This article is written by Sharika Surendran pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from Lawsikho.
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In today’s business-driven era, knowingly or unknowingly, everyone ends up dealing and accepting few terms and conditions and procedurally adhering to a contract. Whether when one is downloading an application or installing antivirus software or buying an air ticket or seeking a place for rent, in some form or the other, one would face a standard form of contract. These standard forms of contract are also known as contracts of adhesion or form contracts or boilerplate contracts or take-it or leave-it contracts.
What is an adhesion contract?
Adhesion contracts are simply those forms of contracts where one party, for example, a seller (who is transacting a business on a large scale), having much greater bargaining power can decide upon the terms and conditions of a contract. While on the other side, the customer, having a weaker bargaining power, has to accept the terms which have been put forward. Hence, adhesion contracts streamline commercial transactions and achieve efficient businesses.
Consumers were susceptible and exposed to adhesion contracts from the start of the industrial revolution or in short when the mass-production economy commenced. Currently, the usage of adhesion contracts has significantly increased in the digital and technology-driven era since many online services and goods are available in the market and in order to avail of them, one has to accept the user agreement with the terms mentioned by the service provider.
It is interesting to note that each sector or industry would more or less have a similar form of an adhesion contract. The clauses or the terms embedded in such contracts will echo the same intention so as to bring uniformity in the market for a particular good or service. For example, while entering into a lease deed, the standard clause for maintaining the property will always be the responsibility of the tenant. This is primarily done to bring uniformity in the market which will aid in reducing the expenses an owner/landlord might face.
Adhesion contracts : boon or bane?
Adhesion contracts are primarily viewed by the consumers with a lot of resentment. The antipathy emerges due to the fact that:
- Firstly, the contract is drafted as more beneficial to a particular side contract which more or less benefits the seller.
- Secondly, the printed clauses or terms would seldom be read or understood by the consumer.
- Thirdly, in a majority of the cases, the clauses or terms appear after the transaction had been concluded or finalised. In order to hide any deceptive clause, the seller would highlight manipulative graphics/presentations or a summary of the adhesion contract and eventually, the customer would abandon the reading of the terms.
- Fourthly, the seller is aware of the consumer’s knowledge and takes advantage of the fact that the consumers won’t read the terms (even though they might contain unfair clauses or conditions).
- Fifthly, the consumer has trust and faith in the seller (or the brand which the seller is endorsing) and belief in the reputation of the seller.
Additionally, under consumer law, the consumer has the ‘duty to read’ all the ‘disclosures’ mentioned by the seller. Unless fraud or duress or unconscionable clause or term is present the Courts won’t entertain the plea and it would be deemed that the adhesion contract has been read and understood by the customer.
Even though there are reservations while debating the bargaining power of adhesion contracts nevertheless, it is vital to understand the need for adhesion contracts. For the ease of doing business and to minimise the risk factor, the placement of adhesion contracts is necessary. From an economics point of view, it is not about the bargaining power of the drafter but is about the transaction costs involved. Imagine negotiating each and every clause while buying an air ticket or installing antivirus software with every customer, such discussions would be time-consuming and the costs associated with it would be enormous. While encountering an adhesion contract, neither the drafter nor the customer has any interest in negotiating general clauses or terms and conditions.
Enforceability of adhesion contracts
In accordance with the Indian laws, it has not been established anywhere that adhesion contracts per se are unconscionable. But the courts have dealt with instances where parties have been on unequal footings and unequal bargaining power. There are two sections that deal with this scenario namely Section 16 (3) and Section 23 in the Indian Contract Act, 1872.
According to Section 16 (3) of the Contract Act, if a person who is in a position to dominate the will of another, enters into a contract with him, and the transaction appears, on the face of it or on the evidence adduced, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall lie upon the person in a position to dominate the will of the other.
Similarly, Section 23 of the Indian Contract Act, 1872, talks about agreements that are immoral or against public policy. In Central Inland Water Transport Corpn Ltd. v. Brojo Nath Ganguly, the Supreme Court of India held that “an unfair or an unreasonable contract entered into between parties of unequal bargaining power was void as unconscionable under Section 23 of the Act.” Hence, if the seller, with more bargaining power, imposes any unfair, unconscionable, unjust or unconstitutional clause or terms and conditions, the Indian Courts would intervene and subject such contracts to judicial review.
In Pioneer Urban Land and Infrastructure Limited v. Govindan Raghavan, the Supreme Court held that “A term of a contract will not be final and binding if it is shown that the flat purchasers had no option but to sign on the dotted line, on a contract framed by the builder. The contractual terms are ex-facie one-sided, unfair and unreasonable. The incorporation of such one-sided clauses in an agreement constitutes an unfair trade practice as per Section 2(1) r of the Consumer Protection Act, 1986.”
How to draft an adhesion contract?
An adhesion contract will differ from one sector to another or one industry to another and it is not necessary the contract will be in the form of a standard/general contract. The clauses or terms could be captured by way of a form or a disclaimer or a disclosure or a notice or an agreement. This will depend on the nature of the business and the transaction which it is going to have with the customer. Hence, adhesion contracts should be drafted in a sector-specific manner and in a way, which is customer friendly and does not place unfair, unreasonable, unenforceable or unconscionable terms on the customer.
