Adhesion contracts simplify how businesses manage lots of clients. However, they come with a significant legal challenge: the risk of unconscionability.
Unconscionability means a contract is so one-sided it might be unfair. This isn't just bad for business ethics; it can lead to costly legal problems. According to the American Bar Association, a lawsuit can cost a small business anywhere from $3,000 to $150,000. And if an adhesion contract is too one-sided, these costs can shoot up, damaging the business's reputation and trust with clients.
This leaves in-house legal teams with a tough job: How do you keep adhesion contracts standard but also fair and legally safe?
In this post, we'll explore this issue. We'll give you tips to make sure your contracts are fair and effective.
What is a contract of adhesion?
A contract of adhesion, sometimes called an 'adhesion contract,’ is a legal agreement typically drafted by one party, which often holds greater bargaining power, and signed by another party with lesser bargaining power.
In this "take it or leave it" situation, you set the contract terms, leaving the consumer with little to no chance to negotiate.
However, the enforceability of adhesion contracts can be influenced by the manner in which they are drafted.
Examples of contracts of adhesion
Contracts of adhesion can be found in a variety of areas of law, including:
- Consumer contracts: Examples include software licenses, insurance policies, and cell phone service contracts. In these types of contracts, one party, typically a large corporation, imposes non-negotiable terms on consumers
- Employment contracts: Contracts such as non-compete agreements are frequently drafted by employers and offered to employees, leaving little room for negotiation
- Real estate contracts: Residential leases are another common example of contracts of adhesion. Landlords typically set the terms of these leases, and tenants have limited input into the agreement
Other examples of contracts of adhesion include:
- Mortgage agreements
- Car purchase agreements
- Gym memberships
- Airline tickets
- Terms of service for websites and apps
When to use an adhesion contract?
Adhesion contracts, often seen as a take-it-or-leave-it deal, are standard in many industries due to their efficiency and simplicity. However, they're not a one-size-fits-all solution.
Here's a rundown of situations where you could consider implementing them:
- Mass market transactions: When your company deals with a high volume of transactions, like software licenses, subscription services, or insurance policies, contracts of adhesion streamline the process. They ensure consistency across thousands of contracts, saving time and reducing the likelihood of errors
- Standardizing terms for routine services: Think of scenarios like telecom services or gym memberships. Here, uniformity in contract terms is crucial. Companies use adhesion contracts to maintain standard, non-negotiable terms. This ensures equal treatment for all customers and clarity in what they're signing
- Online user agreements: The digital realm is a hotbed for these contracts. You should consider adhesion contracts for social media, e-commerce, and cloud services to manage user interactions efficiently. They help in setting ground rules for usage, data handling, and dispute resolution
- Employment agreements for non-executive staff: For rank-and-file employees, standardized employment contracts can be beneficial. They outline clear terms regarding job responsibilities, compensation, confidentiality agreements, and termination conditions, thereby reducing ambiguities
- Real estate leases: Landlords often use adhesion contracts in rental agreements for uniform terms, conditions, and rules across multiple tenants. This standardization is vital for managing multiple properties efficiently
- Credit card agreements: Financial institutions typically use these contracts for credit card agreements. They allow for clear, consistent terms regarding interest rates, payment terms, and fees across a vast customer base.
Are adhesion contracts legally enforceable?
Contracts of adhesion are enforceable but face closer scrutiny in court due to unequal bargaining power. Courts may reject an adhesion contract if it's unconscionable or contains unexpected terms.
The reasonable expectations test
Courts apply the reasonable expectations test, considering what the adhering party reasonably expected in the contract. If a term of the contract is beyond the reasonable expectations of the adhering party, it may be unenforceable.
For example, if an adhesion contract waives the right to sue without allowing negotiation, the court may not enforce it.
The court didn't bind a consumer to a credit card contract because the terms weren't what the consumer reasonably expected. The contract had hidden terms, including one allowing the credit card company to raise the interest rate without notice.
The unconscionability test
Courts apply the unconscionability test, assessing if a contract or term is so shockingly unfair or one-sided. They will consider a number of factors when determining whether a contract or term is unconscionable, including:
- The relative bargaining power of the parties
- Whether the contract or term contains unfair or unreasonable terms
- Whether the adhering party had a reasonable opportunity to understand the terms of the contract before agreeing to them
- Whether the adhering party was forced to agree to the contract in order to obtain the desired goods or services
For example, if an adhesion contract limits liability without allowing negotiation, a court may find it unconscionable.
The court deemed a computer sale contract unconscionable due to one-sided terms, like Gateway's ability to change the contract without consumer notice.
How to write an enforceable adhesion contract (tips + best practices)
It is important to know how to write adhesion contracts that are both fair and enforceable. Here are some tips:
#1 Deep dive into the legal landscape
Start by gaining a comprehensive understanding of the relevant legal landscape. This includes industry-specific regulations, consumer protection laws, and employment laws that may impact your contracts. Knowing the legal framework will help you draft contracts that are compliant and enforceable.
