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.5 min read
2. Where Are Adhesion Contracts Used?
3. Are Adhesion Contracts Legal and Fair?
4. Supporters and Detractors of Adhesion Contracts
5. History of Adhesion Contracts
6. Adhesion Contracts in the 21st Century
7. How UpCounsel can help you
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.
Contract of Adhesion Meaning
Contract of adhesion is a contract that is generally drafted by one party who has greater bargaining power and signed by another party who has lesser bargaining power. 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. Since there is such disparity between the parties, the weaker party usually adheres to the initial contract since it is unable to negotiate the original terms of the deal. This is also sometimes referred to as a “take it or leave it” situation. Most of the contracts that consumers sign are adhesion contracts.While this type of contract would seem unfair or even unenforceable, there is nothing wrong with entering into such an agreement. In fact, this type of contract is more common than one would think. If businesses spent time negotiating every single deal, they wouldn’t get any work done.
Where Are Adhesion Contracts Used?
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. 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
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.
Are Adhesion Contracts Legal and Fair?
Contracts of adhesion are legal and important in the business world. However, 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
- Unequal bargaining power
- Substantive unfairness
For example, in Texas, insurance companies cannot use complex or ambiguous language. If this occurs, the insurance holder can bring a legal action against the insurance company indicating that he or she didn’t understand the terms of the insurance contract. The court will require the insurance company to write its contracts in the way that a person of average intelligence can understand. Therefore, any ambiguity in the contract will be interpreted in favor of the insurance holder.
Similarly, for any parties that are involved in a legal dispute regarding an adhesion contract, the court will look at the doctrine of reasonable expectations to determine if there is any justification for enforcing the terms of the contract. This is done by looking at the contract terms and attempting to identify what the weaker party would have reasonably expected from the contract.
Supporters and Detractors of Adhesion Contracts
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.
History of Adhesion Contracts
The idea of an adhesion contract first appeared in civil law in France. However, it didn't appear on the American legal scene until Edwin W. Patterson published an article in the Harvard Law Review in 1919. Following that article, many courts in the U.S. adopted the idea of adhesion contracts. This adoption was expedited by an adhesion analysis that was endorsed by the California Supreme Court in 1962. Additional information about the first adhesion contracts in the U.S. is found in Steven v. Fidelity & Casualty Co., 58 Cal. 2d 862, 882 n.10 (1962).
Adhesion Contracts in the 21st Century
In the 21st century, adhesion contracts have continued to become more important and relevant. Their growth is due in part to the increase in the use of click-through contracts and contracts signed digitally. In order to legally enforce a contract provided electronically, the agreement must look identical to a contract on paper. Inconspicuous or buried clauses typically can't be enforced.
In a court case titled Fairfield Leasing Corporation v. Techni-Graphics, Inc., the New Jersey Superior Court ruled that an adhesion contract was invalid because the waiver clause had a minimal typeface and single spacing, thus causing it to be ruled as too inconspicuous. Other courts use the unconscionability doctrine, ruling that certain clauses in adhesion contracts are not reasonable or ethical. However, since this ruling can infringe on the option to use contracts or bring up too many issues, the unconscionability doctrine can be more challenging to use.
How UpCounsel can help you
If you need help with contracts of adhesion, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.