Adhesion Contract: an insight

By: Jayshree Patnaik and Manshi

Ever got stuck while purchasing a house, a car or planning a trip due financial stress?
Later arched your back before no bargaining, no negotiating terms to fulfil such
materialistic needs and end up descending to debt traps. While online we tend to
quickly click on “I agree” without reading the terms. These were examples of how
adhesion contracts are forced on us.
I am unsure about which of the either terms came into existence first, adhesion contract
or bandhwa majduri (bonded labour). Bonded labour indeed was an adhesion contract
slapped on to the labourers’ face, the labourers lost their freedom and worked for a
master (moneylenders) in exchange for debt repayment. Though bonded labour was
abolished, adhesion contracts have a long lifespan.

What is an Adhesion Contract?

An adhesion contract is a legal agreement that is drafted by one party, in the absence of
the other party. This means that the party signing the agreement had no chance to
bargain for the agreement’s terms. Although the other party may or may not sign it. Both
the parties stand at different poles when it comes to bargaining power. These contracts
play a role in consumer transactions. Some of the sectors where such contracts are
widely used are insurance sectors, loan documents (car loans, personal loans on apps,
etc.), license agreements during app installations, medical consent forms, leases/rental
agreements and the list goes on as these contracts are used daily by vendors,
distributors, etc. People end up signing the “fine print” contracts where there is
disclosure, but is hidden. In digital space, adhesion contracts come in the form of
clickwrap and browsewrap agreements. The Consumer Protection Act, 2019 safeguards
consumers to challenge exploitative terms of adhesion contracts, this act empowers
Consumer Disputes Redressal Commission to address such grievances. Adhesion
contracts can also be challenged on grounds of undue influence (Section 16, Indian
Contract Act, 1872) and provisions on free consent (Section 14).
Characteristics:
Standardized Terms: The terms and conditions are pre-written and presented as a take
it or leave it contract.
Lack of Negotiation: The party adhering to the contract has limited or no ability to
negotiate the terms.
Unequal Bargaining Power: One party typically has significantly more bargaining power
than the other.

History of adhesion contracts

Adhesion contracts have been around for centuries and were first formalized in French
civil law. They entered American law through a Harvard Law Review article in 1919.
This concept helped American courts understand when contracts of adhesion should be
enforced and when they should not.
Most American courts have adopted the concept of an adhesion contract in varying
ways. While many courts scrutinize them closely, their increasing use has significantly
changed this area of American jurisprudence. Adhesion contracts have grown in
popularity and use throughout the 20th and 21st centuries. This is especially true
because of the rise of digital contracts and “click-through” agreements.
The legality of adhesion contracts has changed significantly over time and continues to
evolve. It is now generally agreed that adhesion contracts may be enforceable when
properly formulated and managed. Courts have often considered the bargaining power
of the parties in relation to the benefit the signee gets from the agreement.
Other courts look to the terms themselves for a determination of “unconscionability” and
reasonableness.
Contract Regulation
Adhesion contracts are usually enforceable in the United States according to the
Uniform Commercial Code (UCC). The UCC helps to ensure that commercial
transactions take place under a similar set of laws across the country.
Although the UCC is followed by most U.S. states, it has not been fully adopted by
some jurisdictions such as American Samoa and Puerto Rico.
Louisiana stands alone among the 50 states in adopting only parts of the UCC.
The UCC has specific provisions relating to adhesion contracts for the sale or lease of
goods. Contracts of adhesion are, however, subject to additional scrutiny and
interpretation under state law.

Pros and Cons

Pros:

Saves time and resources for both parties- as there is no need to customize
agreements for individual consumers, an uniform agreement is used for unlimited end
users. Also, adhesion contracts are called boilerplate contracts because they are never
changed leaving no room for negotiation, thus saving time.

Cons:

As adhesion contracts are drafted by the dominant party, unilateral decision making is
involved and has unfair terms for the signing party: adhesion contracts never allow
negotiation, creating an imbalance of power between the two parties.
The non-drafting party is often exploited entering such contracts.
May restrict the end users from seeking legal recourse: the signatories are bound by the
contract and have little or no options to look around for dispute resolution.

Legal Principles Governing Adhesion Contracts:

Adhesion contracts that are against public policy are considered void, as well as such
contracts must not violate Article 14 of the constitution. Following are the other doctrines
that govern such contracts.

