What is a contract of adhesion? | UPDATED 2024 | A Complete Guide

A contract of adhesion differs from other kinds of contracts in its standardization and non-negotiable policy. One party drafts the contract, complete with terms and conditions, for the other party to sign or leave.

Despite their rigid nature, adhesion contracts are more practical for trade and large-scale commercial contexts. A standard contract of adhesion facilitates most routine business operations, especially when little or no customization is required.

Even if you've never drafted an adhesion contract yourself, you've most likely signed one recently. In this guide, we'll consider numerous adhesion contract examples as well as the limits of enforcing these agreements. 

What is a contract of adhesion?

History of adhesion contracts

Contracts of adhesion, also known as standard form contracts or boilerplate agreements, originated in France during the late 19th and early 20th centuries. They were initially used as non-negotiable agreements, primarily in commercial settings, where one party dictated the terms, and the other could only accept or reject the contract without any room for negotiation. This concept benefited businesses that needed to streamline operations and reduce the time spent on individual contract negotiations.

The significance of adhesion contracts in the United States began to rise in the mid-20th century. A pivotal moment occurred with the 1962 California Supreme Court case, *Graham v. Scissor-Tail, Inc.*, which helped define the legal framework for these agreements in the U.S. The court's ruling recognized the enforceability of adhesion contracts while acknowledging the need for scrutiny to ensure fairness, especially when one party holds significantly more power than the other.

Following this case, adhesion contracts became increasingly common in both business-to-business (B2B) and business-to-customer (B2C) transactions. Their efficiency in standardizing terms and reducing legal and administrative costs made them attractive to businesses. Over time, U.S. federal and state laws developed more explicit guidelines to define the elements and boilerplate language necessary for these contracts to be legally binding. This legal evolution, with its focus on ensuring that while these contracts facilitate business efficiency, they do not do so at the expense of fairness and transparency, is a testament to the legal system's commitment to protecting your rights.

Today, adhesion contracts are ubiquitous in various industries, from insurance policies and credit card agreements to software licenses and online service terms. Their widespread use, which underscores their importance in modern commerce, is something that every legal professional, business owner, and individual involved in commercial transactions should be informed about. The efficiency of non-negotiable agreements is highly valued, but this efficiency is balanced with regulatory measures to ensure that the terms are fair and transparent, protecting consumers and smaller businesses from potential exploitation.

So, the history of adhesion contracts reflects their evolution from a tool for streamlining commercial transactions in France to a prevalent legal framework in the United States. Their rise to prominence has been marked by legal developments aimed at ensuring that while these contracts facilitate business efficiency, they do not do so at the expense of fairness and transparency. Understanding their history and legal context is crucial for navigating the modern business environment where these contracts play a significant role.

Applications and examples of adhesion contracts

Several industries use variants of adhesion contracts, but we regularly encounter the most popular ones.

When is a contract of adhesion invalid, and what are the practical applications of adhesion contracts can be found in the following: 

Terms and conditions

When you sign in to use a new product or service, you're required to sign the terms and conditions. You don't get to choose what the terms are; the product's supplier defines them for you.

Terms and conditions are a legal protection that absolves the supplier of all responsibility when you don't use the product as described. By signing an adhesion contract, you're also consenting to use the product as prescribed by the suppliers. 

Nondisclosure agreements

 NDAs are a perfect use case for adhesion contracts. It restricts one party, usually the signing party, from using or disclosing any confidential information beyond the dictates of the contract.

NDAs are prevalent in industries involving new, innovative, and time-sensitive projects. Companies also ask employees and contract staff to sign NDAs to protect their sensitive data during collaboration.

Medical contracts

Medical contracts, whether in human or veterinary medicine, are drawn up to explain the risks, consequences, and side effects associated with a procedure should the customer accept.

It also outlines how patient health information will be shared or used when they provide consent. Medical contracts can also serve as legal protection for the patient in case the unexpected occurs.

Insurance agreements

For an insurance contract, the company and its agents have the power to decide the terms of engagement, while the potential holder has only the right to accept or refuse.

When it comes to financial agreements, customers must take the time to read an adhesion contract carefully and understand the rules and information provided by the other party.

Master service agreements (MSA)

 MSAs are a peculiar type of adhesion contract that involves little negotiation. Like a master plan, they are more broad and encompassing and are used to discuss the general terms of interactions between two or more parties.

Quite often, master service agreements are used to create subcontracts. Although they are less specific, they require input from more than one party.