To achieve this, subscribing to industry-specific newsletters is a valuable strategy. Here are some recommended legal newsletters that can provide you with timely and relevant updates:
- The National Law Review: This publication collaborates with leading lawyers to deliver tailored news. Subscribing to their e-Newsbulletins can keep you informed about the latest legal trends and insights that are relevant to your field
- Thomson Reuters Legal Newsletter: Thomson Reuters offers a monthly legal e-newsletter that delivers curated insights directly to your inbox. This can be an excellent resource for staying updated on topics related to contract law
- FindLaw for Legal Professionals: FindLaw provides a newsletter specifically designed for legal professionals. This keeps you updated on legal news and developments impacting your practice and contract drafting strategies
#2 Align contract goals with organizational strategy
“The first thing is to make sure you delve deeper into the business and the product. And then understand the strategic initiatives for the business. What is the business trying to accomplish? What are their goals, objectives over the next two quarters, four quarters, or six quarters? You can then focus your efforts and energies on ensuring that you're helping move the company forward with those objectives and goals.”
~ Adam Glick, ex-Head of Legal, Intercom
Cultivating Meaningful Connections for In-House Legal Success
Your contract should reflect your organization’s broader strategy. Whether it's risk mitigation, compliance, customer relations, or intellectual property protection, ensure each clause aligns with these strategic objectives.
- Understand your organization’s key goals, such as market growth, risk mitigation, or customer satisfaction. Ensure contracts reflect these objectives
- Include clauses for risk mitigation and regulatory compliance relevant to your industry. Update these regularly to keep pace with legal changes
- For strategies centered on customer relations, make contracts clear and fair. Incorporate transparent terms and straightforward dispute processes
- If IP is crucial, ensure contracts have robust clauses for IP rights and confidentiality aligned with industry standards
- Regularly consult with sales, customer service, and compliance departments to ensure the practical applicability of contracts
- Revisit and revise contracts to align with any strategic shifts in your organization
- Use contract management tools for easier updates and alignment with strategic changes
#3 Standardize key terms
While standardizing key terms, consider including optional clauses for different scenarios or customer categories. This flexibility can help address unique circumstances without compromising the contract’s uniformity.
- Create a core contract template with essential terms common to all contracts
- Recognize variations needed for different customer categories or scenarios, such as industry-specific compliance or geographic considerations
- Prepare a set of optional clauses that can be included as needed, addressing these specific variations. Ensure these optional clauses are clear and integrate well with the core template
- Keep an accessible library of these clauses, categorized for easy reference
- Educate your legal and contract management teams on when and how to use these optional clauses
- Periodically review and update these clauses to reflect changes in laws, market conditions, or business strategies
- Track the usage of these clauses to identify trends and adjust your clause library accordingly
#4 Write in plain language for clarity
“Avoid unnecessary complexity and shoot for short sentences. Always ask yourself if what you wrote down is clear – could a judge or jury understand the section if there was ever litigation? If not, rework it. For example, think about this statement, ‘This Agreement will terminate on August 31, 2021.’ Does this mean that it terminates when the day starts? When the day ends? And when does the day end? At the end of the business day, at midnight, and in what time zone? The better sentence is ‘This Agreement will terminate on August 31, 2021, at 11:59 p.m. Central Time.’ Be precise and concise!”
~ Sterling Miller, CEO, Hilgers Graben
Ten Things: Making Contracts Easier to Sign
Write in plain, easily understandable language. Avoid legal jargon and complex terminology. The clearer your contract, the less chance for misinterpretation or disputes. Consider including definitions for any industry-specific terms to enhance clarity.
- Use simple, concise language. Replace legal jargon with everyday words where possible
- Utilize tools like Hemingway Editor or Grammarly to check for readability and complexity. Aim for a lower grade level to ensure wider accessibility
- Add a glossary or a definitions section for any technical or industry-specific terms used in the contract
- Create a Frequently Asked Questions (FAQ) section that addresses common concerns and explains complex clauses in layman's terms
- Periodically review and revise the contract language to maintain clarity and ensure it reflects current practices and terms.
Also read: 10 Tips to Maintain Clear Contract Language
#5 Maintain a balance of interests
While these contracts are typically drafted in favor of your organization, it's essential to maintain a fair and reasonable balance. Overly one-sided contracts may be subject to legal challenges. Ensure the terms are reasonable and equitable.
