Contract of Adhesion: Benefits, Drawback and Best Practices

It's nearly unlikely that you haven't agreed to terms of service to use a product or service. 

They’re common, especially on the internet, and are sometimes called standard form contracts, boilerplate contracts, take-it-or-leave-it contracts, or leonine contracts. However, the right word is contracts of adhesion.

Given their nature, you might wonder about their legality, enforceability, pros and cons, and whether you should use them in your business. This article will answer everything you need to know about contracts of adhesion. 

What is a Contract of Adhesion?

A contract of adhesion is used when one party with greater bargaining power sets the terms, leaving the weaker party little or no choice but to accept them to proceed with the transaction. Standardization and non-negotiability are the main features that define adhesion contracts.

Adhesion contracts aren't illegal however, they’re typically drafted in favor of the party that imposes them, often exploiting the fact that consumers rarely read them. Critics argue that if consumers were to actively read these contracts instead of assuming they have no choice, companies would be compelled to create more balanced agreements.

While this argument holds, several factors constrain consumers:

• Complex Legal Language: Adhesion contracts are often long and written in complicated legal languages, discouraging consumers from reading them and unlikely to understand if they attempt to.
• Non-Salient Terms: The most important product/service conditions for buyers are usually price and quality which are often understood before contract signing. This makes boilerplate terms related to unlikely events or specific legal statutes seem unimportant to the purchaser, further reducing the likelihood of reading terms or considering them relevant if they are read.
• Lack of Access to Full Terms: For instance, software license agreements often reveal their full terms only after the product is purchased. Often, the document being signed doesn’t contain the complete contract, and accessing the full terms can be challenging or impossible before acceptance. 
• Social Pressure: Adhesion contracts are often signed after negotiating the main business details, creating pressure to conclude the transaction. This pressure can stem from situations like being in a queue at an airport or car rental desk. Or internally, where salespersons may discourage reading or questioning the terms, or offer concessions that make customers feel obligated to reciprocate by accepting the terms without scrutiny.

In competitive markets, consumers can avoid injustice by shopping around for sellers offering the most favorable terms; however, there’s a low possibility of finding varying terms as adhesive contracts are usually drafted by lawyers to minimize companies’ liabilities and not for competitive advantage. Also, sometimes, the contracts are written and distributed by industry bodies, increasing the homogeneity of the contract and reducing consumers’ ability to shop around. 

Given the odds stacked against consumers, courts often scrutinize adhesive contracts more closely to ensure that they’re not unconscionable or overly one-sided, and they may interpret ambiguities against the contract drafter.

History of Adhesion Contract

The concept of adhesion contracts originated from French civil law in the 19th century during the Industrial Revolution. As mass production increased, businesses needed efficient and uniform ways to handle transactions, leading to the use of standardized contracts.

However, this concept didn’t gain significant traction in American jurisprudence until Harvard Law published an influential article by Edwin W. Peterson in 1919. Subsequently, most American courts, particularly after the California Supreme Court endorsed adhesion analysis in 1962, began adopting it.

The rise of consumer protection laws in the latter half of the 20th century addressed the inherent imbalances in adhesion contracts. These laws often required clear disclosure of contract terms, opportunities for negotiation, and other measures to protect consumers from unfair terms.

Moving to the 21st century, the internet and e-commerce further popularized adhesion contracts such as clickwrap and browsewrap agreements. Courts continue to adapt by focusing on issues like notice, consent, and fairness in these modern contract forms.

Benefits and Drawbacks of Adhesion Contracts

Benefits 

Cost-effective

Instead of drafting and negotiating separate contracts for each customer, companies can use a single pre-drafted contract template, cutting down legal fees and administrative overhead. 

Fosters consistency and predictability of terms

Adhesive contracts ensure consistency in terms and conditions across all transactions. This uniformity helps maintain standard operating procedures and reduces the risk of errors or discrepancies from individually negotiated agreements. 