Contra proferentem and Unconscionability to the
rescue

The contra proferentem can be applied to any contracts, as per UTCA (Unfair Contracts
Terms Act 1977). This doctrine, which originated from insurance contracts, states that
when a contract provision can be interpreted in more than one way, the court will prefer
the interpretation which is more favourable to the party who has not drafted the contract.
However, its effectiveness relies on genuine ambiguities, it cannot protect a party for
understood contracts.
The doctrine of unconscionability allows courts to refuse to enforce a contract if the
contract is deemed grossly unfair to one party. The courts may look at judicial precedent
when determining enforceability.

Are we changing the narrative?

Recently, the government passed a bill to curb the increasing case pendency related to
such contracts.

In December 2024 the Banning of Unregulated Lending Activities (BULA) bill was
proposed by the Indian government to ban the unregulated lending activities and
safeguard the borrowers from exploitation. Also, this bill emphasizes on penalizing the
unregulated entities with substantial fines and imprisonment of up to 10 years. The CBI
is designated to handle the cases. This step will also enhance credibility of the
legitimate lending platforms. The Ministry of Finance has released the draft bill for public
feedback, and the bill is open for comments and suggestions until February 13, 2025.

Types of adhesion contracts

There are several forms of adhesion contracts. Most notably, browse-wrap, click-wrap,
and sign-in-wrap are three common forms of electronic adhesion contracts.
In a paper published by Tulane University, authors Ian Rambarran and Robert Hunt
parse through the finer points of how these electronic contracts work in practice.
“A click-through agreement is usually conspicuously presented to an offeree and
requires that person to click on an acceptance icon, which evidences a manifestation of
assent to be bound to the terms of a contract,” reads the paper. “On the other hand, a
browse-wrap agreement is typically presented at the bottom of the Web site where
acceptance is based on ‘use’ of the site.”
Users looking to sign up for a new online service may be presented the opportunity to
do so using the sign-in-wrap contract. That may include non-negotiable terms like, for
example, a mandatory arbitration clause.
These contracts can also be used in business-to-business transactions and are not
limited to consumer users. They may include things like indemnification clauses, waiver
of liability clauses, and arbitration clauses, and may also require one party to provide
written notice of disagreements and disputes ahead of legal action. For automated
solutions to potential conflicts, consider some popular solution options.

How are things globally?

Since the dawn of time, the Europeans introduced UCTD (Unfair Contracts Term
Directive, 1993) to protect the consumers from unfair terms in the contract. Also, in
2021, a study conducted by the Policy Department for Citizens Rights and
Constitutional Affairs suggests updation of UCTD for digital services. The said study
was requested by the European Parliament’s Committee on Legal Affairs. As the old
UCTD couldn’t rectify the imbalance and unfairness. As stated in the study, the digital
service providers infringed consumer’s data protection, hindered consumer’s use of the right of withdrawal, prohibited and penalized consumers in case of negative reviews and
so on.
The United Kingdom has Unfair Contract Terms Act, 1977 and Consumer Rights Act,
2015 and The Financial Conduct Authority to regulate and keep a check on terms and
reasonableness of terms in such contracts.
In the U.S. Uniform Commercial Code(UCC) and Federal Trade Commission (FTC) are
the regulators which protect the consumers.
Common Examples:
Software End-User License Agreements (EULAs): When you install software or
download a mobile app, you are often presented with an EULA that you must accept to
use the product.
Terms and Conditions on Websites: Websites and products used by consumers are
often governed by terms and conditions, which are typically adhesion contracts.
Insurance Policies: Insurance contracts are often adhesion contracts, with the insurance
company setting the terms and conditions.
Rental Agreements: Many rental agreements are adhesion contracts, with landlords
setting the terms and conditions.
Employment Contracts: Some employment contracts can be considered adhesion
contracts, particularly when the employee has limited bargaining power.
Enforceability:
The enforceability of adhesion contracts depends on how well they are drafted and
adhere to standard procedures.
Potential Concerns:
While not inherently illegal, adhesion contracts can raise concerns about fairness and
the potential for exploitation of the weaker party.
Benefits of adhesion contracts
Adhesion contracts come with many benefits that can streamline your contract
management process. They tend to speed up this process and create significant
benefits to efficiency, such as:
1. Economic efficiency
A standard contract with non-negotiable terms reduces any need for contracts to be
specified to a particular consumer. This saves significant employee time and contract
management efforts. Terms do not change between parties, so there is no need to
redline, negotiate back and forth, or create unique contract provisions.

