Adhesion contracts don't stick in Michigan: why Rory got it right.

AuthorSmith, Margaret M.

INTRODUCTION

It is every insured's nightmare: your insurance company rejects your claim due to your policy exclusions. Immediately, you feel anxious, angry, and scared. Why did you not read the policy provisions? Why did the insurance company fail to explain the terms better? Why did you not ask them for a better explanation? You likely never realized the full implications of entering into a legally binding contract when you wrote that first check to the insurance company.

Most Americans do not realize how often they enter into contracts in their daily lives. Anytime a consumer makes a purchase, the law of contracts enters into play. Contracts of adhesion--those dealings that manifest unequal bargaining power on a take-it-or-leave-it basis--are conceivably present in most of our daily dealings. For example, a simple vending machine transaction for a candy bar could be characterized as an adhesion contract. After all, there is no meaningful choice, no room to negotiate, and, given the circumstances, the consumer may not have another option in sight besides that particular machine. Should this transaction be subject to close judicial scrutiny?

Williston defines a contract of adhesion as "a contract entered without any meaningful negotiation by a party with inferior bargaining power." (1) There are several elements of an adhesion contract. (2) Among these, several stand prominent. First, the document purports to be a contract. (3) Second, the agreement contains few, if any, elements that are open to negotiation. (4) Or, put more simply, one party is presented the agreement on a take-it-or-leave-it basis. (5) Third, the weaker party likely has not read all the terms of the contract due to complicated or convoluted language. (6) Consumers may seek relief from the court based on the fact that the agreement in dispute satisfied these elements. Because of this, the agreement often receives different interpretations by the presiding judge. Thus, the court enjoys the power of being the sole arbiter of the contract's fairness.

The U.S. Constitution recognizes and protects contractual promises. (7) Article I, Section 10 states: "No State shall ... pass any ... Law impairing the Obligation of Contracts...." (8) Moreover, in the case Hale v. Henkel, (9) the U.S. Supreme Court held: "The individual may stand upon his constitutional rights as a citizen. He is entitled to carry on his private business in his own way. His power to contract is unlimited." (10) The interpretation of an adhesion contract remains unpredictable. The notions of unequal bargaining power and take-it-or-leave-it agreements have led courts to dismiss standard contract law principles in part or in their entirety in favor of differing approaches. (11) Parties who disagree about the terms of their agreements need only assert that they entered into an adhesion contract. (12) Judicial determination of this special type of contract changes the rules. The courts apply reasonable expectations or equitable principles, which are not necessarily applicable to standard contract provisions, in order to dispense fairness to the contracting party. (13) The result of this activism is apparent. Inconsistency and unpredictability create confusion and chaos for those, such as insurance companies, who routinely draft boilerplate contracts. (14)

Friedrich Kessler once inquired: "[C]an the unity of the law of contracts be maintained in the face of the increasing use of contracts of adhesion?" (15) Michigan answered the question in the negative. In Rory v. Continental Insurance Co., (16) the claimants brought suit due to their insurance company's denial of their uninsured motorists claim. The case hinged on an automobile insurance policy, which included optional coverage for uninsured motorists, that the plaintiffs held with the defendant, Continental Insurance Company. (17) The plaintiffs were involved in an accident on May 15, 1998. (18) Although the police arrived at the scene, the report lacked any information regarding insurance coverage of either driver. (19) Perhaps as a result of this omission, the plaintiffs failed to file any suit against the driver of the other vehicle until September 21, 1999. (20) During the discovery stage of the first suit, the plaintiffs learned that the defendant driver lacked insurance coverage. (21) It was not until March 14, 2000, that the plaintiffs submitted a claim for uninsured motorist benefits to their insurance company, Continental Insurance. (22) The state statute of limitations for such claims stood at six years, (23) but the plaintiffs' insurance policy contractually limited that time to one year. (24) As a result, Continental denied the plaintiffs' claim. In August, 2000, the plaintiffs filed a suit against Continental, contesting the denial of benefits. (25) They argued that because the insurance policy could be characterized as a contract of adhesion, the one-year limitation should be struck down as unreasonable. (26) The trial court denied defendant Continental's motion for summary judgment, citing the principles of adhesion contracts and holding the shortened period of limitations unenforceable. (27) The trial court stated that to enforce the provision would be "totally and patently unfair." (28) The Court of Appeals agreed and affirmed the trial court's denial of summary disposition; however, the panel based its holding on notions of reasonableness, (29) stating that the contract should receive "close judicial scrutiny." (30) The Michigan Supreme Court reversed, holding, inter alia, that an adhesion contract must be enforced according to its plain terms unless traditional contract defenses apply. (31) The language in the contract was clearly unambiguous, and the notion of "close judicial scrutiny" was not a part of Michigan jurisprudence. (32) In other words, Michigan now refuses to recognize different applications of contract interpretation based on the defining characteristics of the contract. Michigan appears to be the first jurisdiction to state that the descriptor "adhesion" bears no relevance to the interpretation of the agreement.

