It seems that everyone, or most everyone, remembers that house in or near their neighborhood growing up. It was just creepy, might have been haunted, but whatever was going on in there, you just didn’t want to know about – certainly not first hand. However, more often than not, despite all of the fear and apprehension over the unknown – or the misunderstood – there was a lot of anxiety over nothing. This storyline was played out as a sub-plot in To Kill A Mockingbird by Harper Lee (great book, by the way, and a great movie, as well). There, it was the old Radley place, and there was a lot of apprehension, fear, and speculation about its occupant – Boo Radley. As it turns out, however, the reclusive Mr. Arthur Radley (as Atticus Finch introduced him to Scout late in the story) was not to be feared, but was a kind and heroic character who saved the Finch children from a savage attack in the woods by Bob Ewell. This article is not about literature, but, rather, addresses how misunderstanding and misinformation can skew perceptions of reality when it comes to seller contracts and bidder terms and conditions, particularly with respect to contracts of adhesion.
It's been suggested on social media that auctioneers should avoid “adhesionary terms” in their contracts and in their bidder terms and conditions. My concerns with such an un-moored admonition are two-fold: first, I don’t think is it’s possible (it’s certainly not practical), and, second, it encourages auctioneers shy away from the use of reasonably advantageous terms that they are entitled to use to protect their interests. In order for there to be a meaningful discussion on this subject, it is important to understand just what a contract of adhesion is. That discussion will lead, in turn, to a conversation about unconscionability, which, quite simply, is not the same thing as adhesion. Finally, the legal and practical implications of both terms will be considered in the context of the auction industry.
To state the obvious, auctioneers enter into contracts all the time, and they facility the formation of contracts between sellers and buyers, as well. As a practical matter, every fall of the hammer involves at least three principal contracts: (i) the contract between the auctioneer and the seller; (ii) the contract between the auctioneer and each bidder in the form of the auctioneer’s bidder terms and conditions; and (iii) the contract between the seller and the buyer. Additionally, for online auctions there is the contract between the auctioneer and the online platform provider, and multiple contracts between the online platform provider and online bidders.
I write and review contracts for auctioneers. I also draft a fair number of contracts outside the auction context, and have been doing so for about thirty years. In both my experience and my understanding of the law, when contracting parties come together there is not, typically, a prohibition against one party structuring the contract in such a way that it is reasonably advantageous for that party. Simply put, people and entities enter into contracts to obtain the benefit of the bargain, and, to the extent possible, utilize contract terms to facilitate that goal.
Years ago, in a non-auction context, the lawyer on the other side of a contract negotiation complained about the remedies available to my client if his client defaulted sometime in the future. His comment was essentially – “We’re all friends here, why does your client need such
harsh remedies if my client defaults?” I told him that I was pretty sure the parties were not going to be friends if his client defaulted, and that if he was worried about what my client could do in the event of a default, then he shouldn’t default! We closed the deal, and nobody defaulted, but my client was protected if it had happened.
Contracts are all about rights and duties and remedies. Contracts are also largely about identifying and allocating risk. When an auctioneer is setting the rules that apply between the auctioneer and the seller, the auctioneer ought to be able to use terms that are reasonably advantageous to the auctioneer. While the auctioneer is the agent of the seller, the auctioneer is not an indentured servant, and the parameters of the relationship, and the rights, duties, and remedies of the parties, need not be unreasonably skewed in favor of the seller. In this regard, in Mickle v. Christie’s, Inc., 207 F. Supp. 2d 237, 244 (S.D.N.Y. 2002) the United States District Court for the Southern District of New York (applying New York law) enforced provisions of a contract that provided for the auction company “to protect its interests before those of the consignor,” observing “[i]t is . . . an elementary agency law doctrine . . . that the legal duties of an agent may be defined and circumscribed by agreement between principal and agent.”