- Strive for fairness in contract terms. Avoid excessively one-sided provisions that heavily favor your organization at the expense of the other party. This includes being reasonable in areas like termination rights, dispute resolution, and liability clauses
- Conduct regular legal reviews of your contracts to ensure they comply with current laws and industry standards. This also helps identify potentially unfair or outdated terms
- Engage with various departments within your organization, such as sales, customer service, and compliance, to understand the practical impact of contract terms and make adjustments based on their feedback
- Where possible, gather insights from external parties like customers or industry peers. This can provide a different perspective on the fairness and practicality of your contract terms
- Compare your contracts with industry standards and competitors. This can help you gauge the fairness of your terms in the broader market context
- Analyze past disputes or complaints related to your contracts. Patterns in these issues can highlight clauses that are perceived as unfair or problematic
#6 Incorporate feedback loops
Establish a process for receiving and incorporating feedback, both internally and from contract parties. This can help you stay aware of how your contracts are perceived and function in the real world.
- Set up structured channels for gathering feedback, such as surveys, feedback forms, or regular meetings, where both internal stakeholders and external parties can share their views on the contracts
- Foster a culture where employees and contract parties feel comfortable providing honest feedback. Assure them that their opinions are valued and will be considered
- Schedule periodic review meetings with teams like sales, customer service, and legal to discuss contract performance and feedback received. Use these insights to identify areas for improvement
- Actively seek feedback from clients or customers after contract execution or during contract renewal discussions. Inquire about their experience with the contract terms and any difficulties they faced
- Systematically analyze the feedback to identify common themes or specific issues. Prioritize these findings and plan how to address them in contract revisions
- Use the insights gained from feedback to make informed updates to your contracts. This might mean rewording confusing clauses, making terms fairer, or adding provisions from feedback
- Communicate back to those who provided feedback, letting them know how their input has been used. This transparency builds trust and encourages ongoing participation in the feedback process
#7 Review and update regularly
Schedule periodic reviews of your adhesion contracts to ensure they remain compliant with current laws and industry standards. This proactive approach can prevent future legal challenges.
#8 Plan for dispute resolution
Include clear, fair dispute resolution clauses. Consider options like mediation or arbitration to resolve conflicts efficiently.
- Clearly outline the steps and procedures for resolving disputes in the contract. This should include initial contact points, timelines for response, and escalation protocols
- Include a variety of dispute resolution methods such as negotiation, mediation, and arbitration. This allows parties to choose a method that suits the nature of their dispute
- Clearly state the legal jurisdiction and the governing law that will apply in case of disputes. This helps in avoiding confusion and legal complexities
- Encourage alternative dispute resolution methods like mediation or arbitration over litigation. These methods are generally more cost-effective and quicker
- Ensure that your legal and customer service teams are well-versed in these dispute resolution processes. They should be able to guide other parties through the process effectively
- Periodically review your dispute resolution clauses to ensure they remain effective and align with current best practices
- Make dispute resolution clauses easy to find and understand in your contracts. Avoid hiding them in fine print or using overly complex language
- Keep track of disputes and their outcomes. Analyzing this data can provide insights into common issues and help improve future contract terms
Challenges of using adhesion contracts
#1 Consumer protection concerns
Adhesion contracts have been criticized for posing a number of consumer protection concerns, including:
- Unfair terms: Adhesion contracts may limit consumer rights or hinder legal action if issues arise
- Hidden terms: Adhesion contracts may have terms hidden in fine print or hard for consumers to grasp. This can make it difficult for consumers to understand their rights and obligations under the contract
#2 Arbitration clauses and class-action waivers
Adhesion contracts often contain arbitration clauses and class-action waivers. Arbitration clauses require consumers to resolve disputes with the company through arbitration instead of going to court. Class-action waivers prevent consumers from joining together to file class action lawsuits against the company.
Arbitration costs more and takes longer than court, while class actions help consumers hold businesses accountable for wrongdoing.
Arbitration is typically more expensive and time-consuming than going to court, and class action lawsuits can be a powerful tool for consumers to hold businesses accountable for wrongdoing.
Easily navigate adhesion contracts with SpotDraft
Adhesion contracts, though efficient for streamlining business operations, bring inherent challenges that require careful navigation by in-house legal teams. The balance between operational practicality and legal safety is delicate, and the precision in drafting these contracts cannot be overstated.
This is where SpotDraft's Customizable Template Builder comes in. You can create high-volume contracts in just a few clicks, thanks to the built-in legal guardrails and approval routing features.
Plus, you can quickly generate contracts by simply selecting a template and filling in essential details. Integration with CRM, HRMS, and other tools streamlines contract creation, making it faster and more interconnected with your business ecosystem.
Ready to see it in action? Request a demo today!
Adhesion contract template: Download for FREE
This contract of adhesion free template covers essential clauses such as acceptance of terms, service description, payment terms, modifications to service, disclaimers, liability limitations, governing law, and the entire agreement clause.
Keep in mind, it's a starting point and may need adjustments for your readers and their legal jurisdiction.
This template is for informational purposes only and may not be suitable for all situations. It is advisable to see it from a lawyer’s eye before using this template for any official purpose.