Contracts of Adhesion Explained: Examples and Legal Consequences

What is a Contract of Adhesion?

A contract of adhesion is a standard form agreement or instrument that is drafted and supplied by one party to a transaction on a "take it or leave it" basis to a weaker party. Adhesion contracts are typically presented on a "pre-printed", "boiler-plate" or "fill-in-the-blank" basis which frequently occurs in connection with a business, commercial or consumer transaction. These transactions include, purchase orders, leases, mortgages, insurance policies, credit card agreements, hospital admission and consent forms, home solicitation sales, automobile purchase agreements, as well as many others. An adhesion contract is a contract offered by a party who has significantly greater bargaining power than the other party and often creates a significant imbalance both as to substantive rights and remedies, as well as the sophistication and experience of the parties.
The term "contract of adhesion" was originally introduced in the case Jones v. Star Credit Corporation, 348 N.Y.S. 2d 673, 59 Misc.2d 83, 404 N.Y.S. 2d 33 (N. Y. Onondaga Cty. Com. Pl. 1975) (a Food Stamp Program Case) which subsequently influenced the National Consumer Act as well. The court therein referenced a contract of adhesion as the following:
"A contract of adhesion is ‘a standardized form, imposed upon a party to be signed or rejected, without having an opportunity to negotiate its terms…’ A typical illusory example of a contract of adhesion is a contract of an anchor store in a shopping center. The lease agreement for space is offered to all prospective tenants on a ‘take-it-or-leave-it’ basis. Because the shop owner has no choice but to accept the offer, he acquires a lease that is ‘adhesive,’ not a contract to be negotiated."
The term contract of adhesion has been recognized in commercial and consumer law cases. In Judge Howard W. Amstrong’s 1991 case regarding A-P-A Transport Corp. v. Consumer Fund , Inc., 561 So.2d 872, 874 (Fla. App. 1990) (not reported in So.2d), he stated the following; "An adhesive contract is essentially a contract of adhesion i.e. ‘a standardized form, offered on a take-it-or-leave-it basis, and sealed by the party with greater ‘bargaining power." The court therein also went on to state that the stricter rule of contra proferentem – "which provides that once a contract is executed, the interpretation of that contract should be made against the party that drafted it – would not apply to the parties in that case. Judge Amrstrong provided the following interpretation of Florida law:
"The doctrine of contra proferentem is employed to protect ‘the weaker’ party, usually the insured, against the consequences of misstatements or ambiguities in the policy. Appellee is not an insured. It is a sophisticated corporation, as is the Appellant, with considerable resources for legal analysis and advice. The application of the principle residing in the doctrine in this case would not further the purpose for which the principle is formulated. Assuming arguendo that A-P-A [Consumer Fund Inc.] could have read the disputed language differently and, thus, properly written the policy in dispute as a claim made policy without the possibility of a N-O-R-E coverage, rather than a discovery policy with a N-O-R-E coverage, the reason for the principle would not have been served in this case."
Judge Amrstrong’s recognition of A-P-A Transport as a contract of adhesion appears to be contrary to the California Supreme Court’s recognition of the same case as a form contract. See Smith v. Richard A. Carrillo Attorney At Law, 86 Cal.Rptr.3d 629,638 (Cal Ct. App. 2008)(holding that "an adhesive contract is ‘one sealed by the party with the greatest bargaining power.")

Real-World Scenarios of Contracts of Adhesion

It is through everyday life that we can best understand the pervasiveness of contracts of adhesion. These types of contracts are typically in the form of insurance policies, standard lease agreements, and certain software licenses.
Insurance Policies – Although an insured generally has the ability to select what kind of insurer to choose from, once that choice is made, the terms of the policy are essentially out of the insured’s control. The parties do not have the opportunity to negotiate the terms within the contract but rather must conform to the terms presented by the offering insurance company. Therefore, if the terms of the contract are inconsistent with the intent of the parties, an insured may be able to avoid legal enforcement of the policy.
Standard Lease Agreements – Most residential leases are offered on a "take it or leave it" basis. Either the landlord and tenant agree to the uniform terms set forth in the lease agreement or they walk away from the deal and look elsewhere for housing. Even if the parties attempt to negotiate the terms of the lease agreement those changes are subject to the approval of the landlord. The important thing to remember with these type of agreements is that the terms of the contract must be reasonable under the law, otherwise a lease agreement may be unenforceable as an adhesion contract.
Computer Software License Agreements – Whether it is known as the click wrap agreement or browse wrap agreement the purpose is the same, it is an adhesion contract. The user of the software enters into a non-negotiated agreement with the software producer agreeing to all the terms and conditions set forth in the agreement.

Legal Consequences of Contracts of Adhesion

Contracts of adhesion are ubiquitous in our everyday lives. Yet, in our culture of instant gratification and technological advancement, we often blindly agree to the terms set forth without reading the fine print or even thinking about what we are actually agreeing to. The ease of contract formation, however, does not mean that parties are always bound by the terms to which they have agreed. If unfair terms are included in adhesion contracts and if they later become the subject of a dispute, an issue of unconscionability may arise.
The concept of unconscionability arises when one party to a contract possesses an overreaching bargaining power, giving that party the ability to impose unfair operative terms upon the other party. Unconscionability can be procedural and/or substantive. Substantive unconscionability generally exists where the inequity of an agreement is "glaringly obvious…". (Ingle v. Citizens Mortgage Corp.) (2005) 328 T.R. 2d 647, 655.) Courts will find substantive unconscionability where the "unfairness is so extreme as to appear shockingly unjust, oppressive, unconscionable." (Civ.Code § 1670.) Procedural unconscionability generally exists where the elements of a contract are imposed on a party in a manner such that prevents that party from understanding its terms and conditions. Procedural unconscionability also exists where one party does not have an opportunity to negotiate the contract terms. (Szetela v. Discover Bank, supra 97 CA4th 1094, 1099, n. 2 (2002).)
However, not all provisions in an adhesion agreement will be considered unconscionable. California courts generally require "a substantive unconscionable provision that results in unfair surprise … together with a procedural element of oppression or surprise." (Gona v. E*Trade Financial Corp. (2005) 34 C4th 393, 408.)

