The Dangers in Doing Too Much with Your Deposit Account Agreement

There is a natural tendency, when drafting a contract, to think of as many potential areas of conflict between the parties as you can and draft provisions resolving all those conflicts in favor of your side. You should check that tendency somewhat when you are drafting your deposit account agreement because it can cause you serious problems.

The problems spring from the contract law concepts of “unconscionable contracts” and “adhesion contracts.”

When a court decides a contract is unconscionable, it feels the contract is so unfair and one-sided that to enforce it as it is written would work a serious injustice on one of the parties. Courts ordinarily do not look at whether the parties to a contract actually made a good deal. As long as the required elements for a valid contract are present, the contract is enforced according to its terms. But when a contract is so outrageous that enforcing it according to its terms makes a judge’s stomach turn or makes him or her lose sleep at night, the judge can decide that the contract is unconscionable and simply not enforce it, or not enforce the unconscionable provisions in it. The rationale is that a court’s ultimate responsibility is to dispense justice, and while making people stick to the agreements that they knowingly and freely made is usually the just thing to do, some contracts are so unfair that enforcing them is not justice.

An adhesion contract is a contract between two parties of vastly different bargaining power. The disadvantaged party with little bargaining power usually has no choice but to sign the contract or do without the goods or services obtained under the contract. Contracts between a business and a consumer are frequently found to be adhesion contracts if the business supplies a printed form contract, loaded with fine print, and tells the consumer that in order to purchase the goods or services that are the subject of the transaction, the consumer must sign the contract. It’s a “take it or leave it” proposition. The consumer and the business do not negotiate the terms of the contract, and in fact, many times the consumer is not even given the opportunity to read the contract. Courts are especially prone to see contracts as adhesion contracts if the fine print, or “boiler-plate,” language is common in contracts used by many businesses in the industry. When that happens, consumers not only are unable to negotiate with a particular business as to the terms of the contract, but they also cannot go to a competitor for more favorable terms because all the competitors have the same sort of language in their contracts.

Deposit account agreements are prime candidates for being viewed as unconscionable contracts and adhesion contracts if the drafter tries to do too much with them. The contract can quickly become unconscionable if the institution, having years of experience in the banking industry and having seen all the sorts of conflicts that can arise between an institution and its customer, drafts its agreement anticipating all those conflicts and resolving all of them in its favor while at the same time disclaiming any liability for any unforeseen events that may cause a loss. A deposit account agreement also can qualify as an adhesion contract since it is always a printed form, drafted by (or on behalf of) the institution, signed by a consumer who does not and probably cannot negotiate any of the terms and who also probably does not have time to even read the contract before being asked to sign it. Since almost all institutions have similar deposit account agreements, consumers also cannot go to a different institution if they are unhappy with the terms of a particular institution’s contract.

The consequence of having your deposit account agreement characterized by a court as unconscionable or as an adhesion contract is that the court is not bound to enforce it according to its terms. Rather, the court can resolve the conflict between you and the depositor in whatever way the court decides is most fair. For example, suppose you set off the balance in a joint account against a debt owed you by only one of the account holders. Your account agreement authorizes you to do this by saying that you can set off funds in the account against the debt any of the account holders owes you. The other non-debtor account holder objects to your set-off on the grounds that he or she owns money in the account and doesn’t owe a debt to you and you shouldn’t be able to set off those funds for a debt he or she does not owe. If the court decides your deposit account agreement is unconscionable, it could refuses to enforce your set-off provision.

While there is no way to guarantee that a court will not view your deposit account agreement as unconscionable or as a contract of adhesion, there are some steps you can take to lessen the likelihood.

First, stick to the important issues. We’ve listed the issues we feel are important. You may feel others are more important. Whatever issues you feel are the most important in your relationship with your depositors, deal with them and don’t waste words and space on issues that rarely, if ever, arise, or issues that, even if they do arise, do not involve large sums of money and are easy to resolve. You want to avoid loading the agreement with a long list of provisions protecting you from every conceivable occurrence. This makes the contract look one-sided and potentially unconscionable.

Second, besides listing your rights and the customer’s duties in your agreement, include provisions describing the depositor’s rights and your responsibilities, such as your responsibility to pay properly payable items, or your responsibility not to set off the account balance against debts incurred under a credit card plan, or your responsibility to stop payment on an item when the depositor gives you a correct and timely stop-payment order. This gives the contract a more balanced tone and makes it seem less one-sided.

Third, write the agreement in plain language, and design and print it so it is easily readable. Avoid “legalese” and too much fine print. The more understandable and readable a deposit account agreement is, the more likely it is a court will decide the contract reflects a fair transaction between the parties and is neither unconscionable nor a contract of adhesion. Keep it a reasonable length and don’t make it any longer than necessary.

Fourth, give the depositors opening accounts with you an opportunity to read the account agreement and ask questions about it. You might even spend some time going through it with them. Evidence that the customer knew what was in the contract and understood it before signing it helps counter an argument that the agreement is unconscionable or is a contract of adhesion.

Fifth, be a little cautious about writing contract terms that change provisions in the Uniform Commercial Code. As we pointed out earlier, the UCC permits contracting parties to vary many of the terms of the Code so long as in doing so no party disclaims any obligations of good faith, diligence, reasonableness, or care. However, in spite of this authority in the UCC to vary its terms, there is some sentiment among the courts that financial institutions should not be able to do too much of it. The banking industry was heavily involved in the drafting of the UCC, and the feeling is that the industry should not be able to have its cake and eat it too by negotiating for favorable provisions in the drafting of the UCC and then going out and contracting away all the unfavorable provisions in its agreements with depositors. In any event, varying by contract too many of the rules in the UCC could contribute to a court’s unfavorable impression of your contract and increase the likelihood of the contract being viewed as unconscionable or a contract of adhesion.

If you follow these guidelines, your contract should be enforceable in court according to its terms or in the way it is written. Although we’ve spent a lot of time going over the dangers of having a contract be unconscionable or a contract of adhesion, you should remember that a court must deviate from the normal rules of contract law in order to rule in that way. The normal rules of contract law say that if the required elements of a contract are present, the court must enforce the contract as it is written and should not look at or be influenced by whether the parties actually made a good bargain or not. Only in the most dire circumstances should the court make an exception to the rule and not enforce the terms of a contract. If you keep our guidelines in mind, your contract should be enforceable.