This article has been written by Shubham Singh pursuing the Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.
This article has been published by Oishika Banerji.
In today’s business-driven world, everyone, deliberately or unwittingly, ends up dealing with and agreeing to a few terms and conditions, as well as adhering to a contract’s procedural requirements. A standard type of contract is encountered in some form or another while downloading a programme, installing antivirus software, purchasing an airline ticket, or looking for a home to rent. Contracts of adhesion, form contracts, boilerplate contracts, and take-it-or-leave-it contracts are examples of conventional types of contracts. Contracts of Adhesion are standard form contracts in which one party (generally the stronger side) drafts the contract and another party (generally the weaker side) signs it with no authority to negotiate or amend the contract’s terms and conditions. Because the contractual parties’ bargaining powers or positions differ, such contracts are entered into on an uneven footing.
What is an adhesion contract?
An adhesion contract is one in which one party has much more influence than the other in determining the contract’s terms. Generally, in a contract of adhesion, the offeror or party with the stronger influence provides the same set of standard terms and conditions to all the customers who approach him. These terms and conditions provided by the offeror are not negotiable implying that the customer or the contract’s weaker party has only the option to refuse the contract or they have to accept it as it is, they cannot ask for terms and conditions to be added, removed or altered. Sometimes, people also refer to contracts for adhesion as boilerplate contracts or basic contracts.
Today, the majority of contracts signed by regular people are not the product of individual negotiations. A collective bargaining agreement between trade unions and employers, for example, will establish an employee’s employment contract. Adhesion contracts are frequently used in insurance, leasing, automobile purchases, loans, and other transactions involving a large number of consumers who are all bound by the same agreement. In a bank loan contract, the bank and its agent have the ability to form the contract, while the potential loan taker has merely the right of refusal; the customer cannot reject the offer or establish a new contract that the bank may accept.
In earlier days, or since the mass-production economy began, consumers have been vulnerable to contracts of adhesion. The usage of adhesion contracts has increased rapidly in today’s digital and technology-driven era, as many online services and goods are available in the market, and in order to use them, one must accept the user agreement with the terms provided by the service provider.
It is worth noting that each sector or business would have a contract of adhesion that is essentially the same. The provisions or conditions incorporated into such contracts will reflect the same goal of bringing consistency to the market for a certain commodity or service. For example, while signing a lease deal, the typical language states that the renter is responsible for maintaining the property. This is largely done to provide consistency to the market, which will help to reduce the costs that an owner may incur.
History of adhesion contracts
Although adhesion contracts have their origins in French Civil law, they did not enter American jurisprudence until Edwin W. Patterson’s landmark essay in the Harvard Law Review in 1919. The method was later accepted by most American courts, thanks in part to a 1962 Supreme Court of California decision that endorsed adhesion analysis.
Like other aspects of contract law, the validity and enforceability of adhesion contracts have developed through time. Although case law and interpretation vary by jurisdiction, adhesion contracts are commonly recognized as a cost-effective way to perform traditional transactions. Adhesion contracts, when done correctly, saves firms and consumers time and money in legal fees. The law regulating adhesion contracts, on the other hand, is always developing because digital adhesion contracts signed online have been challenged in court for concealing terms or making some portions difficult to notice. A digital adhesion contract must now be as close to a paper contract as practicable.
Interpretation of adhesion contracts
A general contract is made and entered into after negotiations have been carried out between all the parties who have similar equitable semblance of bargaining power. It is done so as to protect the weaker party such that no unfair terms or conditions get enforced. This is not the case when the interpretation is employed in the Contract of Adhesion.
Adherence contracts are interpreted more severely since the weaker party has a greater burden. Since it is impossible to determine whether the consent provided is genuine or not, the distinction between consent to be contractually bound and acquiescence to the contract’s provisions is critical in contract interpretation. As a result, how the contract’s provisions are presented to the other party is a crucial factor in determining whether the deal is fair.
