Adhesion Contract – History, Advantages and Disadvantages

What Is an Adhesion Contract?

An adhesion contract is a mutual agreement between two or more parties where one or more of them has substantially more power than the other in settling disputes concerning the contract terms. 

Such contracts may be written by contractors or created by courts or other government agencies when creating regulations governing parties’ behavior within a given industry. One party can use them to force the performance by the other or to obtain benefits from a third party.

Understanding Adhesion Contracts

Adhesion contracts are standard form contracts that apply to one or many individuals and form agreements between those parties, often used for insurance, leases, and other financial services.

An adhesion contract is an insurance contract offered under limited terms. While the insured has some choice over which policy to take, the insurance company writes all the information and rules. Here, the company and agent have more power than the potential policyholder; hence, you must be careful when reading an adhesion contract. 

The Uniform Commercial Code requires enforceability for adhesion contracts in the United States. The UCC helps ensure that commercial transactions occur under the same set of laws across the country.

While most state laws follow the Uniform Commercial Code, the UCC has not been adopted in American Samoa and Puerto Rico. The Uniform Commercial Code (UCC) is the primary set of rules governing contracts for selling or leasing goods in the United States. However, each state has its additional provisions related to adhesion contracts.

History of Adhesion Contracts

Adhesion contracts are not a recent development in the law, although they have significantly evolved over the years. The earliest forms of these types of contracts were developed in French civil law. However, they weren’t adopted in the United States until 1919, when Edwin W. Patterson presented them in an article published by the Harvard Law Review. Since that time, most American courts have shown support for adhesion contracts and adopted their use.

Adhesion contracts are common in business today. While the case law and interpretation may vary from state to state, it is generally agreed that adhesion contracts are an good way to handle standardized transactions.

Adhesive contracts are legally binding long-term agreements that define the relationship between two parties, usually a supplier and customer. Adhesion contracts save time and money if the drafting is carefully done but can open the organization to risk if legal counsel doesn’t vet the contract terms thoroughly.

 Digital adhesion contracts are also known as fully-integrated contracts, and they’re easy to use but tricky to execute. A well-written digital adhesion contract lays out the terms and conditions in an easy-to-read format that can be quickly agreed to.

Enforceability of Adhesion Contracts

Adhesion contracts are one of the most common problems in contractual interpretation because of their inherent lack of fairness. They are often presented as being non-negotiable and leaving one party at a disadvantage to another. The two most common forms of scrutiny used about adhesion contracts are the rules of good faith and unconscionability.

Courts generally apply the reasonable expectations doctrine to determine a party’s reasonable expectations of what will be required under an adhesion contract. Under this doctrine, if a term or the entire contract goes beyond what a weaker party reasonably expects, it may be deemed unenforceable.

Adhesion contracts have also been challenged under the doctrine of unconscionability, which is a judicial doctrine that looks to whether the agreement was made in good faith by both parties. Generally, if a contract is considered unconscionable when one party has been purposefully and excessively disadvantaged by the terms of the agreement, it can be declared unenforceable.

Adhesion contracts contain a uniform contract, sometimes referred to as standard form contracts, that do not give the parties adequate opportunity to negotiate the terms of the agreement. Adhesion contracts are often extremely one-sided and leave the weaker party with little or no bargaining power.

Some legal experts have criticized this approach because it restricts freedom of contract. This is a legal concept that allows people to impose provisions upon themselves without government interference.

Are Adhesion contracts illegal?

Adhesion contracts are not illegal but are scrutinized by courts carefully to ensure that a party with better bargaining power does not use this stronger position to bind the other party into an unfair agreement. Courts may strike or otherwise excise certain clauses if they are found to be unfair, unenforceable, or unconscionable.

Furthermore, there is a gap between the electronic contract and its paper equivalent. Social networking sites or freelancing sites advertise it as valid in court, but they are not. For them to be accepted by courts, they must mirror the paper equivalents.

Advantages of Adhesion Contract

1. Increases efficiency

Adhesion contracts are unique among other contracts because they create economic efficiencies shared by buyer and seller. When buyers pay with adhesion contracts, they avoid contracts that contain hidden terms; they know exactly for what they are signing up when they purchase goods or services from a seller with an adhesion contract.

In addition, it is a legally binding document that sets out non-negotiable terms and conditions, such as price, duration, and payment terms for goods or services. This reduces complexity for both parties and frees up time that could otherwise be spent navigating legal processes.

2. Reduces Transaction Costs

Using an Adhesion Contract reduces transaction costs for each transaction and eliminates some of the complexity of establishing accounts and paying bills.

It also creates incentives for members to remain in good standing with the various payment networks by requiring them to make periodic payments that recover these costs over time.

Disadvantages of Adhesion Contract

1. Risk for buyers

The Adhesion Contract creates an additional layer of risk for the buyer. While it may seem counterintuitive, an Adhesion Contract increases the chance that the buyer will suffer losses.

The buyer is now putting all his eggs in one basket – this contract creates complications when any one party cannot fulfill their end of the bargain; an Adhesion Contract puts the onus on the buyer to bear all manufacturing and freight plus any repair costs.

2. Unequal power relationship

The main disadvantage of an adherence contract is the unequal power relationship. In most cases, the buyer has little or no power over the seller, and the buyer cannot hold the seller accountable for any shortcomings in quality or workmanship. In other cases, where there is a power imbalance, such as with a hire purchase or a lease, the buyer has the power to cancel at any time and obtain a full or partial refund.

Adhesion contracts are usually written in a form that a court will enforce. An adhesion contract may state the terms and conditions that each party will adhere to minimize the cost of future claims. An adhesion contract may also state how much each party will pay each other in damages should either party fail to respect the agreement.

Key Takeaways

  • Adhesion contracts are standard form contracts that apply to one or many individuals and form agreements between those parties, often used for insurance, leases, and other financial services.
  • Adhesion contracts contain a uniform contract, sometimes referred to as standard form contracts, that do not give the parties adequate opportunity to negotiate the terms of the agreement.
  • Adhesion contracts are one of the most common problems in contractual interpretation because of their inherent lack of fairness.
  • The two most common forms of scrutiny used about adhesion contracts are the rules of good faith and unconscionability.