This Note argues that the Rory principles should be applied in all jurisdictions, and that the concept of adhesion contracts should be eliminated in favor of a return to traditional contract principles that have been a part of American jurisprudence since the formation of the country. (33) To this end, Part I summarizes the doctrine in a historical context. Part II explores the application of this concept in case law and its effect on Michigan's jurisprudence. Part III argues for the elimination of adhesion contracts from a public policy perspective. Finally, Part W answers the counterargument centered on notions of unequal bargaining power and the "big guy vs. little guy" disparity; and it predicts how the Rory decision will affect Michigan law and how it might affect other jurisdictions.

  1. ADHESION CONTRACTS AS A JUDICIALLY CREATED CONCEPT

    Contracts of adhesion evolved in the judiciary. (34) What began as unconscionable agreements slowly took the name "adhesion" in the courts to signify the particular aspects of the contract. (35) Over a period of years, the judiciary created specific guidelines for interpreting these new types of agreements, which led to the inconsistencies that prompted this Note.

    A. The History of the Adhesion Contract: Unconscionable Agreements

    In order to fully understand the development of the adhesion contract, it is helpful to review briefly traditional contract doctrine in American jurisprudence. The basic format of a contract consists of three elements: offer, acceptance, and consideration. If all three elements are met, a contract is formed, and each party is responsible for the discharge of their agreement. In Lewis v. Great Western Railway Co., (36) the Court of Exchequer summarized the accountability of entering into a contract: "It would be absurd to say that this document, which is partly in writing and partly in print, and which was filled up, signed, and made sensible by the plaintiff, was not binding upon him." (37) This nineteenth-century presumption favored the exercise of autonomy for private decision makers. (38) Early American case law suggests the appropriateness of this theory. (39) The Supreme Court aptly relied on English courts when it stated:

    [I]f there is one thing more than any other which public policy required, it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that contracts, when entered into freely and voluntarily, shall be held good and shall be enforced by courts of justice. (40) Thus, "by the general rule ..., absent such gross inadequacy of consideration as to evidence fraud, mistake, or duress, the courts would not make the existence of a contract turn on the judges' appraisal of the worth of the exchange." (41)

    Traditional contract law cited two factors underscoring the freedom of contract: parties may avoid oppressive bargains by careful consideration of alternatives, and the agreement manifests mutual assent. (42) The operative issue for the judiciary regarding contract interpretation included whether there was a "true mutual assent" to the agreement. (43) Historically, a signature on a document, for all intents and purposes, manifested that assent. (44) Contract law in the United States, then, held citizens to a high standard of accountability for their actions. Traditionally, the only method by which a party could effectively void a contract involved a demonstration of fraud, duress, or unconscionability. Courts appeared hesitant to let a party off the proverbial hook. Judges displayed little sympathy for defenses such as illiteracy, negligence in reading the agreement, lack of education, or even failure to understand the language. (45)

    Traditionally, equity courts recognized the defense of unconscionability when denying relief to claimants who were guilty...

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