Promotes efficiency

Imagine Amazon having to negotiate contracts with individual shoppers—it would significantly slow down their business operations and inconvenience customers. In this case, adhesion contracts are the most suitable. They are drafted for an indefinite number of people, making the contracting process quicker and more efficient, especially for industries that handle large volumes of transactions, such as insurance, telecommunications, and online services.

Drawbacks

Unfavorable terms

There’s a potential for unjust terms to be shoved down contract signers. Such terms could include the seller's ability to avoid all liability, unilateral contract modification or termination, mandatory arbitration clauses limiting a party’s access to the court, and liquidated damage clauses, limiting the recoverable amount or requiring the party to pay a specific amount.

Exploitation of unequal bargain  power

As mentioned earlier, adhesion contracts are not illegal; however, there is a significant risk of exploitation of the weaker party. For instance, if the goods sold under an adhesion contract are essential for the purchaser, such as rental property or necessary medical items, the buyer may feel compelled to accept the terms without much negotiation or alternative options.

Examples of Contract of Adhesion

Some examples of adhesion contracts include:

Insurance Policies: Insurance contracts are classic examples of adhesion contracts. Here, the insurance company drafts the policy terms, and the potential policyholder can only accept them. Case example: Prudential Insurance Co. v. Girton.

Employment Contracts: Some employment agreements, especially for lower-level positions, may be considered adhesion contracts. Here, employers provide standardized terms of employment that employees must accept to be hired. Case example: Neal v. State Farm Insurance Companies 

Mortgage Agreements: In these agreements, the banks or financial institutions typically set the terms, limiting borrowers to negotiate interest rates, fees, and repayment schedules. Case example: Williams v. First Government Mortgage and Investors Corporation

Website Terms of Services: Users must accept the terms and conditions set by the service provider to access the service, often without reading or negotiating these terms. These agreements typically manifest in three forms:

• Clickwrap Agreements: Here, users click an "I agree" button after being presented with the terms and conditions. This agreement form is considered more enforceable because it requires explicit consent from the user.
• Browsewrap Agreements: These agreements do not require the user to take any affirmative action to agree to the terms and conditions. Instead, the terms are often accessible via a hyperlink and merely using the website implies consent. Courts typically scrutinize these agreements more closely due to their passive nature.

• Sign-in Wrap Agreements: These agreements bind users to terms and conditions by signing up or logging into a service where a hyperlink to the terms is usually placed near the sign-up or login button, and by proceeding, users implicitly agree to those terms.

Other examples of adhesion contracts include medical service contracts, credit card agreements, streaming service subscriptions, and bank account agreements. 

Can You Enforce Adhesion Contracts?  

Generally, adhesion contracts are enforceable like any other contract under common law—a signature or any objective manifestation of assent binds signatories, whether or not they read or understood the terms. However, courts recognize that these contracts require scrutiny to ensure fairness.

This scrutiny focuses on whether the terms are within reasonable expectations or unconscionable to the party who didn’t draft the contract. Unconscionability is defined by extreme inequality between the drafter and signer, where the terms are so oppressive that no reasonable person would agree to them and no honest person would accept them.

Attributes of unreasonable or unconscionable adhesive contracts include:

• Complex and unclear terms written in legal jargon
• Terms heavily favoring the drafter of the contract
• Important terms buried in fine print or not prominently displayed
• Remedies or penalties that are disproportionately harsh
• Clauses allowing unilateral changes to contract terms without notice
• Exploitation of underprivileged, underaged, or uneducated individual

For example, in the case of Williams v. Walker-Thomas Furniture Co. (1965), the plaintiff purchased household items on credit from Walker-Thomas Furniture Co. The contract contained a clause allowing the company to repossess all items bought on credit if the buyer defaulted on payment, regardless of how much had already been paid. The court found the contract unconscionable due to the significant disparity in bargaining power and the oppressive nature of the terms, ruling that it was unenforceable.

