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 ccasion, adhesion contracts – or clauses within the contracts – will not be considered enforceable.
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. Examples include 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 adhesion contracts are sometimes looked upon as a bad thing, it would not be possible for consumers to make purchases or for businesses to do business on any type of scale without adhesion contracts. 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 an adhesion contract is used has very little choice if he or she is not pleased about the contractual terms. Of course, walking away is always an option 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. 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 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 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 that particular clause might be considered unconscionable.
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.
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.