Adhesion Contracts and the Unconscionability Defense in Minnesota

Posted by Christopher A. Jensen | May 11, 2020 | 0 Comments


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People frequently sign unfair contracts that are difficult to perform. If they are sued for breach of contract, a court will likely enforce it. However, some contracts are so unfair that a court refuses to enforce it.

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An “adhesive” or “unconscionable” contract is one that is grossly unfair and takes advantage of a weaker party. A party can use these arguments to defend against a breach-of-contract claim and invalidate the contract.

This article looks at contracts of adhesion in Minnesota and the related defense of unconscionability.

The Basics of “Adhesion” and “Unconscionability”

“Adhesion” means sticky. In the legal context, an “adhesive contract” means that a weaker party is stuck with an unfair contract. In some cases, a court can refuse to enforce a contract of adhesion.

“Unconscionable” means excessive, unreasonable, unfair, and shocking. In the legal context, “unconscionable” means that a contract is extremely unfair and it would be unreasonable for a court to enforce it against the weaker party.

Both concepts are doing the same thing. They are protecting a vulnerable party from an unfair contract. As such, adhesion and unconscionability are viewed as defenses to a breach-of-contract claim.

Examples of Unconscionable Adhesion Contracts

Adhesion and unconscionability issues can arise in many contractual situations. Here are some very basic examples:

A contract for a small amount of goods requires the weaker party to pay $1 million dollars in liquidated damages if he breaches the contract.A big company has a template contract that requires consumers to arbitrate disputes in Fiji and with high filing costs.An insurance policy requires a person to file a claim within 1 day of being injured or one that requires the person to get 10 doctor opinions before submitting a claim.A company charges $500 for a glass of water.

These are extreme examples of unfair contracts. While these may not arise in the real world, it reinforces the point about unfair contracts.

Clauses in Contracts

Adhesion and unconscionability defenses could apply to any type of contract.

The parties may try to protect themselves with clauses in the contract. For instance, they could include a “Knowing and Voluntary” clause (note: do not use this without tailoring to your situation):

Knowing and Voluntary Agreement:The Consumer agrees that he/she has read this Agreement, understands its terms, has had the opportunity to negotiate and propose changes to the contract, and has had an attorney review the contract. The Consumer agrees that the remedies provided in this contract upon a breach are reasonable in light of the expected damages to be suffered by either party. Therefore, the Consumer knowingly and voluntarily signs this agreement below.

Likewise, parties sometimes try using a “Savings Clause” or a “Severability Clause” in the event that a court rules part of the contract to be invalid. Here is a basic Savings Clause (note: do not use this without tailoring to your situation):

Savings Clause:If any provision of this Agreement is held invalid, the invalidity shall not affect other provisions of the Agreement. It is the parties" intent that the court give effect to all other provisions and sever the invalid provision.

There is no guarantee that such clauses would avoid an adhesion or unconscionability defense, but it could potentially be helpful.

Legal Standard – Contracts of Adhesion

The “contract of adhesion” principle is a common-law principle that stems from cases. Most contracts will be governed by case-law standards.

Contracts for the sale of goods are generally governed by the Uniform Commercial Code (UCC). The UCC rules on unconscionability are discussed in a later section of this article.

The common-law adhesion standard was summarized by Schlobohm v. Spa Petite, Inc.,326 N.W.2d 920, 924-25 (Minn. 1982):

By definition, an adhesion contract is drafted unilaterally by a business enterprise and forced upon an unwilling and often unknowing public for services that cannot readily be obtained elsewhere.… It is a contract generally not bargained for, but which is imposed on the public fornecessaryservice on a “take it or leave it” basis. Even though a contract is on a printed form and offered on a "take it or leave it" basis, those facts alone do not cause it to be an adhesion contract. There must be a showing that the parties were greatly disparate in bargaining power, that there was no opportunity for negotiationandthat the services could not be obtained elsewhere.

(citations omitted).

The inclusion of boilerplate language is only one factor tending to point to an adhesion contract. Hauenstein & Bermeister, Inc. v. Met-Fab Industries, Inc.,320 N.W.2d 886, 891 (Minn. 1982). Other factors include the parties" sophistication, bargaining-power disparity, opportunity for negotiation, opportunity to obtainthe product elsewhere, and the product"s status as a public necessity. Alpha Sys. Integration, Inc. v. Silicon Graphics, Inc.,646 N.W.2d 904, 909-10 (Minn. Ct. App. 2002) (citing Personalized Mktg. Serv., Inc. v. Stotler ,447 N.W.2d 447, 452 (Minn. Ct. App. 1989),review denied(Minn. Jan. 12, 1990)).

The subject of the contract must relate to a “necessary service” for the public. This includes those “generally thought suitable for public regulation,” including “common carriers, hospitals and doctors, public utilities, innkeepers, public warehousemen, employers,and services involving extra-hazardous activities.” Schlobohm,326 N.W.2d at 925. Recreational activities generally do not qualify.Id.at 926.

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The takeaway is that a court can invalidate some or all of an adhesive contract, but the adhesion doctrine is meant for a relatively narrow scope of cases.