Adhesion contract should cover the following elements while drafting:
Adhesion contracts should always cover clauses that are clear and straight. The contents of the contract should be upfront and should not have any ambiguous terms. The terms should be reasonable and should not have any deceptive content. The adoption of such practices will improve the seller’s goodwill and reputation.
Further, the practise of revising the terms/clauses in adhesion contracts should be adopted by the seller as and when there are changes in the regulation or the market. Daniel Schwarcz has observed in his article titled ‘The role of courts in the evolution of standard form contracts: An insurance case study’ that firms who are dealing with software products and are associated with the End User License Agreements (EULA) are more likely to end up doing contractual innovation. Firms engaging in EULA are prone to review the terms after getting feedback from the customer or employee or court decisions.
The terms of the adhesion contracts should be disclosed to the public prior to the finalisation or launch of any product or service. The consumers should get sufficient opportunities to understand and familiarise the terms of the contract. Additionally, the press or advocacy groups should get an equal opportunity to share any opinion on the said adhesion contract.
Any disclosure or disclaimer placed in the adhesion contract should be stated in a simple and clear manner. The font size of the terms or clauses should be standard and readable by the naked eye. While printing such disclosure or disclaimer, all the government rules and regulations should be adhered to.
Further, the government should create precedents by enforcing stringent regulations with regard to any disclosure or disclaimer in any unregulated market (for goods and services) and penalties should be enforced when such regulations are not followed.
Grievance redressal mechanism
The adhesion contract should include details of a grievance officer where a customer can address its grievances or opinions with regard to any terms or conditions. The grievance officer should be available via call, mail, e-mail or any social messenger services and the said modes should be easily available and get connected. Additionally, a time duration to address the grievance should also be stated. Further, while deciding on any dispute which leads to arbitration or mediation, a series of choices with regard to jurisdiction should be prearranged with the customer. This should be done so that the customer is on an equal footing with the seller.
Non-inclusion of draconian clauses
As mentioned above, adhesion contracts are viewed by customers as procedural and sometimes as clickwrap. In addition to that, the consumer feels helpless because of nil or low negotiating power, so the natural reflex action is to ‘Accept’ and move on in order to avail of the services being provided. If there is no regulation on the market forces, the sellers can take advantage of the consumer by writing misleading terms (such as under the category of exemption clauses).
Hence, an adhesion contract should be drafted in a customer-friendly manner and draconian clauses should be excluded. Below is a snapshot of few clauses that should be included in an adhesion contract:
How not to draft and what elements not to include
How to draft and key points to include
Auto-renewal of subscription or license.
Automatic upgradation or automatic modification of any software product or service.
Consumers should be provided prior notice or information regarding any auto-renewal or any unilateral modification or automatic upgradation of a subscription or license.
Inadequate or insufficient time to read/ deliver the terms of the contract
Adequate time to be given so that the customer becomes aware and consents to the terms of the contract.
Limitation of Liability (LOL)
The seller won’t be liable for any liability or the seller shall restrict its liability for loss or damage to ‘x times’ or ‘x%’ or ‘half the value of the product/service’, whichever was less.
All the unforeseeable losses (remote or speculative) could be excluded by the seller but all the foreseeable losses could be capped/limited reasonably. LOL should not be drafted which would be against public policy.
Breach of contract (including negligence)
Sellers won’t be liable if a breach is committed and would be exempted from any damages.
Consumers shall be paid adequate and reasonable amounts of damages if the seller has been found to commit any breach of the terms of the agreement.
Sellers won’t be liable for gross negligence, wrongful misconduct, breach of IP, bad faith etc.
The seller has to admit his responsibilities and rectify (including compensate) if any loss or damages occurs due to gross negligence, wrongful misconduct, breach of IP etc.
Waiver to contest or complain.
Waiver of any rights or duties should be intimated to the customer in writing with a valid and legal purpose.
Unilateral amendment or modification of any terms or clauses retrospectively
Any amendment or modification of terms or clauses retrospectively should not be done. If any amendment has to be done, prior notice and information should be provided to the customer.
Implied consent from consumers to any dispute resolution mechanisms (such as mediation or arbitration) in inconvenient venues and before industry arbitrators.
No provision of implied consent or forced/binding arbitration should be present. A series of choices should be provided with regard to dispute resolution mechanisms.
After the advent of the COVID-19 situation, sellers should always provide an online forum to discuss and settle any disputes.
In this era of heavy e-transactions, an adhesion contract does play a vital role and, in the future, the occurrence and importance of the same will grow by leaps and bounds. But it is also the responsibility of the corporate giants to maintain a reasonable standard contract that does not boast of one-sided privileges and protection. It is up to the consumers to pinpoint any lacunae or injustice or unfair terms to which the users are subjected. Consequently, courts should take into account the development of such contracts and ensure the enforcement of impartial terms between the bargaining parties.
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