Challenges of enforcing a contract of adhesion

Adhesion contracts, stringent agreements that streamline standard business transactions, are subject to the scrutiny of U.S. jurisdictions. These entities play a pivotal role in determining if a contract is excessively one-sided, thereby ensuring the fairness of these agreements. Several key factors may lead to an adhesion contract being deemed unenforceable by the courts:

• Lack of Prominent Notice: The contract must inform the signing party of its terms and conditions. The agreement may be invalid if crucial information is hidden in fine print or conspicuously presented.
• No Proper Records: Adequate documentation of the agreement and the circumstances surrounding its signing is essential. If proper records are maintained, proving the contract's validity becomes easier.
• No Clear Affirmative Consent: Both parties must give clear and affirmative consent. This means that the agreeing party must explicitly accept the terms rather than be passively bound by them.
• Imbalance in Obligations: The obligations stated in the contract must be balanced and fair. Suppose one party bears a disproportionate share of the commitments while the other reaps all the benefits; the agreement can be considered unjust and unenforceable.
• Nature of the Contract: The overall nature and context of the contract play a crucial role. If the contract exploits the weaker party's lack of bargaining power or understanding, the court may invalidate it.

These criteria ensure that adhesion contracts, while useful for efficiency in business transactions, do not become tools for exploitation or unfair advantage. Courts scrutinize these agreements to protect parties from unreasonable terms and to uphold principles of fairness and equity in contractual relationships. 

Importance of adhesion agreements

These boilerplate agreements are essential aspects of daily transactions. Regardless of the use cases, high-volume, non-negotiable agreements ensure the following benefits.

Access to products and services​

Unless you agree to a software's terms of use, you cannot sign in or gain full access to its features. It's a standardized way of doing business.

These contracts aid the mass supply of goods and services to an infinite number of people. Industries that use adhesion contracts ensure that customers agree to their terms before providing the required service.

Fewer transaction costs

 With an adhesive invisible contract, companies can reduce the time and resources spent bargaining, communicating, and issuing contracts. Terms do not change between parties, and there's no need for the back-and-forth that introduces unique provisions.

Adhesion contracts streamline your workflows to make them uniform for everyone. As you save on significant employee time and contract management costs, you're also saving on enforcement costs since the agreements are the same across boards.

Convenience

Click-wrap and sign-in contracts are the hallmarks of convenience. These adhesion contracts simply require users to click 'I Accept' to generally enforceable terms.

Even in more complex settings, such as rental and insurance agreements, both consumers and businesses can benefit from the ease of use. After users review the provisions within the agreement, they can either accept the deal or go elsewhere.

Legal protection

Adhesion contracts serve as legal protection for suppliers in case of any dispute. As long as the contracts are legally binding, they can be admissible in court.

These contracts are usually enforceable under the Uniform Commercial Code (UCC) in the United States. Consumers may also get a fair hearing in case of a manipulative adhesion contract; thus, record keeping is essential. 

Best practices for creating adhesion contracts

Before deploying any contract, whether adhesion or not, it's essential to check for loopholes or errors and ensure the language is not too complicated for users. It's best to seek the counsel of a legal professional when creating these standard-form contracts.

The courts may declare an adhesion contract unconscionable in cases of one-sided T&Cs that aim to oppress or manipulate users unreasonably.

When drafting adhesion contracts, the supplier must ensure that the terms are not exceptionally unfair to the signing party, lest the agreement become unenforceable in court.

It's also good practice to use contract management software to keep track of how contracts are shared, signed, or managed. Dedicated software also provides all forms of contract templates from which you can choose.

Save money and effort when you create legally binding adhesive contracts that can be managed from anywhere. Lumin have extensive experience assisting organizations with their contract management needs.

The pros and cons of adhesion contracts

Adhesion contracts, also known as "standard form contracts" or "boilerplate contracts," are pre-drafted agreements where one party sets the terms and the other has little or no ability to negotiate more favorable terms. These contracts are widely used in various sectors, including insurance, real estate, and consumer services. While adhesion contracts can offer several benefits, they also have significant drawbacks. Empowering yourself with a comprehensive understanding of both sides of the equation is crucial for businesses and consumers alike. 

