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Contracts
University of North Dakota School of Law
Davis, W. Jeremy

Adhesion Contracts

Contract of Adhesion – “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”
– an imprecise term used to describe a document containing non-bargained clauses that are in fine print, complicated, and/or exceptionally favorable to the drafter

Why courts may refuse to enforce adhesion contracts.

that such a contract or provision which does not fall within the reasonable expectations of the weaker or “adhering” party will not be enforced against him (if the contract or the clause in question was not negotiated); and
even if consistent with the reasonable expectations of the parties, will be denied enforcement if, considered in its context, it is unduly oppressive or “unconscionable” (the drafter had a gross disparity in bargaining power

Restatements (Second) § 211(3) – provides that where a party effectively manifests assent to a standardized expression of agreement, and the other party has reason to believe that he would not have done so if he had known that it contained a particular term, “the term is not part of the agreement.”

Disclaimers and Limitations of Warranty Liability – in every K for the sale of goods a warranty that the seller has good title to the goods.

Implied Warranty of Merchantability – the goods meet certain basic standards including fitness for their ordinary purpose.

Seller may try to limit warrant liability with a Disclaimer – UCC 2-316: to exclude or modify the implied warranty of merchantability, the language must mention merchantability and the disclaimer must be conspicuous.

Courts look to broad public policy w/these provisions – see Henningsen v. Bloomfield Motors

O’Callaghan v. Waller and Beckwith Realty

Majority

Competition between landlords gave tenant enough bargaining power to be bound to exculpatory clause (exculpatory clause was negotiated)
Legislature has acted to address housing shortage (in the form of rent controls); rent control prevents landlord from charging increased rent in exchange for the elimination of the exculpatory clause (if a change or remedy is warranted, the legislature is in the best position to change it)

Minority

There isn’t enough competition to justify the enforcement of the exculpatory clause, because every landlord has a similar exculpatory clause (exculpatory clause wasn’t negotiated)
Change needs to be made now to provide relief (and to further public policy)

Issues with strict construction

Exculpatory clauses can be re-drafted to remedy the “strict construction” in favor of the lessor (if the exculpatory clause covers the sidewalk, and a tenant gets hurt on the lawn, the lessor will re-draft the clause to cover the lawn as well)
Strict construction doesn’t allow the standard of care to be articulated (the standard is dynamic due to the re-drafting of the clauses)
Strict construction is a bad practice (strict construction is “mis-construction”)

Restatement Second § 211(3) – where a party expressly manifests assent to a standardized expression of agreement, and the other party has reason to believe that he would not have done so if he had known that it contained a particular term, “the term is not part of the agreement”

Summary thus far:
1. Subject matter is important (residential lease, claim check, etc.) … how does the subject matter affect public policy?
2. Relative status of the parties is important
3. Conduct of the parties (relative to status) is important (bargaining power, existence of competition, presence of negotiation, “take it or leave it” environment)
4. Ways for court to resolve conflict:
a. Strict construction
b. Defer the issue to another branch (allow the legislature to create a remedy)
c. Decide that the servient party did not assent to exculpatory clause because no notice of the clause was given

Doctrines of Reasonable Expectations

Steven v. Fidelity and Casualty Co. of New York (1962) (insurance from airport vending machine case) –
– when insurance is sold in circumstances that discourage detailed inquiries, the reasonable expectations of the parties should be honored even though the policy terms do not support them

Graham v. Scissor-Tail, Inc. (1990)

Facts

P concert promoter wants to sign client of D corporation
P and D sign standard “form contract”
Clause in contract states that problems must be handled via arbitration through terms specified in the contract

Doctrine of Reasonable Expectations doesn’t really apply here (doesn’t work well outside of the insurance arena)
Considerations:

Subject matter – music contract (not a great impact on public policy)
Status – P was a “sophisticated” businessman, not an “unsophisticated” consumer
Conduct/bargaining – P has signed “thousands” of these contracts in the past
Strict construction won’t work (if the clause applies, it controls)
“No notice/no assent” doesn’t work (P knew of the clause & threatened to use it)

Court invalidated the arbitration clause because the arbitrator named in the contract (D’s Int’l Exec. Board) was presumptively biased in favor of D (UNCONSCIONABILITY)

Henningsen v. Bloomfield Motors, Inc.

