Contract of Adhesion (Best Overview and Legal Definition)

What is a contract of adhesion?

Is an adhesion contract enforceable

What is the legal definition of a contract of adhesion?

In this article, we will break down the concept of adhesion contracts so you know all there is to know about it.

We will look at its legal definition, benefits, drawbacks, history, enforceability, examples and more.

You’ll probably be surprised to realize that you’ve entered into many contracts of adhesion yourself in different situations.

Are you ready?

Let’s get started!

What is a contract of adhesion?

Contract of adhesion definition 

A contract of adhesion, also known as a “standard form contract”, “boilerplate contract” or “form contract” is a contract draft by one party and given to another party to accept as-is or sign without any modifications.

Investopedia defines a contract of adhesion as follows:

“In an adhesion contract, one party has substantially more power than the other in creating 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 not negotiable.”

Characteristics of a contract of adhesion 

Contracts of adhesion have certain distinctive characteristics:

  1. The terms and conditions are drafted by one party 
  2. The terms and conditions are based on boilerplate language
  3. They are used to provide goods and services to a large number of people 
  4. They are drafted to apply to an indefinite number of people 
  5. The party agreeing to the terms and conditions could not negotiate the terms

Disproportion in the contractual parties’ bargaining power

In a contract of adhesion, you’ll often see a disproportion in the bargaining power of the parties.

For example, consider the relationship between a merchant and a consumer.

The stronger party dictates and imposes the contractual terms and conditions while the weaker party is required to accept the ‘imposed’ terms without having a real possibility to negotiate any important aspects of the contract.

An adhesion contract is often used in the area of insurance, mortgage, consumer credit forms and automobile purchases.

Contract terms and conditions not negotiated 

The difference between a normal contract and a contract of adhesion is that the parties did not mutually negotiate the terms and conditions to their satisfaction. 

In other words, one party defines the terms and conditions of the contract and imposes it on the other.

The other party is required to accept the terms and conditions without having the ability to negotiate any essential element of the contract.

History of adhesion contracts 

The notion of adhesion contracts entered the American common law around 1919 when the Harvard Law Review published an article on the topic.

The concept of a contract of adhesion comes from the French civil law system (“contrat d’adhésion”).

Advantages and disadvantages of contracts of adhesion 

Contracts of adhesion have benefits and drawbacks.

The most important benefit of a contract of adhesion is that it allows a company to streamline routine transactions.

The streamlining of recurring transactions helps reduce transactional costs.

For example, when you buy a smartphone, you adhere to the terms and conditions imposed by the manufacturer. 

Using a contract of adhesion, the manufacturer can reduce its transaction costs by selling its smartphone by the millions without having to negotiate a contract with every single customer.

A contract of adhesion provides predictability, uniformity and efficiency to a company’s contracting process.

On the other hand, there are disadvantages to adhesion contracts.

In a contract of adhesion relationship, you will generally have a stronger party potentially taking advantage of a weaker party.

Not having equal bargaining power, the weaker party is unable to negotiate any of the contractual terms and conditions.

As such, the stronger party will impose contractual terms benefit it without regard to the rights of the weaker party.

Are adhesion contracts enforceable?

The enforceability of adhesion contracts depends on the proportionality and reasonableness of the obligations of the parties to the contract, the circumstances surrounding how the contract was signed and all other relevant circumstantial elements are important.

Careful assessment by the court

What you can expect is for a court to carefully assess the overall fairness of a contract of adhesion.

The courts have the power to void certain clauses in a contract of adhesion or even the entire contract.

To assess the overall enforceability of the contract, the court will evaluate the following aspects:

  1. The bargaining power of the parties
  2. Fairness of the contractual obligations
  3. Unconscionability 
  4. Possibility of unfair surprise
  5. Nature of the agreement
  6. Lack of notice

Reasonable expectation doctrine 

To decide if an adhesion clause or contract should be enforced, the court will use the doctrine of reasonable expectations.

Based on this doctrine, the court will try to determine what would a reasonable person in the weaker party’s situation would have expected from the contract.

If a person would not have reasonably expected a specific outcome, the court may lean towards the protection of the weaker party and refuse the enforcement of the contractual provision.

Restatement (Second) of Contracts

The influential Restatement (Second) of Contracts provides some guidance with respect to the enforceability of a contract of adhesion.

The courts must evaluate the reasonable expectation of the party adhering to the contract.

Would a person reasonably expect what was contained in a contract of adhesion?

Section 211 of the Restatement (Second) of Contracts states:

“Where the other party has reason to believe that the party manifesting such assent would not do so if he knew that the writing contained a particular term, the term is not part of the agreement.”

