What Is an Adhesion Contract?
An adhesion contract is an agreement where one party has substantially more power than the other in setting the terms of the contract. For a contract of adhesion to exist, the offeror must supply a customer with standard terms and conditions that are identical to those offered to other customers. Those terms and conditions are non-negotiable, meaning the weaker party in the contract must agree to the contract as it is rather than requesting clauses be added, removed, or changed. Adhesion contracts may also be referred to as boilerplate contracts or standard contracts.
- Adhesion contracts are "take it or leave it" agreements where you must accept the contract as a whole or walk away.
- Adhesion contracts are meant to simplify business transactions by standardizing the agreement between the supplier and the buyer.
- To be enforceable, adhesion contracts cannot be unreasonably one-sided.
- Courts ultimately decide what is reasonable within an adhesion contract. This evolves over time and may differ across jurisdictions.
Understanding Adhesion Contracts
Adhesion contracts are often used for insurance, leases, vehicle purchases, mortgages, and other transactions where there will be a high volume of customers who will all fall under some standard form of agreement. In an insurance contract, the company and its agent have the power to draft the contract, while the potential policyholder only has the right of refusal; the customer cannot counter the offer or create a new contract to which the insurer can agree. It is important to read over an adhesion contract carefully, as all the information and rules have been written by the other party.
Adhesion contracts are usually enforceable in the United States thanks to the Uniform Commercial Code (UCC). The UCC helps to ensure that commercial transactions are taking place under a similar set of laws across the country. Although the UCC is followed by most American states, it has not been fully adopted by some jurisdictions like American Samoa and Puerto Rico. Louisiana stands alone among the 50 states in that it has only adopted parts of the UCC. The UCC has specific provisions relating to adhesion contracts for the sale or lease of goods. Contracts of adhesion are, however, subject additional scrutiny and interpretation under state law.
History of Adhesion Contracts
Adhesion contracts originated as a concept in French civil law, but did not enter American jurisprudence until the Harvard Law Review published an influential article on the subject by Edwin W. Patterson in 1919. Subsequently, most American courts adopted the concept, helped in large part by a Supreme Court of California case that endorsed adhesion analysis in 1962.
As with most aspects of contract law, the legality and enforceability of adhesion contracts has been formed over time. The case law and interpretation may vary from state to state, but it is generally agreed that adhesion contracts are an efficient way to handle standardized transactions. Using adhesion contracts saves companies and customers time and money in terms of legal counsel when they are done properly. However, the law around adhesion contracts is always evolving. For example, digital adhesion contracts signed online have been challenged in court for burying clauses or making it difficult to read certain clauses, so a digital adhesion contract must now be as close to a paper contract as possible.
Enforceability of Adhesion Contracts
For a contract to be treated as an adhesion contract, it must be presented as a "take it or leave it" deal, giving one party no ability to negotiate because of their unequal bargaining position. Adhesion contracts are subject to scrutiny, though, and that scrutiny usually comes in one of two forms.
Courts have traditionally used the doctrine of reasonable expectations to test whether an adhesion contract is enforceable. Under this doctrine, specific parts of an adhesion contract or the whole contract may be deemed unenforceable if the contract terms go beyond what the weaker party would have reasonably expected. Whether a contract is reasonable in its expectations depends on the prominence of the terms, the purpose of the terms, and the circumstances surrounding acceptance of the contract.
The doctrine of unconscionability has also been used in contract law to challenge certain adhesion contracts. Unconscionability is a fact-specific doctrine arising from the same equitable principles—specifically the idea of bargaining in good faith. Unconscionability in adhesion contracts usually comes up if there is an absence of meaningful choice on the part of one party due to one-sided contract provisions combined with unreasonably oppressive terms that no one would or should accept. Simply put, if the contract is exceptionally unfair to the signing party, it can be declared unenforceable in court.
The doctrine of unconscionability shifts the focus from what the customer might reasonably expect to the motive of the supplier. Unconscionability is easier to argue if the supplier is making a significant profit from the agreement, especially if the amount of profit is in some way tied to the weaker party's lack of bargaining power. Some legal experts have pushed back on this approach as it has implications in terms of the freedom of contract—the legal concept that people can freely determine the provisions of a contract without government interference.