Bargaining is a superb skill that can sometimes help to close deals and get what you want at a lower price. Having this ability is an advantage when negotiating prices or adjusting the contract details. But, as business grows, entrepreneurs and business owners find it difficult to negotiate every clause in every agreement.
By drafting a contract of adhesion, the negotiation process streamlines and reduces legal friction and allows business owners to focus on their business growth rather than repetitive contract reviews.
In this article, we will understand the adhesion contract and its advantages and disadvantages when used in a business agreement.
Contract of Adhesion: Definition
To define adhesion in contracts, it refers to a legal document that is a non-negotiated terms and conditions document. Generally, these contracts are take-it-or-leave-it, with one party having significantly more bargaining power than the other.
An agreement enforceable by law is called a valid contract – adhesion contracts fall into this category when they meet fairness and legality tests.
In simple words, these adhesion contracts do not allow consumers a realistic opportunity to bargain. The customer has only one option: to take the provisions “as is” or choose not to agree. However, the courts may sometimes invalidate adhesion contracts if they are found to be unconscionable or against public policy. In addition, adhesion contracts are also referred to as standard, standardised, or boilerplate agreements.
History of Adhesion Contracts
Nowadays, many businesses have adopted an adhesion contract as a way to simplify their operations and ensure consistency in their agreements with customers. But do you know that the contract of adhesion was initially coined in French civil law?
Yes! The concept was first introduced by French legal scholars to describe contracts in which one party has significantly more bargaining power than the other. Then, it entered American law when Edwin W. Patterson’s article on life insurance contracts was published in the Harvard Law Review in 1919.
Later, in the 20th and 21st centuries, the adhesion contracts became popular due to the rise of digital contracts and “click-through” agreements. The validity and enforceability of adhesion contracts have evolved over the years, and they continue to evolve.
How Does an Adhesion Contract Work?
In the digital era, most agreements are created online, where users are required to click “I agree” without the opportunity to negotiate or modify the terms. For example, if you install an app or book a ticket on a website, you are likely agreeing to an adhesion contract that outlines the terms and conditions of using that service.
These agreements are presented on a “take it or leave it” basis, with no opportunity to negotiate terms or modify language, dictated entirely by one party who holds a substantially stronger bargaining position in the transaction. However, the courts often shape these agreements for fairness, especially when the clauses heavily favour the party that drafted them.
If the court found that the adhesion contract is unconscionable or overly one-sided, it may deem it unenforceable and protect consumers from unfair practices.
Examples of Adhesion Contracts
In many situations, knowingly or unknowingly, we accept the contract of adhesion in our daily lives, and it has become prevalent in many industries nowadays. Here are some commonly known contracts of adhesion examples:
Insurance Policies
Many insurance policies often contain adhesion contracts, where the terms and conditions are non-negotiable and must be accepted as is.
For example, take car insurance, where the insurance party has to accept the terms set by the insurance company and it is often difficult to change the terms and conditions; they can only choose the coverage options provided by the company.
Other examples of adhesion contract insurance are health insurance and home insurance. Each adhesion example shows a non-negotiable structure favoring one party as they also follow the same terms and conditions by giving the insurance company control over policy language and interpretation. Therefore, reviewing the terms and conditions before signing the adhesion contract insurances is essential.
Leases and Rental Agreements
Another common example of adhesion law is lease and rental agreements. The landlord or property management company typically drafts the standardised terms and conditions in these agreements, which are non-negotiable for the tenant.
The landlord may draft the terms to protect their interests, such as specifying rent due dates and maintenance responsibilities. In these situations, the tenant must either accept the terms or seek alternative housing options.
Credit Card Agreements
When a loan is received, the lender (who gave money) will provide the borrower with a credit card agreement. These agreements outline the terms and conditions of the credit card, including interest rates, fees, payment due dates, and strict consequences for late payments.
Understanding the agreement’s terms and conditions is essential to prevent negative consequences.
Read the terms and conditions carefully before signing any documents to avoid problems in the future.
Terms and Conditions
The websites and apps we use today generally ask the users to accept their terms and conditions before using their services. These agreements typically delineate the rights and responsibilities of both the user and the company, as well as the potential repercussions for any violations of the stipulated terms.
End-User License Agreements
We can see the end-user license agreement in software applications, digital content, and online services. It outlines the rights and restrictions of the user in regard to the product or service being provided. It is important for users to read because they often include clauses regarding data privacy, intellectual property rights, and liability limitations.
