What is an adhesion contract?

An adhesion contract is a contract where one side has all of the bargaining power and the other side has to agree to the terms or walk away from the transaction. Adhesion contracts are an extremely common form of contract and an essential part of doing business. These contracts can be just as binding as regular contracts. However, on occasion, adhesion contracts – or clauses within the contracts – will not be considered enforceable.

What are some examples of adhesion contracts?

Adhesion contracts are contracts where there is no negotiation or mutual exchange between two parties. The contract itself is one-sided– a take it or leave it– arrangement. The vast majority of contracts that people sign are adhesion contracts and are sometimes called standard form contracts or boilerplate contracts. These could be digitally signed contracts or paper contracts.

Examples of adhesion contracts are included in many commercial transactions, such as a contract for cellular phone service; a contract to buy a car; a contract for insurance; and a residential apartment lease.

When a person purchases software and clicks to accept the terms of service, this is an adhesion contract. When a person buys a plane ticket or a ticket for a cruise and there are terms of service and disclaimers on the back, these are all examples of adhesion contracts.

Although contracts of adhesion are sometimes looked upon as a bad thing, it would not be a reasonable expectation for consumers to make purchases or for businesses to do business on any type of scale without this kind of document. Imagine if every car purchase involved negotiation on every detail of the sale, or if people in line at the cell phone store individually negotiated the many terms of every sales agreement for cell phone service. Nothing would ever get done and the transaction cost of doing business would be astronomical.

Unfortunately, despite the economic efficiency and necessity, the consumer is often at a significant disadvantage because of the nature of adhesion contracts. Someone buying a car, signing up for cell phone service, or entering into one of the hundreds of other transactions where a standard form contract is used has very little choice if he or she is not pleased about the contractual terms. Of course, the signing party can make the decision to walk away but people need cars and cell phones and every company has some type of contract, so this is rarely a viable or realistic option for achieving more choice or autonomy in purchasing and contracting.

Despite the disadvantage to the consumer and the consumer’s general inability to escape adhesion contracts, adhesion contracts are generally enforced in a court of law. However, the courts do make exceptions to protect consumer’s rights as the weaker party in these contracts of adhesion. The exception to the general rule of enforceability is when an adhesion contract is considered unconscionable.

What is an unconscionable contract?

An unconscionable contract is an adhesion contract where the unequal bargaining position is too unbalanced. In other words, the terms are so biased, unfair and one-sided in favor of the contracting party with the bargaining power that the courts refuse to enforce the contract as written. The party who is claiming unconscionability will need to show first that the contract was a contract of adhesion and will then need to go on to demonstrate the issue as to why the contract is unacceptably biased in favor of the party with the superior bargaining power.

In most cases, when unconscionability is claimed, it is claimed in regards to specific clauses rather than to entire contracts as a whole. For instance, if a contract contains a clause precluding the party with the inferior bargaining power from enforcing a warranty claim, then depending on the circumstances, that particular clause might be considered unconscionable.

What are commonly challenged clauses?

In adhesion contracts, there are certain clauses that are often subject to being challenged as unconscionable. By far the most commonly questioned clause in an adhesion contract is a clause requiring arbitration instead of litigation.

Arbitration is a form of alternative dispute resolution where a private third-party resolves any disputes that arise. The procedures for arbitration are normally defined according to the contract and the remedies are often considered to be more limited than those available in a court of law.

Although arbitration clauses are commonly challenged, they are rarely considered to be unconscionable, especially in light of federal laws favoring arbitration. As long as the procedure for arbitrating the dispute is not grossly unfair and as long as the party with inferior bargaining power retains some shot at righting perceived wrongs, the arbitration clause will generally be upheld in an adhesion contract.

Another commonly challenged clause in adhesion contracts is a clause that restricts the rights of aggrieved consumers to file class action lawsuits. Some state laws had previously prohibited this type of contractual clause; however, a 2011 case — AT&T Mobility v. Concepcion — changed the rules and contracts (even adhesion contracts) may now impose limitations on class action rights, making it harder – if not impossible – for class action lawsuits to be filed.

Case Studies: Understanding Adhesion Contracts and Unconscionable Clauses

Case Study 1: Cell Phone Service Agreement

Jane needed a new cell phone plan and signed up with a major service provider. Upon reviewing the contract, she noticed several clauses that seemed one-sided in favor of the company, leaving her with limited recourse in case of disputes.

With the help of a contract law attorney, Jane challenged the unconscionable clauses, particularly the clause restricting her from filing a class-action lawsuit. The attorney negotiated with the service provider, leading to a revised contract that better protected Jane’s rights as a consumer.

Case Study 2: Apartment Lease

Tom, a renter, was presented with an adhesion contract when signing a lease for his new apartment. The lease contained clauses that gave the landlord significant power and control over the tenancy. Uncomfortable with the unequal bargaining position, Tom consulted a contract law attorney.

The attorney identified unconscionable clauses that restricted Tom’s rights and negotiated with the landlord for a fairer lease agreement, ensuring Tom’s rights as a tenant were better protected.

Case Study 3: Software End-User License Agreement (EULA)

Michael purchased software for his business and, during the installation process, was required to accept the software’s end-user license agreement (EULA). The EULA contained a clause forcing disputes into binding arbitration, which raised concerns about limited remedies and unfair procedures. Seeking legal advice, Michael consulted an attorney experienced in contract law.

The attorney reviewed the EULA and determined that the arbitration clause was enforceable under federal law. However, the attorney helped Michael understand the implications and risks of arbitration and guided him in making an informed decision before accepting the EULA.

How can you get legal help?

Although adhesion contracts are generally enforceable, the unconscionability exception and other public policy exceptions still do protect the rights of those who enter into these types of contracts. Individuals who believe they have entered into an adhesion contract and who are concerned about their legal rights under the contract’s terms should consider speaking with an experienced contract law attorney for advice.