Doctrine of unconscionability

The doctrine of unconscionability is when a party imposes a contract of adhesion on the other and the terms and conditions are so oppressive that no reasonable person would accept them. 

Unconscionability is a doctrine arises from equitable principles and is characterized as follows:

  1. There is a disproportion in the economic power of the parties
  2. There is a disproportion in the bargaining power of the parties 
  3. The stronger party exploits the weaker party
  4. The stronger party is more sophisticated than the weaker party
  5. The obligations of the contract are disproportionate 
  6. The terms of the contract are not consistent with what the weaker party would have expected 

By answering these questions and more, the court will determine if an adhesion contract or clause should be enforced.

The Uniform Commercial Code 

Contracts of adhesion are enforceable in the United States particularly due to the widespread adherence to the Uniform Commercial Code.

UCC has specific provisions providing for contracts of adhesion with respect to the sale or lease of goods.

Although UCC provides for adhesion contracts, the courts will assess and scrutinize the contract as rigorously to ensure overall reasonableness and fairness.

Examples of adhesion contract

Contracts of adhesion are typically used in the following areas:

  1. Insurance contracts
  2. Lease agreements
  3. Deeds
  4. Mortgage agreements
  5. Automobile purchases
  6. Consumer credit forms 
  7. Online clickwraps or click-through agreements 
  8. Credit card agreements
  9. Rental agreements 

Insurance contracts

The most notable example of a contract of adhesion is with regard to insurance contracts.

If you are looking to get yourself car insurance, life insurance or any other insurance policy, the insurance provider will determine the terms and conditions applicable to the insurance contract.

As a client, you can either accept all those terms and conditions without much negotiation or you can refuse to sign.

An insurance contract is a contract of adhesion as the insurance provider is the only party determining the contractual rights and obligations and the client is merely adhering to all those terms.

In other words, the contract is “take it or leave it”.

Mortgage agreements

Another notable example of a contract of adhesion is with regard to mortgage contracts.

If you are eager to buy a property and you are looking for the bank to finance your purchase, you’ll need to sign a mortgage agreement.

The terms of the mortgage and bank financing are dictated to you.

Essentially, you are given the forms and documents and you are asked to sign and initial at many places without having the ability to negotiate any of the standard terms.

If you want financing, you need to accept the terms of the contract.

If not, no financing!

Frequently asked questions

Are contracts of adhesion legal?

A contract of adhesion is not illegal.

In fact, you may have signed many in your lifetime.

When you downloaded a software product online and you clicked on “I agree” to the terms and conditions of the license, you actually entered into a contract of adhesion.

Why?

Because one party drafted those terms, they use boilerplate language, they favour the stronger party, and you have to either accept it as-is or leave it.

With more and more online contracts and license agreements, contracts of adhesion have actually proliferated in the modern days.

A contract of adhesion is a valid contract when it is used fairly.

If not, the courts have the power to strike oppressive or unreasonable clauses or even void the entire contract.

What is the definition of an adhesion contract?

A contract of adhesion is a contract drafted by one party and imposed in a non-negotiable way.

The party agreeing to the boilerplate terms and conditions is generally a weaker party with significantly less negotiating power.

The weaker party is asked to sign the contract on a “take it or leave it basis”.

What is meant by a contract of adhesion?

When someone refers to a contract of adhesion, they are generally referring to a contract where they were given a bunch of terms and conditions and asked to sign or click “accept”.

A very good example is clickwrap agreements.

A clickwrap is a contract that appears on your computer screen asking you to accept or reject the terms to access or download software.

If you reject, you cannot go any further.

If you accept, then you’ve accepted all the terms without having the ability to negotiate the terms.

Is an adhesion contract enforceable?

Yes, a contract of adhesion is enforceable.

Generally, it’s the stronger party who may have a real interest in enforcing the contract as the terms and conditions of a contract of adhesion will be in its favour.

However, the courts will scrutinize the contract before enforcing its terms.

This is where the doctrines of reasonable expectation and unconscionability come into play.

Unconscionability is characterized as follows:

  1. There is a disproportion in the economic power of the parties
  2. There is a disproportion in the bargaining power of the parties 
  3. The stronger party exploits the weaker party
  4. The stronger party is more sophisticated than the weaker party
  5. The obligations of the contract are disproportionate 
  6. The terms of the contract are not consistent with what the weaker party would have expected 

Based on the reasonable expectation, the court will try to determine what would a person in the weaker party’s situation would have reasonably expected from the contract.