Likewise, when an auctioneer is setting the rules that apply between the auctioneer and the bidders (which will also form the basis of the contract between the seller and the buyer(s)), the auctioneer is entitled to use terms that are reasonably advantageous to the auctioneer, to the seller, to protect the sale. I don’t see how that is unfair, unreasonable, or inequitable. In United States v. Blair, 193 F.2d 557, 560 (10th Cir. 1952), the United States Court of Appeals for the Tenth Circuit observed that “[t]he owner of the property offered for sale at . . . auction has the right to prescribe the manner, conditions and terms of the sale. The buyer may rely upon such announced terms and conditions of the sale, and he is likewise bound thereby, . . . .” Those prescribed terms and conditions come in the form of the auctioneer’s bidder terms and conditions.
Notwithstanding the nature of contracts, generally, and established jurisprudence involving auctioneers, I have seen the phrase “adhesionary terms” (without context or definition) used with a pejorative connotation, I have also seen the terms unfair, unreasonable, and inequitable (all without definition or example) bandied about with the sometimes tacit, sometimes overt, suggestion that auctioneers should avoid the use of reasonably advantageous terms (as either a sword or a shield) in their contracts and bidder terms and conditions.
Admittedly, without context, and without an accurate definition, the phrase “adhesionary terms” may sound like something you might want to avoid – sort of like Boo Radley’s house. Moreover, using the term “adhesionary” as a synonym for unconscionable, unfair, unreasonable, and inequitable carries a deceptively ominous tone. In reality, however, such use demonstrates a fundamental misconstruction of the term, and confuses the dialog. While an adhesionary contract can be unfair or unconsionable, that is not necessarily the case. So let’s talk about contracts of adhesion and unconscionability.
According to Blacks’s Law Dictionary (quoting from the Fifth Edition that I used in law school a long time ago), a contract of adhesion is a
"[s]tandardized contract form offered to consumers of goods and services on essentially [a] ‘take it or leave it’ basis without affording [the] consumer [a] realistic opportunity to bargain and under such conditions that [the] consumer cannot obtain [the] desired product or service except by acquiescing to the form contract. [A] distinctive feature of [an] adhesionary contract is that [the] weaker party has no realistic choice as to its terms.” Black’s Law dictionary goes on to note that “[n]ot every such contract is unconscionable.” That is an important observation because it recognizes the distinction between adhesion and unconscionability. Similarly, the Cornell University Law School Legal Information Institute defines a contract of adhesion as “[a] standard form contract drafted by one party (usually a business with stronger bargaining power) and signed by the weaker party (usually a consumer in need of goods or services), who must adhere to the contract and therefore does not have the power to negotiate or modify the terms of the contract. Adhesion contracts are commonly used for matters involving insurance, leases, deeds, mortgages, automobile purchases, and other forms of consumer credit. Also known as adhesive contract; adhesory contract; adhesionary contract; take-it-or-leave-it contract; leonine contract.”
In the real world, we all routinely enter into adhesionary contracts when purchasing goods and services. Insurance contracts, mobile phone contracts, purchase and sale agreements (for sound systems, cars, trucks, electronics, etc.), contracts with internet service providers, auctioneer contracts with online auction platform providers, end-user agreements between registered bidders and online auction platform providers, and numerous other types of contracts presented on preprinted forms without the ability to negotiate terms are contracts of adhesion. Yet, every day, courts enforce such contracts. In fact, it has been suggested that business would grind to a halt if each and every such contract had to be negotiated from scratch. In this regard, the West Virginia Supreme Court has observed that “it is likely that the bulk of the contracts signed in this country are contracts of adhesion and are generally enforceable.” State ex rel. Saylor v. Wilkes, 613 S.E.2d 914, 216 W.Va. 766 (2005) (citing State ex rel. Dunlap v. Berger, 211 W.Va. 549, 567 S.E.2d 265 (2002)). According to the West Virginia Supreme Court, it is only when a “gross inadequacy in bargaining power” combines with “terms unreasonably favorable to the stronger party,” that the contract provisions may be found unconscionable, and, thus, unenforceable. State ex rel. Saylor v. Wilkes, 613 S.E.2d 914, 216 W.Va. 766 (2005) (citing Troy Mining Corp. v. Itmann Coal Co., 176 W.Va. 599, 604, 346 S.E.2d 749, 753 (1986)). This brings me back to the point that, when setting the rules that apply between an auctioneer and the seller or the rules that apply between the auctioneer and the bidders, the auctioneer ought to be able to use terms that are reasonably advantageous, but not grossly overreaching or onerous.