Legal Protections from Contracts of Adhesion for Consumers

While contracts of adhesion are not per se illegal, their potential for abuse has spurred a host of consumer protection laws and regulations aimed at reducing the inherent power imbalance between corporations and consumers. These protections take the form of disclosure requirements, anti-discrimination laws, limits on liability, and rights to sue and seek relief.
A broad swath of US administrative agencies in concert with state governments have created rules aimed at protecting consumers from unfair contract terms and practices. One of the most frequently invoked statutes is the federal Magnuson-Moss Warranty Act, which protects consumers from deceptive warranties. The National Conference of State Legislatures details numerous state laws, which vary from state to state but generally include provisions requiring businesses to clearly disclose cancellations, changes of service, and billing practices for added features. Prohibitions against discriminatory contract terms are relatively rare, but California law, for example, prohibits discrimination in credit contracts based on sex, ethnicity, national origin, family status, or religion, although said laws require intent to discriminate . The federal Truth in Lending Act (TILA) requires clear disclosure of credit terms and cost. TILA violations can lead to statutory damages in addition to traditional damages within the statute of limitations period. Under TILA, consumers cannot waive their rights, although they can settle often by giving up potential statutory damages.
Additionally, the Federal Trade Commission (FTC) has extensive rules governing disclosures on all sorts of sales contracts. In recent years, the FTC has focused more on contract terms themselves that may trigger consumer complaints. The FTC’s Bureau of Consumer Protection pursues firms that may be employing adhesion contracts to fleece consumers, rather than seeking to serve their needs. And finally, the Consumer Financial Protection Bureau (CFPB) has argued for greater adherence to state law on consumer debt practices. With input from consumer advocates and focus groups, the CFPB has emphasized the need for greater disclosure and fairness of terms in all consumer contracts, and particularly regarding debt.

Guidelines for Signing Contracts of Adhesion

Tips for Individuals Who Are About to Sign an Adhesion Contract
When it comes to contracts of adhesion – as with any contract you are about to sign – it is always a good idea to familiarize yourself with the terms to the fullest extent possible. Ask the company to explain anything you do not understand. Look for any section or clause that seems to be in a highlighted box. Red flags should include anything that appears particularly one-sided or that seems to favor the company much more than the consumer. Adhesion contracts can be long and full of legal jargon. Before you sign, you should be sure that you have a complete understanding of the terms. Be sure to read the fine print carefully, as this is often where the company will include pertinent information about your rights after signing the contract. For example, some adhesion contracts may include a clause that attempts to take away your right to try to resolve the matter in court via arbitration or mediation – if this kind of dispute resolution system is not fair to you, ask that the terms be revised. Finally, if you do not understand the terms of the contract – such as the consequences of not abiding by the contract in its entirety – consult an attorney. They will be able to look over the entire document and help you determine not only if the terms are acceptable, but also whether you have any grounds on which to challenge the contract before signing.

The Future of Contracts of Adhesion

As global commerce continues to expand in a technology driven environment, the prevalence of adhesion contracts is likely to increase. The sheer speed at which consumers must interact will continue to drive the use of adhesion contracts. In the not too distant past, the retail banking community began to move to an entirely online presence for a customer’s ability to open a checking account. In order to do so, an individual needed to be able to upload identifying information, complete applications and agreements, and initiate a money transfer in every sense online. In fact, a rush to eliminate physical branches has begun, driven by mobile banking which allows complete banking transactions to be completed without ever having to enter a branch. Not surprisingly, a person attempting to complete an online banking transaction is presented with an adhesion contract for the customer’s agreement to the terms. While this sort of transaction and agreement occurred years ago in the e-commerce world, it is now being forced into other marketplaces that touch us all. Even in more conventional businesses, the use of technology is driving the move toward adhesion contracts. Over the spring 2013 filing season, for instance, the IRS eliminated the paper Form 4506 Authorization that allows taxpayers to submit a request to get copies of their tax transcripts. As of May 2, 2013, this form was replaced by e-consenting for individuals . The two options for individuals are now: (1) providing a signature electronically on the IRS e-file signature form; or (2) establishing a PIN number (that only individual knows), to allow the authorization to be made online. For a taxpayer, however, the IRS website is not clear they are agreeing to an adhesion contract. In fact, the IRS e-Filing website states:
Are You Ready to e-File Your Return Now?
If you have all the information needed to e-file now and you’re ready to e-file, click the link below. Your timing is perfect! We’ve designed this process to let you e-file your return as efficiently as possible. We’ve also included a second section to "e-Sign" your Form 8878 or Form 8879, so you don’t have to wait to file your return because of missing signatures. Visit the Help Section if you have questions about your e-filed return, or about how to use this site to e-file your return.
There is no specific reference to a Contract of Adhesion driving this process, nor is there even a reference that there is any adhesion contract at all. Yet, the potential consequences for non-compliance and rejection by the IRS of an electronic tax return are troublesome. The IRS could be adopting this practice for its own efficiency, but the electronic process should really require a better presentation than the one provided. In fact, to provide individual taxpayer with better notice it would not be difficult to require a check box individual taxpayers to check that they understand and agree to the terms before proceeding with the electronic filing process.