This article is written by Ananya Saren, Surendranath Law College, Calcutta University, 4th year BALL.B student during an internship at LeDroit India.
KEYWORDS
- Adhesion contracts
- Take-it-or-leave-it agreements
- Undue influence
- Unequal bargaining power
- Standardization
- Unconscionability
- Contra proferentem rule
INTRODUCTION
Adhesion contracts, also known as “take-it-or-leave-it” agreements, are common in today’s legal and business world. These contracts are often used in situations where one party has much more power than the other, leaving little room for negotiation. The stronger party writes the terms, and the weaker party must either accept them as they are or not enter into the agreement at all. Adhesion contracts are frequently used in industries like insurance, employment, and online services. However, these contracts raise concerns about fairness and whether both parties truly have the freedom to make decisions.
WHAT IS AN ADHESION CONTRACT?
An adhesion contract is a standardized agreement where one party, usually with more money or legal power, sets the terms. The other party, often a consumer or employee, has no choice but to either accept the terms or walk away from the deal. In these contracts, the stronger party benefits from having control over the pre-drafted terms. Although adhesion contracts are not illegal by themselves, they often raise questions about whether they are fair or enforceable, especially under Indian law.
LEGAL PROVISIONS: ADHESION CONTRACTS UNDER INDIAN CONTRACT ACT, 1872
The Indian Contract Act of 1872 does not specifically define adhesion contracts, but certain sections help us understand how they are treated in Indian law:
- Section 16 – Undue Influence
This section deals with situations where one party uses its dominant position to unfairly influence the other party’s decision. In adhesion contracts, if the stronger party puts undue pressure on the weaker party, the contract can be made voidable. This means the weaker party can choose to cancel the agreement. Section 16 is important when the terms are clearly in favor of the party that wrote the contract.
- Section 23 – Lawful Consideration and Object
According to Section 23, a contract is void if its purpose or the benefits exchanged (called “consideration”) are illegal, immoral, or against public policy. If the terms of an adhesion contract are unfair or unreasonable, they can be challenged under this section. For example, if the contract terms harm the public or are oppressive, they may be invalid.
In LIC of India v. Consumer Research Center (1995), the court held that unreasonable terms in adhesion contracts, such as one-sided clauses, could be struck down as being against public policy under Section 23. This case highlighted that contracts must be fair and just to be enforceable.
CHARACTERISTICS OF ADHESION CONTRACTS
Adhesion contracts, also known as “take-it-or-leave-it” agreements, have a few important features that set them apart from other types of contracts:
- Non-Negotiable Terms
One main feature of an adhesion contract is that the terms cannot be negotiated. The party with more power (usually a business or service provider) writes the contract in advance, and the other party (usually a customer or employee) has no option to change the terms. This creates an unequal situation because the stronger party controls all the terms, while the weaker party can either accept the contract as-is or walk away. This lack of negotiation often leads to terms that favor the stronger party.
Example: In industries like insurance or cell phone services, companies use pre-written contracts that customers have to accept without changes if they want the service. These contracts may include terms that are unfair, like harsh penalties for canceling the contract, but customers have no choice if they need the service.
- Standardization
Adhesioncontracts are often used in industries where companies handle many similar transactions, such as banking, insurance, or real estate. Writing separate contracts for every transaction would be too expensive and time-consuming, so companies create standardized contracts instead. These contracts are the same for everyone, making the process easier for businesses. However, this also means that the terms might not always be fair or tailored to the individual consumer’s needs.
Example: In the banking industry, loan agreements are often standardized, meaning all borrowers get the same terms. Borrowers have little power to negotiate things like interest rates or payment schedules.
- Unequal Bargaining Power
Adhesion contracts usually involve a big difference in bargaining power between the two sides. The stronger party (often a corporation) creates the contract, while the weaker party (a consumer or employee) cannot negotiate any changes. This imbalance is especially common when the service or product is something essential, like healthcare, housing, or a job. The weaker party might feel forced to accept bad terms because they need what is being offered.
Example: Rental agreements for housing often reflect adhesion contracts. Tenants who need a place to live may have no choice but to accept whatever terms the landlord offers, even if those terms are unfair, such as limited responsibility for repairs or high rent increases.
EXAMPLES OF ADHESION CONTRACTS IN INDIAN JURISPRUDENCE
- Insurance Contracts
Insurance contracts are a typical example of adhesion contracts. In these cases, the insurance company sets all the terms, and the policyholder (the person buying the insurance) has little or no ability to negotiate. Insurance contracts often include specific conditions that limit the insurer’s liability or create certain obligations for the policyholder before they can receive any benefits. Since the insurance company has more bargaining power, the policyholder usually has no option but to accept the contract as it is.
- Employment Contracts
Adhesion contracts are also common in employment agreements, especially for lower-level jobs. In such cases, the employer sets all the terms, and the employee must accept these conditions to secure the job. There is usually little or no room for the employee to negotiate key aspects such as salary, working hours, or termination clauses. This creates an unfair situation where the employer can impose terms that may not benefit the employee.
