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Commentary: Beware of Contracts That Set Unreasonable Terms

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Contracts of adhesion have nothing to do with mastic, glue or paste. Instead, they are something that contractors, particularly those who engage in contracting with public entities, should know about.

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One of the definitions of a contract of adhesion is that it is a contract “ . . . presented on a take-it-or-leave-it basis, commonly in a standardized printed form, without opportunity for the ‘adhering’ party to negotiate more reasonable terms except perhaps on a few particulars.”  The significance of that type of contract is that some of the terms of contracts of adhesion may not be legally enforceable.

A recent New Jersey Superior Court decision may provide comfort to some members of the construction industry. In that case, a construction company was engaged by a public authority to remove the top layer of concrete on a parking deck by means of hydro demolition. The process was to expose the rebar, after which the contractor was to re-pour the parking deck using a special weather-resistant concrete mix. A dispute arose between the contractor and the public authority over completion time, and the contractor was terminated.

The contractor filed suit against the public authority, but the authority insisted that the court had no jurisdiction because of an arbitration-like provision in the contract that required disputes to be decided by the authority’s chief engineer. His decision was to be final, binding and conclusive on the parties.

The authority’s chief engineer, who incidentally had been the very person who had terminated the contractor, may have been biased. If he was, the dispute provision of the contract was unenforceable, according to the decision in “Gothic Construction Group, Inc. v. Port Authority Trans-Hudson, Inc., 711 A.2d 312” (N.J. Super. 1998).

In the New Jersey court’s decision, it observed that the contract in question was the product of public bidding, prepared by the authority using its customary dispute clause, and, even though the contractor signed the contract, the appearance of bias may have been grounds for avoiding the contract dispute procedure.

Courts have fashioned adhesion contract rules in an effort to prevent more dominant parties from taking unfair advantage of weaker parties. The New Jersey case discussed above is a classic example. There, the public authority solicited public bids on a project, drafted the construction contract and included a clause that made its own chief engineer the final judge and jury of disputes between the parties. Although the contractor was not forced to contract with the governmental authority, it also had no voice or ability to negotiate out the obviously unfair dispute-resolution provision.

Construction industry members may consider contract-of-adhesion principles when faced with unfair contract or subcontract terms drafted by other parties with no opportunity for negotiation and where there is a marked difference (disparity) in bargaining power between the two parties. Specific contract clauses that may be ripe for argument would be liquidated damages, payment, indemnity and dispute-resolution provisions.

A word of caution, however.  Colorado appellate courts do not appear to have addressed contract-of-adhesion principles in a construction contract context. In one recent Colorado Court of Appeals case, it was argued that one of the Denver International Airport construction contracts was a contract of adhesion.

In that case, the contractor attempted to avoid Denver’s dispute resolution procedures that were somewhat similar to those involved in the New Jersey case discussed above.  The city’s manager of public works or his or her appointed hearing officer was to be the decision-maker, but there was also a limited judicial review available. 

Unfortunately, the Colorado Court of Appeals refused to consider the adhesion question issue because it had not been argued in the trial court (“Kiewit Western Co. v. City & County of Denver, 902 P.2d 421” Colo. App. 1994).
In a later airport-related case, the Colorado Supreme Court likewise ruled that the Denver contract dispute procedure was enforceable in “City & County of Denver v. District Court,” 939 P.2d 1353 (Colo. 1997).  (PCL-Harbert was the airport contractor involved in that case. The decision does not discuss whether the adhesion question was raised.)

The current City and County of Denver “Standard Specifications for Construction General Contract Conditions” dispute and claims provisions require that the manager of public works (or manager of aviation, for airport projects) or a hearing officer assigned by that manager conduct hearings.  Their decisions are reviewable in court only if (1) the decision-makers had exceeded their jurisdiction, or (2) abused their discretion. Those are limited (and vague) grounds that are unlikely to be successful.

Colorado courts have recognized contract-of-adhesion principles in connection with other types of contracts, particularly involving insurance policies. Under some circumstances, construction industry members may have an opportunity to utilize adhesion-contract principles if faced with unfair, unreasonable or ambiguous contract or insurance policy language.

Having a court refuse to enforce particular provisions in contracts voluntarily signed and agreed to by the parties is not a simple proposition. However, if contract-of-adhesion elements are present, success may be possible.

Albert B. Wolf is a principal in the Denver law firm of Wolf Slatkin & Madison PC. This column was written with the intent of providing general legal information intended to be reasonably accurate although not comprehensive. Readers are therefore urged to consult their attorneys for any specific legal advice they may desire concerning the subject matter of this column.

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