Austin TX Business Law Blog

Monday, July 31, 2023

Adhesion Contract Basics

Most of us have signed an adhesion contract even if we were not aware that what we were signing was an adhesion contract. These types of contracts have the terms drafted just by one party. The signee of the contract has no input on the contract terms. As such, courts will be reluctant to enforce an adhesion contract if certain precautions are not taken because of the great disparity in bargaining power of the two parties to the agreement. Sometimes referred to as “boilerplate contracts,” adhesion contracts, when properly executed, can be extremely helpful to businesses. Having a standard contract where the terms are not negotiated can save a ton of time, money, and headaches. It is important, however, that businesses are using such contracts judiciously or risk them being found invalid.

Adhesion Contract Basics

To be clear, adhesion contracts are legally enforceable agreements, but must be properly executed for this to hold true. As previously stated, courts will carefully scrutinize adhesion contracts as the bargaining powers of the two parties to the agreement are very uneven. To be enforceable, the terms of the contract must be fair. Unconscionable terms are also going to lead to an invalidation of an adhesion contract.

To determine whether the adhesion contract is enforceable, courts may employ the “reasonable expectation” test. An adhesion contract is likely to hold up against this test if it is found to be reasonable. Reasonableness of the contract will depend on factors such as:

  • The prominence of contract terms
  • The clarity of contract terms
  • The circumstances around which the contract was accepted
  • The benefits the contract grants to the signee
  • The obligations the contract imposes on the signee

There are a number of benefits that businesses can gain by using adhesion contracts and that is why they commonly appear as things like terms and conditions, lease agreements, and rental agreements, as well as insurance documents and more. Having standard, form contracts means economic efficiency for a business. The avoidance of needing to customize the agreement to different signees means saved time, effort, and easier contract management.

Additionally, considering there is no negotiating of the terms, there are fewer transaction costs associated with adhesion contracts. There is no back and forth negotiating or bargaining. The establishment and management of the terms is all on one side. All of this means that adhesion contracts can cost much less and just be much more convenient than alternatives. Additionally, it is much easier and more streamlined to have all those who are party to these adhesion contracts be subject to the same terms. There is no need to deep dive into specifics and intricacies that may be unique to one agreement and not the other.

Business Law Attorney

Adhesion contracts can be a valuable tool for a business to utilize, but they must be done the right way. Let the team at The Kumar Law Firm help you with this. Contact us today.

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