Home Contract Contract of Adhesion – Principles of Contract

Contract of Adhesion – Principles of Contract

January 4, 2022

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This article has been written by Akshay Jaulkar pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution. This article has been edited by Ruchika Mohapatra (Associate, Lawsikho)

This article has been published by Sneha Mahawar.

Introduction

When someone uses the word ‘Agreement’ or ‘Contract’, what we understand is the consent between two or more parties to execute a definite scope of work, and for performing these obligations there is an agreed consideration or compensation between the Parties and the contract between the parties is legally binding. Even the literal meaning of the word agreement is a situation in which people have the same opinion or they accept an arrangement made.

Now, imagine what would happen if there is no agreement or mutual consideration between the parties and still, they execute the agreements to get the work done. Appears to be terrible, right? Yet, many times knowingly, naively, or simply ignorantly, we sign such agreements on a day-to-day basis. When you purchase a house and sign a loan agreement with a financial institution, when a manufacturer sells its products and asks its dealers, sellers, distributors to simply sign on their global standard terms and conditions, or when you register yourself with an online stockbroking account, or the when you agree to the terms of use of software or a social media site, or simply when you purchase an insurance policy, etc. you are essentially signing a contract without discussing the terms first.

Do you even get a chance to put your points or negotiate for your own good in such situations? The answer is a big no. In legal terms, such agreements or contracts are categorized as ‘Contract of Adhesion’.

Let us find out more about the contract of adhesion, its history, how it differs from the principles of Contract in the following paragraphs.

What is the Contract of Adhesion

Definition

As per the Corporate Finance Institute, Canada (CFI Education Inc.),“Contract of Adhesion is an agreement between parties whereby one party (the one with a higher bargaining power) sets out all or most of the terms of the contract. The other party (the one with a weaker bargaining power) has little or no power to negotiate for reasonable terms.”

Characteristics of Contract of Adhesion

Standardization

Such contracts are drafted and made as a standard to be used for the masses. The content of the contract barely changes i.e., no scope of customization. Such standardization simplifies business transactions across a defined territory or for the worldwide business of the organization. They are generally used where there are routine and mass demands for goods and services.

Boilerplate clauses

Most of the clauses in such agreement are the boilerplate causes viz. definitions, confidentiality, liability and indemnification, term and termination, taxes and duties, force majeure, waiver of subrogation, notices, entire agreement, governing law, jurisdiction and arbitration.

Non-negotiable

Since such contracts are standard and make use of boilerplate clauses, there is hardly any room for negotiation. The individual or an organization that has been offered such a contract has to just read it and sign it. Since the terms are non-negotiable, the opposite party has very limited to zero bargaining power.

Time and cost-effective

Due to its nature of non-negotiation, the contract need not be revised frequently. Contracts are time and cost-effective as they are to be drafted only once and can be used for several years across the locations.

Sole Discretion

The Party providing such contract shall always have more power to modify or amend the present contract and business terms at its sole discretion. Even the rights related to the termination for convenience are predominantly on such a party’s side.

Risk on the buyer or customer

All of the above characteristics of the Contract of Adhesion put more risk on the buyer.

Often Ignored

With the emergence of digital platforms, e-commerce websites, internet-based businesses, social media, etc. the use of contract of adhesion has expanded drastically. As it involves the use of boilerplate clauses, it tends to be lengthy for the reader to read it completely and the user just ignores or accepts it considering it to be either irrelevant or less important.

In short, Contracts of Adhesion are standard, predictable, non-negotiable, and support the business to structure the transactions when the business is connected with the masses.

Pursuant to the above characteristics, sometimes such contracts are even referred to as ‘Take-it or Leave-it Contracts’. In such contracts, the drafting Parties are usually the businesses and the other party is usually a buyer or a customer or a consumer.

Contract of Adhesion vs. the general principles of Contract

All of the above characteristics show that Contract of Adhesion is quite opposite to the fundamentals of a normal contract viz. mutual consideration, right to negotiate, etc. Yet, such contracts of adhesion are popular amongst the businesses as it offers them better control, cost and time optimization, more authority, and easy governance.

Is Contract of Adhesion illegal

While the Contract of Adhesion is not illegal, courts all over the world still scrutinize carefully all such contracts to ensure that they are not unfair, unjust, unenforceable etc. Courts usually strike out or mark invalid or scrap the whole contract if they find out that the terms in such a contract are not fair. In general, courts disfavor the use of adhesion contracts but will not make them illegal. In any case, the contract of adhesion shall not be so unfair that it surpasses the common law and the law of the land.

Most concerning clauses

For the buyer or customer or consumer accepting the following clauses from the contract of adhesion can be a cause of concern:

Limitation of Liability

The actual damages caused can be more than the limitations put by the businesses, making it unfair for the customer.

Governing Law, Jurisdiction and Arbitration

Customers will have to accept the governing laws, and jurisdiction of the countries for which they have very limited to zero knowledge. Even the choice of whether there should be Arbitration or not, its rules, the seat of arbitration, and distribution of related costs everything will be controlled by the business.

Liquidated damages

Businesses having more control over the terms of the contract will try to ease or lower their responsibilities related to the liquidated damages.

Payment Terms

Only business will have all rights to decide on the mode of payment, no. of days within which payment shall be made, a requirement of the advance amount, credit period, bank guarantees, etc.

Elements of drafting a good Contract of Adhesion

Unconscionability

As such contracts are being drafted by organizations having a dominant hand in the transaction and the terms of these contracts are non-negotiable. It does not mean that the organization can draft extremely unjust or one-sided clauses. Clauses in the agreement shall not be biased; they shall be fair and as far as possible providing equal opportunities to the parties involved. If the court finds any such adhesion contracts that are oppressive or unconscionable, the court may refuse to enforce such a contract.

Use of simple language

The language of such contracts shall be fair, balanced, simple, and easily comprehensible to the parties involved whether it is an individual or other organization.

Compliance with international standards

Contracts of Adhesion shall be drafted in such a pattern that they can be distributed to the masses across the locations where an organization has its businesses.

Use of past cases

While drafting such contracts, it is advisable to make use of previous cases related to the contract of adhesion as a reference so as not to repeat the same wording due to which the court scrapped that contract.

Complaint addressing procedure

Contract of Adhesion shall have an established procedure for addressing the grievances of the parties involved or otherwise the other party who is signing the contract will have no place except the arbitrator or the courts to resolve any minor issue or a dispute.

Conclusion

Although, it is an individual’s or an organization’s choice whether it wants to enter into such contracts or not but in today’s world of internet-based services and globalized markets, it is practically impossible to avoid such scenarios. What one can do best, is to try to read the terms of these contracts before signing them and in case of any doubt reach to its legal advisor. Use of such contracts will increase in the future with the creation of new online businesses/marketplaces as using adhesion contracts, sales companies and customers can save time and money in terms of legal counsel when they are done properly.

References

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