Power Imbalance in the Courtroom: Litigating Adhesion Contracts

Aug 15, 2022
JP Diener Edmonds Lawyer

A contract of adhesion is one that is prepared by one party to the transaction and presented to the other on a take it or leave it basis.  These are most likely to arise in relationships between businesses and consumers (as opposed to relationships between two individuals or relationships between businesses).  Adhesion contracts are most common in motor vehicle purchases, insurance policies, mortgages, airline tickets, and a whole host of consumer service contracts such as with cable and internet providers.  These contracts are usually standard, boilerplate documents presented without any opportunity to negotiate the terms.

Adhesion contracts are attractive to most businesses because they prevent the cumbersome situation of having to keep track of numerous contracts for the same product or service that have a wide variation in terms.  When your company provides a product or service, it is much easier to know that you have the same terms governing every transaction, and it cuts down significantly on transaction costs and associated legal fees. 

The law recognizes the importance of adhesion contracts to businesses that are regularly engaging in numerous transactions of the same type, and therefore contracts of adhesion are not automatically invalidated by the courts.  In fact, adhesion contracts are presumed to be binding and enforceable absent a showing of procedural unconscionability.  That means the burden is on the party challenging the enforceability of the contract to show that it is manifestly unfair.

A party to an adhesion contract who wishes to challenge its validity must prove that there was a lack of meaningful choice and must further show that the contract was unreasonably one-sided in favor of the more powerful party.  But even where such unfairness can be proven, courts are unlikely to strike down the entire contract, and will instead sever, or strip out, the unconscionable provision(s), leaving the rest of the contract in place. Provisions in adhesion contracts that are often found to be manifestly unfair (a.k.a. procedurally unconscionable) are those which only award attorney fees to the powerful party, those limiting damages against the powerful party, and those that place more cost and burden on the party with lesser power (i.e. binding arbitration provisions that require out of pocket payment to initiate and maintain). 

As a company that desires and even needs to use adhesion contracts in your business, you can avoid litigation, or at least help assure your victory in litigation, if your contracts are carefully drafted to avoid unnecessarily one-sided provisions.  That means including provisions that apply mutually to each party and that do not place an unreasonable burden on the consumer. A well drafted adhesion contract that can be viewed as fair, rather than oppressive or opportunistic, will almost always hold up, and therefore will cut down on costly and time-consuming disputes.  They will also help build your public reputation, because no one wants to do business with someone they feel is untrustworthy or trying to take unfair advantage of their customers.  As is often said: every dollar spent on a carefully drafted contract will save five dollars (or more) in litigation costs.   

To learn more about adhesion contracts, please contact Beresford Booth at info@beresfordlaw.com or by phone at (425) 776-4100.