Benefits and drawbacks of adhesion contracts
Bank lending, insurance, mortgages, leases, and huge purchases are all popular uses for adhesion contracts. Although adhesion contracts tend to promote efficiency and speeds up the purchase process, their usage is debatable owing to some of the possible benefits and drawbacks they may bring, including:
1. Improving business efficiency
Adhesion contracts remove the need for personalized contracts that are unique to each customer by offering a standardised contract that lays out non-negotiable terms and conditions, which promotes efficiency and helps both the buyer and the seller to save some time and improve business efficiency.
2. Lowering transaction fees
Transaction costs are sunk expenses incurred as a result of taking part in a transaction or a good exchange. Communication, negotiation, and enforcement expenses are among them. Adhesion contracts significantly decrease these expenses by delivering all of the information in a legally binding, non-negotiable contract.
3. The buyer’s risk
Non-negotiable clauses are included in adhesion contracts, which are effectively “take it or leave it” contracts. The parties who drafted the contract frequently do so in such a way that any costs associated with the loss or damage of the products being purchased are borne by the buyer. It exposes the buyer to unacceptably high risk, as the buyer may have no alternative but to sign the contract.
4. Unjust terms and unequal power relations
When the drafting party has a lot of negotiating power and the buying party has next to none, none, and the goods being sold are important to the buyer (like medicinal goods or a house), the buyer may have no choice but to agree on the contract – even if the terms and conditions are unfair and completely in favour of the selling party.
Enforceability of adhesion contracts
A contract must be presented as a “take it or leave it” transaction in order to be recognized as an adhesion contract, with one party having no opportunity to negotiate due to their inferior bargaining position. However, adhesion contracts are scrutinized, and this inspection typically takes one of two aspects.
To determine whether an adhesion contract is enforceable, courts have typically applied the law of reasonable expectations. Specific sections of an adhesion contract, or the entire deal, may be declared unenforceable under this concept if the contract provisions exceed what the weaker party may reasonably expect. The prominence of the terms, the purpose of the terms, and the circumstances surrounding contract acceptance all influence whether a contract’s expectations are reasonable or not.
In contract law, the doctrine of unconscionability has been used to challenge some adhesion contracts. Unconscionability is a fact-specific theory based on the same equitable principles—specifically, the concept of good faith negotiating. Unconscionability in adhesion contracts generally arises when one party lacks meaningful choice as a result of one-sided contract clauses mixed with excessively onerous terms that no one would or should accept. Simply expressed, a contract might be deemed unenforceable in court if it is very unfair to the signing party.
According to Indian law, there has been no determination that adhesion contracts are unconscionable in itself. However, the courts have dealt with situations in which parties were on uneven footings while negotiating leverage. The Indian Contract Act, 1872 specifically has two clauses that deal with this situation: Section 16 (3) and Section 23.
In accordance with Section 16 (3) of The Indian Contract Act, 1872 it says that: “Where 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.”
Furthermore, Section 23 of the Indian Contract Act of 1872 addresses agreements, which are morally reprehensible or contrary to public policy. The Supreme Court of India ruled in Central Inland Water Transport Corporation Limited v. Brojo Nath Ganguly that “an unfair or unreasonable contract entered into between parties of unequal bargaining power was void as unconscionable under Section 23 of the Act.” As a result, if the seller, who has more bargaining power, imposes any unfair, unconscionable, unreasonable, or unconstitutional clauses or terms and conditions, the Indian Courts will intervene and evaluate the contract.
Due to the large-scale commercialization of activities, companies that serve millions of consumers daily began making contracts with them using a standard form of contract or an adhesion contract, allowing them to occupy a large market share, rather than dealing with each customer individually, which would necessitate a separate contract, which would be a time-consuming and expensive procedure. However, because such contracts are characterized as “leave it or take it,” the inferior party, namely the customer, may be exploited. Since they approved and signed the terms and conditions, the customer does not have an acceptable legal remedy. However, it is also the obligation of the corporate behemoths to maintain a decent Adhesion Contract that does not include one-sided benefits and protection. It is up to the customers to call up any flaws, inequities, or unjust terms that they are exposed to. As a result, courts should consider the evolution of such contracts and guarantee that impartial conditions are enforced between the bargaining parties.
- The Indian Contract Act, 1872.
- Central Inland Water Transport Corporation Limited v. Brojo Nath Ganguly.
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