A contrasting case to prove that not all adhesive contracts are unfair is Neal vs. State Farm Insurance Company. 

Neal, an employee of State Farm Insurance Company argued that he was entitled to be paid a commission based on net monthly premium collections for the six months immediately preceding his termination. However, the court found that the contract specified payments based on net premium collections received by the company during the sixth month preceding the service month, not for the last six months of employment. The court concluded that the contract language was clear and did not support Neal's interpretation.  

In the event of ambiguity, however, the court will interpret the adhesive contract Contra proferentem. This doctrine places the burden of losses on the contract drafter—as they are typically in the best position to prevent harm—while favoring the receiving party. 

Should You Use Adhesive Contracts For Your Business?

The short answer is Yes. 

When drafted and managed properly, adhesive contracts can offer substantial benefits with minimal legal risks. Here are some tips to ensure fairness: 

Clear and Simple Language: Avoid complex legal jargon to ensure that terms are easily understandable by all parties. Provide summaries or highlights of key terms such as those related to dispute resolution, termination, and liability to help signatories grasp the most important aspects fully and quickly. 

Transparency: Disclose all terms and conditions upfront, ensuring that important clauses aren’t hidden in fine print. Encourage customers to seek legal advice if they have any concerns or questions about the terms.

Flexibility: Offer varying degrees of flexibility, such as OpenAI's exclusion of team plan data and above from AI training by default. Allow negotiation of certain terms, especially for significant transactions or with long-term clients. 

Customer Feedback: Solicit feedback from customers regarding their experiences with contract terms and use it to make improvements. For example, when Zoom came under fire for clauses involving AI training on customer data in their terms of service, their product officer responded with a blog post clarifying the types of customer data Zoom does not use. Additionally, empower your customer-facing teams like sales to address concerns about contract terms rather than disregard them in the bid to close deals.

Managing Adhesion Contracts Using Contract Automation Software

Contract automation tools like Docupilot provide efficient ways to create adhesion contracts without sacrificing flexibility and transparency. Here are some Docupilot features for creating and managing your adhesion contracts: 

Template creation

Templates maintain consistency in adhesion contracts, saving time and reducing costs by removing the need to create them from scratch every time. With Docupilot, you can import existing templates, draft new ones using the rich text editor, or choose from the library of premade templates like this one:

Merge fields

Merge fields reduce the rigidity of adhesion contracts by making provisions for specific scenarios. After creating your contract, add placeholders for dynamic content such as names and addresses using curly brackets. You can use other merge fields like conditions, images, and tables for further customization. For example, if you need to tailor terms in employee contracts based on different candidate levels or positions, conditions can accommodate these variations.

Bulk creation

With Zapier or Make, you can integrate Docupilot with data sources such as Excel and HubSpot to automatically populate dynamic fields and generate multiple customized contracts. 

Automated workflow

Docupilot integrates with tools like Yousign and Docusign to automatically route contracts for signing, and with Dropbox and Google Drive for storage.

Other features for ensuring proper management of adhesion contracts include:

Collaboration features: Enable relevant stakeholders to automate approval workflows, ensuring contracts undergo necessary reviews before finalization.

Audit trails: Track contract changes over time, providing evidence in legal disputes.

Suggested read:

Essential Elements of Valid Contracts

Uncover the key components that make a contract legally binding, ensuring your agreements are enforceable and protect your interest

Create Efficient Yet Flexible Adhesive Contracts With Docupilot

Contracts of adhesion are common in many industries due to benefits like efficiency, cost savings, and consistency. While these contracts often favor businesses, it's crucial to prioritize fairness by using clear language, showing transparency, and encouraging feedback to prevent legal risks.

With contract automation softwares like Docupilot, you can streamline the creation, management, and execution of these contracts to aid efficiency and compliance.

Sign up with Docupilot for free to create your first adhesion contract today.