Court found liability

No competition among auto dealers – this clause is common to virtually all car purchases
Insufficient notice – clause was in 6-point type on the back of the contract
Public policy considerations

We all like cars
Don’t want manufacturers to be able to escape liability

Considerations

Subject matter – car purchase agreement
Status – consumer (unsophisticated)
“Take it or leave it” adhesion contract
Strict construction doesn’t help the P
Doctrine of Reasonable Expectations might help – no reasonable person would expect from a reading of the contract that the contract barred recovery for personal injury

Duty to read/duty to disclose – “in the absence of fraud, one who signs a written agreement is bound by its terms whether he read and understood it or not, or whether he can read or not” (Cohen v. Santoianni)
– With the fine print, the contract was physically unreadable

Carnival Cruise Lines, Inc. v. Shute (1991) – the court chose to enforce the forum-selection clause – “[the accident] occurred off the coast of Mexico . . . this dispute is an essentially local one inherently more suited to resolution in the State of Washington than in Florida.” “[B]ecause respondents do not claim lack of notice of the forum-selection clause, we conclude that they have not satisfied the ‘heavy burden of proof’ required to set aside the clause on grounds of inconvenience.”
– RULE: Forum-selection clauses are valid unless the plaintiff can satisfy the “heavy burden of proo

, but the court sees as supporting bad public policy because marijuana is illegal
– RULE: Moran suggests factors to consider: “Before labeling a contract as being contrary to public policy, courts must carefully inquire into the nature of the conduct, the extent of public harm which may be involved, and the moral quality of the conduct of the parties in light of the prevailing standards of the community…”
– While manufacturing drug paraphernalia is not illegal, it does conflict with public policy against marijuana, the court is left with the decision to declare the whole contract illegal

“Clean- Hands Doctrine” – it is hard to enforce a contract when both sides (or either party) were involved in illegal activities related to the contract at hand

X.L.O. Concrete Corp. v. Rivergate Corp.(1994)–
– Simply because the contract is related to public policy doesn’t make the contract illegal

Covenant Not to Compete
– No greater than required for protection of employer
– Does not impose hardship on employee
– Not injurious to public

Hopper v. All Pet Animal Clinic (1993) –
– Initial burden of covenant not to compete is on the employer to show that it is reasonable and is fairly related

Central Adjustment Bureau, Inc. v. Ingram (1984)– Each defendant was asked to sing a non-competition covenant few weeks after they started working in order for them to keep their jobs. The defendants signed the covenants and continued to work for the plaintiffs for years and enjoyed promotions and raises. Then the defendants resigned in order to start their own company that would directly compete with the plaintiffs company. The plaintiffs brought action against the defendants.
– Issue: Did the covenant have consideration that is required for it to be enforceable?
– Holding: Yes
– Reasoning: The covenants were reasonable under the given circumstances. The defendants signed the covenants and in return, the plaintiffs offered them prosperous work. “…covenant is enforceable provided the employer continues to employ the employee for an appreciable length of time after he signs the covenant, and the employee serves his relationship with his employer by voluntarily resigning.” The defendants’ argument that the plaintiff had no obligation to employ the defendants and the company could have fired the defendants right after they signed the covenant is not accepted by the court. “The authorities are uniform in holding that where there has been full or substantial performance by one party to a bilateral contract, originally invalid for want of mutuality of obligation, the other party cannot refuse performance after receiving the promised benefits.” Reversed.
Dissent (Brock): In order for an act to constitute consideration for a promise it must have been bargained for and given in exchange for that very promise. In the current case, the