While there are circumstances, particularly in consumer transactions in which the terms of a contract (whether it is a contract of adhesion or not) can be so overreaching and so onerous that courts will not enforce them, unconscionability is a high standard that is not casually or easily found by the courts. As such, people are generally held to the contracts that the voluntarily enter (and are presumed to have read, understood, and agreed to the terms of those contracts). To put the concepts of adhesion and unconscionability in context, it is helpful to look at a well known unconscionability case – Williams v. Walker-Thomas Furniture Company, 350 F.2d 445 (D.C. Cir. 1965). The Williams case involved installment sales agreements that a Washington, D.C. furniture company used with consumers. The way the agreements were set up, the customer made a purchase and paid over time, and the seller retained a security interest in the goods until all payments were made. If the customer made subsequent purchases while a balance was owing, all of the furniture was subject to repossession. By way of example, in 1962, one customer purchased goods valued at about $390, and when he missed payments, the seller sought to repossess all items purchased by the customer since his first transaction in 1958. Similarly, a second customer bought a $500 stereo set in 1962, and when she missed installment payments, the seller sought to repossess all goods that she had purchased since 1957. The appellate court looked at the installment sales agreement, and questioned whether the terms that exposed all previous purchases to repossession because of a failure to make payments on the most recent purchase was overreaching or unconscionable. The appellate court remanded the case to the trial court with specific instructions to consider the question of unconscionability. The case settled, but stands for the proposition that certain terms – particularly in consumer contracts – can be so onerous that the courts may refuse to enforce them.
In another case, Lucier v. Williams, 366 N.J. Super. 485, 841 A.2d 907 (2004), the New Jersey Superior Court determined that an exculpatory clause in a home inspection contract was unconscionable. In Lucier, the court held that a home inspection contract containing a clause limiting damages for negligence to a portion of the amount paid for the inspection was “a classic contract of adhesion.” Starting with the proposition that “contracts will generally be enforced as written” the Lucier court went on to observe that “[i]n determining whether to enforce the terms of a contract, we look not only to its adhesive nature, but also to ‘the subject matter of the contract, the parties’ relative bargaining positions, the degree of economic ompulsion motivating the ‘adhering’ party, and the public interests affected by the contract.” Additionally, the court stated that “[t]o be enforceable, the amount of the cap on a party’s liability must be sufficient to provide a realistic incentive to act diligently.” Id. Applying the principles articulated above, the New Jersey court concluded that, under the circumstances, the limitation of liability provision in Lucier was “unconscionable.” The determination was case specific, and the court focused on the “grossly unequal bargaining status of the parties” and the consequence that “the substance of the provision eviscerates the contract and its fundamental purpose because the potential damage level is so nominal that it has the practical effect of avoiding almost all responsibility for the professional’s negligence.” As such, the court held that “[t]he foisting of a contract of this type in this setting on an inexperienced consumer clearly demonstrates a lack of fair dealing . . . .”
In both Williams and Lucier, the courts started with a contract of adhesion, but, critically, continued their analysis to consider whether the terms of the contracts were so overreaching and so onerous as to be unconscionable, and, thus, unenforceable. This approach reaffirms the proposition that not every contract of adhesion is unconscionable or unenforceable. It also clarifies that adhesion is not a synonym for, and is not properly used interchangeably with, the terms unconscionable, unfair, unreasonable, and inequitable.
