not get bogged down in prolonged negotiations about the ancillary terms of the contract. If we consider again the illustration of the retail bank loan and consider the time and cost of negotiating the provisions of a bank loan on an individual basis, we realize the enormous transaction costs this would entail. The standardization of forms for contracts is a rational and economically efficient response to the rapidity of market transactions and the high cost of negotiations. Another advantage of the contract of adhesion is that the enterprise which prepares the form the other party must take or leave can rationally calculate the costs and risks of performance.n7 The pre-printed terms of a limited warranty, for example, control a seller's risks and play an important role in the rational pricing of a seller's product. Indeed, this self-evident proposition is amply demonstrated by the active market that has arisen in the last quarter of the twentieth century for the sale and purchase of warranties. Throughout this treatise, special treatment of contracts of adhesion and other standardized contracts will be supplied whenever appropriate.

Legal Topics:

For related research and practice materials, see the following legal topics:

Contracts LawTypes of ContractsAdhesion ContractsInsurance LawClaims & ContractsPolicy InterpretationAdhesion Contracts

FOOTNOTES:

(n1)Footnote 1. This part of its history is traced in E. Allan Farnsworth, Contracts 295 (2d ed. 1990).

(n2)Footnote 2. For example the Hague Convention for the Pacific Settlement of International Disputes of 1899 invited certain non-signatory States to adhere to it and ''[f]or this purpose must make known their adhesion to the Contracting Powers by a written notification addressed to the Netherlands Government and communicated by it to all other Contracting Parties.'' This and similar treaties are quoted in 5 Green H. Hackworth, Digest of International Law 79 (1943). A State Department critic of the term, wrote in a memorandum, ''Adhesion smacks of the gum-bottle.'' Id. at 75.

(n3)Footnote 3. Arthur Leff, Contract as a Thing, 19 Am.L.Rev. 131, 143 (1970).

(n4)Footnote 4. See Sharon Steel Corp. v. Chase Manhattan Bank, N.A., 691 F.2d 1039 (2d Cir.1982) .

(n5)Footnote 5. See, e.g., the cross-collateral clause in Williams v. Walker-Thomas Furniture Co., 350 F.2d 445 (D.C.Cir.1965) . The proposed contract was adhered to by a single welfare-mother. First-year law students are usually unable to comprehend the intended effect of the clause.

(n6)Footnote 6. See Carl Felsenfeld and Alan Siegel, Writing Contracts in Plain English (1981).

(n7)Footnote 7. See Friedrich Kessler, Contracts of Adhesion-Some Thoughts About Freedom of Contract, 43 Colum.L.Rev. 629, 631-632.