Adhesion Contracts: Did You Really Agree to the Terms?

Almost every modern transaction runs on a form. Bank accounts, credit cards, phone plans, software, tickets, leases and employment agreements arrive as printed or on-screen terms that the customer may accept or decline but cannot negotiate. A common argument follows naturally: if a person had no chance to bargain, and in practice no chance to read, he did not really agree, and the terms should not bind him.

The argument points to something the law has openly acknowledged. Courts have long recognized that assent to a standard form is different from assent reached through negotiation. But recognizing the difference has not led courts to treat form contracts as void. It has led them to develop specific tools for deciding which terms in such contracts will be enforced and which will not. Understanding those tools requires separating four ideas that are often run together: adhesion, unconscionability, unfair surprise and invalidity.

What "adhesion" means

The California Supreme Court's decision in Graham v. Scissor-Tail, Inc., 28 Cal. 3d 807 (1981), adopted a definition first offered by Justice Tobriner in 1961: the term "signifies a standardized contract, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it."

That definition is descriptive. It identifies a kind of contract; it does not condemn it. The court in Graham said so directly, quoting an earlier decision: to describe a contract as adhesive is "the beginning and not the end of the analysis insofar as enforceability of its terms is concerned." The court then stated the general rule: "a contract of adhesion is fully enforceable according to its terms" unless one of two limits applies.

The two limits

The first limit is the weaker party's reasonable expectations. A term that falls outside what the adhering party would reasonably have expected may not be enforced against him. This is the doctrine of unfair surprise: a clause buried where no ordinary customer would look, or one that defeats the evident purpose of the transaction, is suspect for that reason.

The second limit is unconscionability. A term that is unduly oppressive may be refused enforcement even if it was not surprising. The Uniform Commercial Code, which most states have enacted with variations for sales of goods, provides that a court finding a contract or clause "to have been unconscionable at the time it was made" may refuse to enforce the contract, enforce the remainder without the clause, or limit the clause "as to avoid any unconscionable result" (UCC §2-302(1)). The Code also requires that the parties be given "a reasonable opportunity to present evidence as to its commercial setting, purpose and effect" (§2-302(2)).

Williams v. Walker-Thomas Furniture

The leading federal illustration is Williams v. Walker-Thomas Furniture Co., 350 F.2d 445 (D.C. Cir. 1965). Between 1957 and 1962 customers bought household goods from a District of Columbia store on printed installment forms. An obscure provision spread each payment pro rata across every item the customer had ever bought, so that a balance remained on every item until the balance on all of them was paid. When one customer defaulted shortly after buying a stereo, the store sought to repossess everything she had purchased since 1957.

Judge J. Skelly Wright's opinion described unconscionability as including "an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party." Both elements matter. The court also noted that "gross inequality of bargaining power" may show the absence of meaningful choice. But the court did not declare the contracts void. It held that unconscionability was a ground on which a court could refuse enforcement, and sent the case back for the facts to be examined. Judge Danaher dissented, suggesting the problem was one for the legislature.

That outcome is frequently overstated in both directions. Williams is not authority that form contracts bind no one; it is authority that a form contract's terms are open to judicial scrutiny when the bargaining was one-sided and the terms are unreasonably harsh.

Graham's own result

Graham illustrates how narrow the inquiry can be. A concert promoter had signed a union form contract requiring disputes to go to arbitration before the musicians' union, one of whose members was the other party. The court found nothing in the record suggesting the union's procedures were unfair in practice. It nonetheless held that designating one side's own union as the arbitrator of all disputes failed to achieve the "minimum levels of integrity" required of a contractual substitute for judicial proceedings. The clause fell; the contract, and the general practice of using union forms, did not.

Carnival Cruise Lines v. Shute

The United States Supreme Court considered a related question in Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585 (1991). A passenger injured on a cruise sued in Washington; the ticket contained a clause requiring suits to be brought in Florida. The Court declined to hold that a non-negotiated forum clause in a form ticket is never enforceable, and upheld this one, while stating that such clauses "are subject to judicial scrutiny for fundamental fairness." It found no indication that Florida had been chosen to discourage legitimate claims, and noted the passengers had notice of the provision.

Justice Stevens, joined by Justice Marshall, dissented. He appended a facsimile of the ticket in its actual type size to show that "only the most meticulous passenger is likely to become aware of the forum-selection provision," noted that it was the eighth of twenty-five numbered paragraphs, and observed that many passengers could not read it until after paying for a ticket they could not get refunded. His dissent is the strongest judicial statement of the consent problem in form contracts: assent given under those conditions is, in his view, too thin to carry certain terms.

Where the argument is strongest

The adhesion argument is strongest when it is narrow: when a particular term is hidden, surprising, one-sided or works to strip the weaker party of protections the law otherwise provides, and when the circumstances show the party had no realistic alternative. Courts in the cases above have taken exactly those features seriously. Old rules of interpretation reinforce the point; Graham notes that ambiguities in a standardized contract are generally construed against the party who drafted it.

The argument is weakest when it is general. No court in these cases accepted the proposition that standard-form contracts as a class lack assent. The practical reason is plain: if every non-negotiated agreement were void, the customer would lose the benefit of the transaction along with its burdens. The doctrinal reason is that the law treats the decision to accept a form, after having an opportunity to decline it, as assent to the reasonably expected terms.

What can reasonably be concluded

An adhesion contract is a real and recognized category, and the absence of bargaining is legally relevant. But adhesion is a description, not a defense. The questions courts actually ask are whether a particular term defeats reasonable expectations and whether it is unconscionable, and they answer those questions term by term, on evidence, under the law of the governing jurisdiction. Doctrines and outcomes vary among states and among types of contract, and federal statutes govern some areas, such as arbitration, in ways this entry does not attempt to summarize.

For how assent is formed in the first place, see the archive's discussion of how contractual obligations are defined in federal law.