What is a Contract of Adhesion?
A contract of adhesion is a contract between two parties in which the drafting party has all of the bargaining power. The other party, therefore, must either agree to the proposed terms or refuse to sign.
It is also commonly referred to as an adhesion contract, take-it-or-leave-it contract, standard form contract, or boilerplate contract.
The terms and conditions of this type of contract are non-negotiable, and the bargaining party (usually consumers in need of a product or service) does not have the power to demand modifications in the offered terms from the drafting party (generally a business with more bargaining power).
A contract of adhesion is used in a variety of transactions including insurance, leases, mortgages, deeds, and more. Whenever you sign up to a website’s mailing list and agree to its terms and conditions, you’re also signing this type of contract.
A practical example of a contract of adhesion
Imagine that you’re traveling to another city and need a car to get around. You go to a car rental agency and select the car. You’re handed a two-page contract with a list of terms and conditions. You read it through and realize you don’t feel comfortable with the clause that makes you liable for all dents found on the car upon return. However, the agency tells you that these terms aren’t negotiable. This contract, therefore, is a contract of adhesion. You either agree to the terms or walk away.
Enforceability and treatment of adhesion contracts under common law
Common law views contracts of adhesion the same way as any other contract. The objective manifestation of intent in the form of a signature or otherwise legally binds the bargaining party, even if they claim that they didn't understood the terms.
While contracts of adhesion are generally interpreted by courts contra proferentem (i.e., against the proffering person), special rules apply in different jurisdictions. These contracts are enforceable in the US because of widespread acceptance of the Uniform Commercial Code (UCC). The UCC contains specific provisions for contracts of adhesion for the sale or lease of goods.
What are unconscionable contracts?
While this type of contract is a practical tool necessary for many types of commercial transactions, some believe they are unfair. In case of a dispute, a court will scrutinize the contract and void provisions that it finds unfair or unconscionable by using the doctrine of unconscionability.
An unconscionable contract is a contract of adhesion that unfairly favors the contracting party with excessive bargaining power. When a court finds a contract of adhesion to be unconscionable, it refuses to enforce the contract.
The following clauses often raise a red flag regarding a contract of adhesion’s fairness:
- Liquidated damages — This clause may cap the amount of money that the bargaining party may recover or explicitly mention the amount they must pay in the event of a dispute.
- Reservation of the right to choose a forum — The drafting party may reserve a right to choose a forum, effectively leaving the bargaining party without a say in the process of forum selection.
- Compulsory arbitration — The drafting party may limit the bargaining party’s ability to access the judiciary when the bargaining party wants to contest any clause in the contract.
Generally, the party claiming unconscionability will claim it with regards to particular clauses and not the full contract. For example, a clause that keeps the party with inferior bargaining power from claiming a replacement of a defective product, depending on other circumstances, may be considered as unconscionable.
The party claiming the unconscionability must show that the contract was a contract of adhesion and demonstrate their case regarding why the contract unfairly favors the drafting party with more bargaining power.
Advantages and disadvantages of contracts of adhesion
Even though they have several shortcomings, contracts of adhesion are used widely in the business world.
Some benefits and drawbacks of these contracts are:
- Allows streamlining of routine transactions, consequently reducing transactional costs. For instance, when you purchase an air conditioner, you agree to the terms imposed by the manufacturer.
- Offers uniformity and efficiency, and allows the execution of multiple transactions without the need to negotiate with each individual customer.
- Unequal bargaining power between the parties may result in the stronger party taking undue advantage of the weaker party.
- There may be cases where the buyer has no choice but to accept the contract. For example, when the buyer needs to borrow money for an emergency.
Contracts of adhesion, though they can be inherently biased, streamline transactions through a standardized agreement between the parties. The law protects the buyer when a clause in a standard form contract unreasonably favors the drafting party. This ensures that businesses have a commercially viable form of contracting without substantive unfairness to the buyer.