Pros of Adhesion Contracts​ 

• Efficiency and Convenience Adhesion contracts streamline the contracting process. For businesses, they reduce the time and effort required to negotiate terms with each customer or client. This efficiency is particularly beneficial for companies dealing with large volumes of transactions, such as telecommunications providers, banks, and utility companies. The convenience of quickly entering into agreements without lengthy negotiations is a significant advantage for businesses. Customers also benefit from this streamlined process.
• Consistency and Standardization These contracts ensure fairness and equality in terms and conditions across all transactions. This uniformity can help businesses maintain a transparent and predictable legal framework, reducing the risk of disputes and misunderstandings. Standardized contracts mean consumers can expect similar terms and services across the board, providing them with a sense of reassurance and security.
• Cost Savings By using pre-drafted contracts, companies can significantly reduce legal costs. The need for individualized legal review and negotiation is minimized, which can result in substantial savings. These cost savings, a key financial benefit, can be passed on to consumers through lower prices for goods and services.
• Clarity and Predictability Adhesion contracts, as they are drafted by legal professionals, typically present clear terms and conditions. This clarity can benefit both parties by outlining rights, responsibilities, and procedures straightforwardly, providing a sense of peace of mind and confidence, and reducing the likelihood of confusion and conflict.

Cons of Adhesion Contracts

• Lack of Negotiation Power One of the primary criticisms of adhesion contracts is the imbalance of power they create. The party offering the contract, often a giant corporation, has the upper hand, while the other party must either accept the terms as they are or forego the service or product. This lack of bargaining power can lead to heavily skewed terms in favor of the drafter.
• Potential for Unfair Terms Due to the imbalance of power, adhesion contracts can include terms detrimental to the weaker party. These may consist of hidden fees, restrictive clauses, or limitations on liability. Such terms might go unnoticed by consumers, who may need to thoroughly read or understand the contract before agreeing.
• Limited Consumer Protection Although some jurisdictions have laws to protect consumers from unfair terms in adhesion contracts, these protections can be limited. In many cases, consumers must take legal action to challenge unfair terms, which can be costly and time-consuming. Furthermore, the burden of proof often lies with the Consumer to demonstrate that the terms are unconscionable.
• Perceived Inequity Adhesion contracts can create a perception of unfairness, eroding trust between businesses and consumers. When customers feel they have no choice but to accept unfavorable terms, it can lead to dissatisfaction and a negative view of the company. This perception can harm a business's reputation and customer relationships.
• Legal Challenges Courts may scrutinize adhesion contracts more closely, especially if there is evidence that the terms are one-sided or oppressive. Judges may invalidate or modify specific clauses deemed unfair or unconscionable. This can introduce legal uncertainty for businesses relying on these contracts and may result in additional legal costs and complications.

Is an Adhesion Contract Enforceable?

An adhesion contract can be enforceable for several reasons:

• Mutual Agreement: Both parties voluntarily enter into the contract, albeit with one party having more influence over the terms.
• Consideration, a fundamental principle in contract law, refers to the exchange of something of value between the parties. This could be goods, services, or money. It's a crucial element in contract formation, as it ensures that both parties are giving and receiving something of value.
• Legal Formalities: The contract meets all legal requirements, such as being in writing (if necessary) and signed by both parties where required by law.
• No Unconscionability: The contract terms are not grossly unfair or one-sided to the point of being unconscionable. Courts may refuse to enforce unconscionable contracts.
• Transparent Terms: The contract terms are unambiguous, providing a clear understanding for all parties involved and leaving no room for misunderstanding.
• Public Policy: The contract should not violate public policy or applicable laws. Public policy refers to the principles that guide the legal system and protect the welfare of the public. Contracts that encourage illegal activities or go against these principles may be deemed unenforceable.
• Past Conduct: The parties have previously conducted similar transactions under similar terms without dispute, establishing a course of dealing that supports enforceability.
• Adherence to industry Standards: The terms align with customary industry practices, providing a sense of security about the contract's compliance with established norms.
• Informed Consent: The adhering party has had a reasonable opportunity to read and understand the contract terms before agreeing.
• Alternative Options: The adhering party had a reasonable opportunity to seek alternatives or negotiate the terms, even if they ultimately chose not to do so.

These factors collectively contribute to the enforceability of adhesion contracts, provided they meet legal standards and do not unfairly disadvantage the adhering party. 

Wrapping up 

Adhesion contracts, characterized by the disparity in bargaining power between parties, play a significant role in modern contract law. When utilized appropriately, they can offer advantages to both sides, fostering a sense of optimism and open-mindedness.

While these contracts have certain drawbacks, gaining a clear understanding of their mechanics can empower you to make informed decisions about their use. If you have any questions or concerns about adhesion contracts, consulting a qualified legal professional is advisable, ensuring you feel confident and in control.

Thank you for reading this blog post about the nature and significance of adhesion contracts in contractual law. For more information on managing contract agreements, explore automated solutions that simplify and streamline the process.