2. Fewer transaction costs
Your company can greatly reduce its transaction costs by using contracts of adhesion.
They reduce bargaining, communication, and management costs by making them
uniform and non-negotiable. You can also save on enforcement costs, as the
agreements are the same between a variety of parties.
3. Convenience
Maintaining consistency throughout contracts is simply more convenient. You don’t
have to worry about which party was subject to which specific terms. Instead, they are
all subject to the same terms. This greatly reduces the headache of tracking and
managing complex legal agreements.

Case Laws:

SPECHT VS NETSCAPE, 2002
The Plaintiff, Specht downloaded Defendant Netscape’s SmartDownload program and
Netscape Communicator which facilitated transmission of files online. Underneath the
“Download” button hidden was a link associated with the software, an arbitration clause
was included in the terms mandating arbitration in jurisdictions favorable to the
company. The program allowed Netscape to record any subsequent downloads leading
to violation of Federal Privacy laws of the users.
The District Court in favour of the Plaintiff held that the consumers would not assent to
contractual terms that are so inconspicuous.

BOLKIAH VS KPMG, 1999
The issue of adhesion contracts rose in the context of confidentiality clauses in
employment contracts. The Court observed that employers must not be excessively
restrictive. The case primarily revolved around employment law, however, it reflected
the broader principles applied to adhesion contracts.

UNITED INDIA INSURANCE CO. LTD VS LAXMIBAI, 2009
The Supreme Court dealt with the issue of adhesion contracts in insurance policies, the
claimant argued that the terms of the insurance contract were not explained properly
and were unfair. The Court ruled that the insurance company could not avoid liability
simply because the terms were not understood by the insured.
(Because not every Adhesion contract is
unconscionable)

L’ESTRANGE VS GRAUCOB LTD, 1934
Miss L’Estrange, the Plaintiff purchased a slot machine for cigarettes from Graucob, the
Defendant and signed a contract that stated that the warranty of the product was
excluded. The machine was faulty, the Plaintiff filed a suit for the same, the Defendant
was able to prove that there was no breach of the agreement by his end. Miss
L’Estrange responded that she failed to read the agreement properly. The legal principle
applied here is that the clauses of a written contract are binding on those who sign it,
even if they are unaware of the full content or neglect to read them.

FERRO ALLOYS CORPORATION LTD VS A.P. STATE ELECTRICITY BOARD, 1993
The Andhra Pradesh State Electricity board increased the security deposit amount for
consumers who consumed high-tension electricity to ensure prompt payment for
electricity supplied. The Plaintiff, Ferro Alloys Corporation filed a suit against Andhra
Pradesh State Electricity board stating that the surcharge was discriminatory and was
not reasonable. The judgement held that the Electricity board has the authority to
categorize consumers and implement different tariffs. The Court held that existence of
unequal bargaining powers does not render a contract unenforceable unless it is proven
to be unconscionable or against public policy.

Where Are Adhesion Contracts Used?

You usually encounter them when you are arranging for airline tickets, insurance policies,
mortgage loans, health care, or the purchase of an automobile.
Do Consumers Benefit From Adhesion Contracts?
Yes, generally speaking, because it standardizes contracts and makes transactions
faster and easier to conduct. If consumers had to read every contract for every
purchase they make or hire a lawyer to review them on their behalf, it's possible that far
fewer transactions would take place. Despite that, it's important to understand the terms
of any adhesion contract provided to you.

Conclusion:

The Courts are given a paramount importance to review adhesion contracts, however,
new laws should be introduced for the online sphere, now that it is AI driven. Although
adhesion contracts are efficient, allowing high transaction volumes it is necessary to
make these contracts just and fair with Government regulated terms that can bridge the
gap.

Avoiding fine prints and legal jargon in contract is crucial to eliminate people’s struggle.
Specifying the dispute resolution process in the contract should be mandatory.
The contract should be in compliance with the laws, regulations and policies of the
jurisdiction.

The non-drafting party should be provided with clear audio information about the terms
(fees, penalties, etc.) of the contract as usually the contract is left unread because it is
lengthy in nature. It would be virtuous if the audio is available in local language.
Consumer awareness is vital as informed consumers can protect themselves from
exploitation.

The money lending sector in India is an unorganized sector, it is crucial to regulate this
sector and borrowers should have financial literacy to avoid informal loans. Consumers
should strictly rely on organized entities like banks and NBFCs. Banks should increase
their reach to rural areas. Digital lending platforms should be regulated.

References

1. https://www.casemine.com/
2. https://indiankanoon.org/
3. https://www.moneycontrol.com/
4. https://legal.thomsonreuters.com/blog/contract-of-adhesion/