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Adhesion Contract

An agreement between parties whereby one party sets out all or most of the terms of the contract

What is an Adhesion Contract?

An adhesion contract, also known as a “boilerplate” contract or a “standard form” contract, is an agreement between parties whereby one party (the one with a higher bargaining power) sets out all or most of the terms of the contract. The other party (the one with a weaker bargaining power) has little or no power to negotiate for reasonable terms.

 

Adhesion Contract

 

Adhesion Contract – Advantages

Adhesion contracts are commonly used in situations involving consumer credit, insurance, mortgages, leases, and large purchases. Although adhesion contracts tend to increase efficiency and speed up the purchasing process, their use is controversial due to some of the potential advantages and disadvantages they pose, such as:

 

1. Increasing economic efficiency

By providing a standardized contract that lays out non-negotiable terms, adhesion contracts reduce the need for customized contracts that are specific to each consumer, which increases efficiency and saves time for both the buyer and the seller.

 

2. Reducing transaction costs

Transaction costs are sunk costs that are accrued as a result of participating in a transaction or an exchange of a good. They include communication costs, bargaining costs, and enforcement costs. Adhesion contracts substantially reduce these costs by providing all of the information in a non-negotiable contract that is enforced by the law.

 

Adhesion Contract – Disadvantages

 

1. Risk on the buyer

Adhesion contracts are essentially “take it or leave it” contracts and include non-negotiable terms. Parties that draft the contract often do it in a way such that any expenses related to the loss or damage of the goods being purchased is accrued to the buyer. It places an unreasonably high risk on the buyer – who may not have a choice but to sign the contract.

 

2. Unequal power relations and unjust terms

In situations where the drafting party has high bargaining power and the buying party has little/no bargaining power, and the good being sold is important to the purchaser (e.g., a medicinal good or a house), then the purchaser may have no choice but to accept the contract – and, in such cases, the terms can be unjust and completely in favor of the selling party.

 

Use and Legality of Adhesion Contracts

Adhesion contracts are being used more and more as the use of digitally-signed contracts and industry-wide standardized contracts grows, especially due to the increase in online purchasing of goods and services and the efficiency they provide.

Although adhesion contracts are legal in most countries, they are often scrutinized thoroughly by courts before legal enforcement, especially due to the potential for unreasonably one-sided terms that are in favor of the draftsman.

The courts aim to ensure that the bargaining party does not become subject to unconscionable or unfair terms. If the courts find that there are terms that are in alignment with unjustness or unconscionability, they may declare the specific terms or the entire contract as void.

 

Practical Example

Suppose a college student has a hard time finding an affordable place to live. The student finally finds a place near the university but must sign a non-negotiable contract that involves a clause that does not allow gatherings of more than five people and does not allow animals/pets in the house.

The student was left with no choice but to sign the agreement due to the pressure she faced and the possibility of not finding housing. Here, the landlord had higher bargaining power, and the student was put in a “take it or leave it” situation – which makes it an adhesion contract.

 

Additional Resources

CFI offers the Certified Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below:

  • Competitive Advantage
  • Opportunity Cost
  • Bargaining Power of Buyers
  • Bargaining Power of Suppliers

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