Adhesion contract: The What, Why, and How
What is an adhesion contract?
Also known as a contract of adhesion, an adhesion contract is a standard-form contract where the parties are of disproportionate bargaining power. They are drafted by the party with greater bargaining power on a “take-it-or-leave-it” basis. It is often used in situations where there is an imbalance of power between the parties. Adhesion contracts permeate all industries like insurance, telecommunications, and software licensing.
How do adhesion contracts work?
Here’s a breakdown of the process:
Drafting: The party with the more powerful party drafts the contract with standard pre-defined clauses to streamline transactions and minimize the effort and time spent on the agreement. This is typically the business or service provider.
Presentation: The presentation may involve the perception of limited choices, like purchasing insurance or signing up for services online.
Acceptance: The acceptance is either explicit (with a signature) or implicit (with a sign-up). Without negotiation, consumers may unwittingly agree to terms that are unfavorable, unclear, or leave room for liabilities and extra fees later.
While adhesion contracts are efficient, they may not always be fair. And yet they pervade daily life and everyday social structures. Let’s look at some instances.
Examples of adhesion contracts
Here are some examples of adhesion contracts:
Software licenses: End-user license agreements (EULAs) for software often contain terms that limit liability, disclaim warranties, and restrict user rights to share or operate outside the software. They may also limit the software provider’s liability for damages from software use.
Credit card agreements: Credit card companies typically present standard contracts with outlined terms on interest rates, late fee payments, and dispute resolution.
Rental agreements: Leases for apartments or rental properties often include standard clauses around tenant responsibilities, rent payments and increases, property maintenance, guest restrictions, and eviction procedures.
Mobile phone contracts: Service providers offer contracts with terms related to data usage, service termination fees, and equipment upgrades. They may also limit the carrier’s liability for service interruptions, data overage charges, and early termination fees.
Types of adhesion contracts
Adhesion contracts manifest in various forms across different sectors:
1. Consumer contracts
These involve everyday transactions between businesses and individual consumers, such as those for purchasing goods or services.
Retail purchases: Agreements to buy goods from online or physical stores.
Service contracts: Contracts for Urban Company services, mobile data plans, Wi-Fi, etc.
Warranties: Manufacturer warranties for electronics, appliances, or vehicles.
2. Employment contracts
These contracts govern employer-employee relationships. They spell out terms like salary, benefits, and working conditions. While some offer room for negotiation, many contain standard terms.
At-will employment: Clauses that state employment can be terminated by either party at any time.
Non-compete clauses: Restrict employees from working for competitors after leaving the company.
Confidentiality agreements: NDAs that maintain the secrecy of company information.
3. Insurance contracts
These outline the terms of coverage, exclusions, and premiums for insurance policies.
Health insurance: Policies detail medical expenses, deductibles, exceptions, and co-payments.
Auto insurance: Policies outline coverage for accidents, theft, damages, and unforeseen circumstances.
Homeowners insurance: They cover pre-determined rates of interest, repayment schedules, and penalties.
4. Online services
Legal agreements that govern the use of online platforms, social media, and streaming services.
Terms of Service (ToS): Agreements that govern the usage of mobile applications, social media, and streaming services. They include provisions on data privacy, user content restrictions, and limited liability.
Key characteristics of adhesion contracts
Standard form: The contract is typically pre-determined and non-negotiable and used repeatedly with little or no variation. This makes it easy for businesses to streamline transactions.
Unequal bargaining power: One party has significantly more power than the other in setting the terms.
Lack of negotiation: The weaker party has limited or no ability to negotiate or modify the terms. They reflect significant disparity and imbalance in negotiating power.
Potential for unfairness: The terms may be one-sided or disadvantageous to the weaker party.
Enforceability of adhesion contracts
While adhesion contracts are generally enforceable, courts may review them for unconscionability. Unconscionability refers to terms that are so unfair or one-sided as to be shocking to the conscience. If a court finds a contract to be unconscionable, it may refuse to enforce it.
Legal considerations and protections
Adhesion contracts, while efficient for facilitating transactions, often raise significant legal concerns, particularly regarding fairness and equity. Various consumer protection laws exist to safeguard individuals from potentially exploitative terms in these contracts. Key considerations include the doctrine of unconscionability, consumer protection laws, and the potential for class action lawsuits.
1. Unconscionability doctrine
Courts may refuse to enforce terms that are deemed unconscionable. The unconscionability doctrine is a critical legal principle that allows courts to refuse enforcement of contract terms that are deemed excessively unfair or one-sided. This doctrine serves as a safeguard against exploitation, particularly in scenarios where there is a significant imbalance of bargaining power between the parties involved. Courts assess unconscionability based on two main criteria: procedural unconscionability and substantive unconscionability.
Procedural unconscionability: This aspect examines the circumstances under which the contract was formed. Factors include whether the weaker party had a meaningful choice, if there was any deception involved, and whether the terms were presented clearly. For instance, if a consumer is not given adequate time to read or understand the contract, it may be deemed procedurally unconscionable.
Substantive unconscionability: This focuses on the actual terms of the contract. If the terms are grossly unfair or heavily favor one party over another, they may be considered substantively unconscionable. Courts have broad discretion in determining what constitutes an unconscionable term, often looking at industry standards and practices.
2. Consumer protection laws
Many jurisdictions have laws that protect consumers from unfair or deceptive contract terms. In addition to the unconscionability doctrine, many jurisdictions have enacted consumer protection laws designed to shield consumers from unfair or deceptive practices in contracts. These laws often include provisions that require transparency in contract terms and prohibit misleading advertising or representations. Key features of consumer protection laws include:
Disclosure requirements: Businesses may be mandated to provide clear and concise information about the terms of service, including fees, cancellation policies, and data usage practices.
Prohibition of unfair terms: Many consumer protection statutes allow courts to void specific clauses that are deemed unfair or deceptive. This can include hidden fees or penalties that were not adequately disclosed at the time of the agreement.
Right to cancel: Some laws grant consumers a specified period during which they can cancel a contract without penalty, especially for services purchased online or through telemarketing.
Class action lawsuits: Consumers may be able to band together to challenge unfair contract terms through class action lawsuits. These lawsuits enable consumers to challenge common grievances against a service provider effectively.
Increased leverage: By joining forces, consumers can exert more pressure on companies to amend unfair practices or settle disputes.
Resource efficiency: Class actions reduce the burden on courts by consolidating multiple claims into a single case, making it easier for courts to address widespread issues.
Public awareness: Class action lawsuits often draw public attention to unfair practices within industries, prompting regulatory scrutiny and potential legislative changes.
Legal considerations surrounding adhesion contracts are essential for protecting consumers from exploitation. The doctrines of unconscionability and various consumer protection laws serve as critical safeguards against unfair practices.
Negotiating terms
Despite the inherent limitations of non-negotiables, there are several strategies that the parties with less bargaining power can employ to protect their interests.
When such a party seeks legal advice, you can help them understand their rights and obligations, identify unconscionable terms that could be challenged in court, and help negotiate with the service provider if necessary.
You may also ask them to consider alternatives, research competitors, and negotiate with other providers.
Parting thoughts
Adhesion contracts are a prevalent feature of modern commerce. Recognizing the inherent power imbalances and potential for unfairness is crucial. Legal professionals play a vital role in advising clients on their rights and obligations under adhesion contracts, identifying potential legal challenges, and advocating for fairer contract terms.