Important observations about form contracts, contracts of adhesion, and unconscionability were also made by the Louisiana Supreme Court in Aguillard v. Auction Management Corp., 908 So.2d 1 (2005). The Aguillard case involved a real estate auction in which the property was put up subject to seller’s confirmation. Prior to the auction, the auctioneer distributed bidder terms and conditions, consisting of multiple pages printed in 9-point font. Under the heading “ANNOUNCEMENTS” the bidder terms and conditions included a mandatory arbitration provision that precluded a bidder from suing in a court of law, and required, instead, that bidder complaints be resolved through arbitration. The bidder terms and conditions also contained a provision that “All announcements from the Auction Block will take precedence over all previously printed materials and other oral statements made.” After the auction, the high bidder signed a Purchase and Sale Agreement that was presented to the seller, but the seller rejected the high bid. When the parties were unable to come to a mutually agreed price, the high bidder sued in court. The auctioneer challenged the lawsuit because the bidder terms and conditions required dispute resolution through arbitration. The intermediate appellate court (affirming the trial court decision in favor of the buyer) concluded that “the entire contract between the parties, including the arbitration clause, was adhesionary and lacked mutuality.” The lower court concluded, further, that the high bidder was not in a position to bargain regarding the terms of the agreement and was required to accept the bidder terms and conditions prior to receiving a bid number and participating in the auction. The lower court also noted, among other things, that (i) the bidder terms and conditions were printed in extremely small 9-point type and the arbitration clause was not set out or distinguished in any way, and (ii) the statement that announcements from the block took precedence effectively gave the auctioneer the ability to unilaterally change any or all parts of the contract, including the arbitration clause, simply by verbal announcement from the block. For these reasons, the trial court and the intermediate appellate court concluded that the bidder terms and conditions were unenforceable. The Louisiana Supreme Court disagreed, and reversed, observing that – "Contracts are not always formed through a bargaining process. Owing to the necessities of modern life a particular kind of contract has been developed where one of the parties is not free to bargain. That occurs when a business concern carries out its operation through a very large number of contracts entered into with innumerable co-contractants . . . ." Thus, the court upheld both the mandatory arbitration provision and the provision that announcements from the block would control over previously printed materials. Aguillard v. Auction Management Corp., 908 So.2d at 9 (La., 2005).
Now that we have some context, let’s look at bidder terms and conditions. I suppose that it is entirely possible for an auctioneer to open the auction by announcing – “O.K. folks, we’re about to start the auction, but first, we need to establish the bidder terms and conditions, so let’s negotiate those now.” In that way, you are not offering adhesionary bidder terms and conditions on a take it or leave it basis. But, how practical is that? And, if, in an effort to avoid dictating adhesionary terms to your gathered bidders you negotiate the terms with all of them, collectively or individually, will you ever actually get to open the auction? A more reasonable – and realistic – approach might be to start with something like this – “The bidder terms and conditions for this auction have been made available for your review and are posted at the registration desk. All bidding is subject to those terms and conditions, and, by bidding, you agree to be bound by those terms and conditions.” This way, prospective bidders can either accept the bidder terms and conditions (in which case they have an opportunity to bid), or not (in which case they forego the opportunity to bid). This is the approach taken by the court in United States v. Weisbrod, 202 F.2d 629 (7th Cir. 1953), where, in a case involving the sale of government surplus, the court observed that reasonable conditions may be established for bidding at an auction, and any potential bidders who are unhappy with those conditions, have the choice not to bid.
While judicial recognition of the prevalence and utility of form contracts is not a license to employ unreasonable or onerous provisions , the foreboding shadow of an uninformed connotation attributed to “adhesionary terms” should not cow auctioneers into abandoning language that is reasonably advantageous to the auctioneer. One final note on fairness – generally speaking, people don’t get out of contracts, or avoid the consequences of those contracts, by saying “it’s not fair.” As a practical matter, “it’s not fair” is a pretty weak legal argument.
This article is for information and discussion purposes only and is not intended as legal advice. No attorney-client relationship is intended or established. If you have issues or concerns related to the topics addressed in this article, you should consult an attorney.