Contracts of Adhesion: Everything You Need to Know
Contracts of adhesion — also known as boilerplate contracts, standard form contracts, take-it-or-leave-it contracts, or adhesionary contracts — are contracts between two parties where the drafting party usually has stronger bargaining power than the other.3 min read
Contracts of adhesion — also known as boilerplate contracts, standard form contracts, take-it-or-leave-it contracts, or adhesionary contracts — are contracts between two parties where the drafting party usually has stronger bargaining power than the other.
About Contracts of Adhesion
This is not a term you hear often unless it becomes very important. The party with the stronger bargaining power is usually a business that draws up the agreement, and the party with the weaker bargaining power is often a consumer who needs specific goods or services. The second party usually cannot modify the terms or negotiate the contract.
These are standard contracts in a number of transactions, such as the following:
- House leases
- Car buying
- Insurance coverage
- Home contractor services
- Auto repair services
- Medical services
- Veterinary care
- Dental services
The party that drafts the contract has the upper hand because the consumer has no room to negotiate terms. Most of the contracts that consumers sign are adhesion contracts.
Other businesses that commonly use adhesion contracts are cable companies, cell phone providers, airlines, online vendors, and hotels. For instance, when you purchase an airplane ticket, you do not sit down with an airline representative to negotiate terms in the contract, such as the departure time, ticket price, and cabin temperature.
Companies of all sizes would not be able to operate efficiently if the only way they could enforce contracts was negotiating each agreement separately. Instead, most businesses prepare standard contracts for their potential clients to sign. If consumers are not happy with the agreement as-is, they are free to take their business elsewhere.
In general, contracts are not unenforceable just because they are adhesion contracts.
Consider an insurance contract as an example of an adhesion contract. The insurance company and its agent draw up the agreement, and the potential policyholder can only refuse to sign. Consumers cannot draw up a new agreement or counter the offer.
Insurance companies, like most other business, are for-profit, and these contracts are especially common in the insurance field. There are few insurance companies that allow consumers to change contract terms or negotiate. Basically, consumers can take it or leave it.
Fairness of Adhesion Contracts
Although contracts of adhesion are important in the business world, there is lots of disagreement about how fair they are. Courts scrutinize contracts of adhesion carefully. Sometimes, they void specific provisions on the basis of potential inequality in bargaining power, overall unfairness, and unconscionability.
Courts use the following factors when determining the fairness or lack thereof in a contract of adhesion:
- The potential of unfair surprise
- The nature of the contract
- Lack of notice
- Substantial unfairness
- The balance of bargaining power
Supporters of standard contracts argue that these agreements promote efficiency, which saves parties time and negotiation costs. If businesses did not have form contracts, proponents argue, the time involved in negotiating and preparing a single contract for every transaction would increase substantially. As a result, prices would increase, perhaps outrageously. Another downside to that is that the consumer could put in unfair terms.
There is also the question of whether the drafters of adhesion contracts — which they enter into freely, without any coercion on the part of the client or consumer — should evade liability for unfair agreements.
The clauses that cause the most concern regarding fairness in an adhesion contract include the following:
- Specific forum selection: The contract maker has the power to choose the forum, locking the signor out of the selection process.
- Mandatory arbitration: If a signor wishes to contest the contract, limits are placed on the signor's access to the court system.
- Liquidated damages: This limits how much the signor may recover or specifies how much the signor may have to pay in case of a dispute.
The most important thing you can do before signing an adhesion contract is to read it over carefully. Remember — the other party wrote it to be in its favor, not yours. If you have questions or concerns, you may want to consult with an expert who's skilled in contract law. That way, you will better understand all of the legalese, terms, and conditions before you sign.
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