Advantages of Adhesion Contracts
Adhesion law benefits both contracting parties by ensuring that the conditions are transparent and enforceable. The following are some of its advantages:
Economic Efficiency
An adhesion contract helps reduce legal and administrative costs related to contract creation and negotiation. However, it needs to be legally drafted by an experienced attorney to ensure fairness and protection for both parties involved.
Fewer Transaction Costs
Companies and business owners become busy as their business grows and succeeds. Adhesion contracts help manage the process flow and save the time and resources needed for each transaction. In addition, it results in cost savings for individuals whoever is involved.
Convenience
Adhesion contracts outline terms and conditions clearly and conveniently. So, it does not need lengthy negotiations or back-and-forth discussions, saving time and effort for both parties. It clearly explains the rights and obligations of each party, reducing the likelihood of misunderstandings.
Disadvantages of Adhesion Contracts
If the adhesion contract contains unfair terms or is not properly drafted, it can lead to legal disputes.
Unequal Power Terms
Adhesion contracts often involve unequal power terms, with one party having significantly more bargaining power than the other. Courts may strike down the contract if it is found unfair or one-sided. . To avoid potential legal challenges, it is important for parties to ensure that adhesion contracts are fair and reasonable in their terms.
Risk for Customers
Although many advantages exist for businesses in using adhesion contracts, such as efficiency and consistency, there is a risk for customers who may feel disadvantaged due to a lack of negotiation power. This can result in a loss of trust and potential harm to the business’s reputation.
Potential Unenforceability
If the adhesion contract contains terms that are overly favorable to one party, such as a company, it can create a risk for customers who may not fully understand or agree to those terms. Additionally, if certain terms in the adhesion contract are found to be unconscionable or against public policy, they may be deemed unenforceable by a court.
Enforceability of Adhesion Contracts
In legal terms, a change in important terms of an agreement is called a contract modification – which is often restricted in contracts of adhesion.
Generally, adhesion contracts are drafted in a take-it-or-leave-it manner, which means the party that drafts the contract has all the power, and the other party has no ability to negotiate terms. However, the adhesion contract may not be enforceable if certain terms are unconscionable or against public policy.
In such a case, the court determines it by looking at how fair the contract is. The following factors influence the outcome:
• The bargaining power of the parties involved
• Clarity or obscurity of the contract terms
• Compliance with relevant laws and regulations
Adhesion Contracts Under Indian Law
According to the Indian Contract Act of 1872, adhesion contracts are generally considered valid under Sections 16(3) and 23, and these contracts are typically deemed valid, provided they are fair and in alignment with public policy.
The Act also lets the court cancel such contracts when the terms are found to be unfair, exploitative, or contrary to public interest.
How to Draft Fair and Effective Adhesion Contracts for Your Business
Adhesion contracts are helpful for businesses to streamline the transaction and save time. A clear and fair draft of adhesion contracts help the business owners maintain transparency and avoid overly one-sided clauses. Therefore, here are some key points to consider when drafting a contract of adhesion:
- Unconscionability: Generally, the drafting party has a dominant role in the contract of adhesion, so it is important to draft the terms and conditions fairly and reasonably for both parties involved.
- Use Simple Language: Avoiding legal jargon and complex terms in the contract is helpful for all parties to fully understand the terms of the contract.
- Compliance with international standards: Adhesion contracts must be drafted in a form that is understandable to the general public in the locations where an organisation operates.
- Use of past cases: When drafting an adhesion contract, it is important to refer to the previous cases to avoid unconscionable terms. Taking suggestions from an experienced attorney is helpful to draft a fair and legally binding contract.
The Bottom Line
The contract of adhesion is really helpful when it comes to standardising agreements and saving time in the fast-paced business world. Most of the businesses find them convenient to use, but it is important to ensure that the terms are fair and they comply with legal standards to avoid any potential issues in the future. It is always a good idea to have a legal professional review of any adhesion contracts before signing to protect your interests.
For Legal Support
Are adhesion contracts legally binding?
Adhesion contracts are legally binding as long as they meet certain criteria, such as being clear and compliant with laws.
What are some examples of adhesion contracts?
Contracts of adhesion examples are insurance, banking, employment, and online services.
Why are adhesion contracts used?
Adhesion contracts are used to save time and ensure consistency in agreements, especially in industries with standard terms and conditions. Adhesion contracts also help companies protect their interests and limit liability by setting clear expectations for both parties.