An important Indian case related to this is Central Inland Water Transport Corporation Ltd. V. Brojo Nath Ganguly (1986). In this case, the Supreme Court struck down certain clauses in an employment contract that allowed the employer to terminate an employee without a valid reason. The court ruled that these clauses were unfair and against public policy because the employee had no choice but to accept them, given the unequal bargaining power between the employer and employee.
- Website Terms and Conditions (Clickwrap Agreements)
Adhesion contracts are also widely used in the digital world, particularly in the form of “clickwrap” or “browsewrap” agreements. These agreements appear when users want to access a website or service, and they must click “I Agree” to continue. The terms of these agreements are non-negotiable, meaning users cannot modify or discuss them. Most users do not read these agreements but must accept them if they want to use the service.
For example, when users download software or sign up for subscription services like streaming platforms, they must accept adhesion contracts through clickwrap agreements, without having any say in changing the terms.
JUDICIAL INTERPRETATION AND SCRUTINY
Indian courts have developed certain principles to ensure fairness in adhesion contracts. Two important legal doctrines applied by the courts are the doctrine of unconscionability and the contra proferentem rule.
- Unconscionability: This doctrine is applied when a contract or its terms are so unfair or one-sided that they shock the conscience of the court. In such cases, courts can declare the entire contract or specific terms within it as void. Indian courts use this doctrine more frequently to protect parties with less bargaining power from unfair contract terms. When deciding whether a contract is unconscionable, courts look at factors like the balance of power between the parties and whether the terms are reasonable.
In Delhi Transport Corporation v. D.T.C. Mazdoor Congress (1991), the Supreme Court ruled that if a contract contains unreasonable or unconscionable terms, those terms can be struck down.
- Contra Proferentem: This rule states that if there is any ambiguity in a contract, the unclear terms should be interpreted against the party who drafted the contract. In the case of adhesion contracts, this principle is often used to favor the weaker party—usually the one who did not have any role in drafting the contract. This rule ensures that the stronger party (the one who wrote the contract) cannot benefit from any unclear terms in the agreement.
In the case of Usha International Ltd. V. United India Assurance Co. Ltd. (2012), the Delhi High Court ruled that if an insurance contract (which is a type of adhesion contract) contains any unclear language, the ambiguity should be interpreted in favor of the insured party.
CHALLENGES AND CRITICISM
Adhesion contracts are often criticized because they can limit the rights and bargaining power of the weaker party. While these contracts are efficient for large-scale transactions, they can also create significant disadvantages for individuals or smaller parties.
- Lack of Negotiation
One of the biggest criticisms of adhesion contracts is that they prevent the weaker party from negotiating better terms. In traditional contracts, both parties can discuss and agree on terms that benefit each side. However, in adhesion contracts, the stronger party prepares the contract in advance, giving the weaker party no opportunity to negotiate. This goes against the principle of “free consent,” which is essential for forming a valid contract under the Indian Contract Act, 1872.
A famous case that addresses this issue is Central Inland Water Transport Corporation Ltd. V. Brojo Nath Ganguly (1986). In this case, the Indian Supreme Court ruled that clauses preventing employees from challenging unfair dismissals were unjust and against public policy.
- Unfair Terms
Adhesion contracts often include terms that are one-sided and unfair to the weaker party. These terms may limit the stronger party’s liability, force the weaker party into mandatory arbitration, or limit their legal remedies. Often, the weaker party is not fully aware of these terms until a problem arises, and by then, they have little choice but to accept the contract as it is. The unfairness is worsened by the fact that the weaker party may not have the option to reject the contract, especially when the service or product is essential.
For example, some employment contracts contain arbitration clauses that force employees to settle disputes outside of court. This can prevent employees from seeking fair resolutions through legal means.
- Judicial Enforcement
Although courts have the authority to cancel or modify unfair adhesion contracts, they may sometimes uphold these contracts for the sake of business efficiency. In some cases, courts might decide that adhesion contracts are necessary for industries like banking, insurance, or telecommunications, which depend on standardized agreements. As a result, courts might enforce these contracts even if they are harsh for the weaker party.
For instance, when banks impose strict terms on borrowers, courts might hesitate to interfere if those terms are seen as crucial for the smooth operation of the banking system, even if they negatively affect the borrower.
INTERNATIONAL PERSPECTIVE
Adhesion contracts are not just an issue in India; similar problems arise in other countries. In the United States, courts use the “doctrine of reasonable expectations” to decide if a consumer could have reasonably understood the contract terms. In France, adhesion contracts have been shaped by civil law principles, and over time, both countries have developed legal protections to guard consumers against unfair contract terms.
CONCLUSION
Adhesion contracts are a common part of modern business, especially in industries that need standardized agreements for efficiency. These contracts are not illegal by themselves, but courts carefully review them to make sure they are fair and don’t take advantage of the weaker party. The Indian Contract Act, 1872, includes important sections like Section 16 (which deals with undue influence) and Section 23 (which relates to public policy) that help protect against unfair terms in adhesion contracts. However, it is mainly the courts that interpret these laws to safeguard the rights of the weaker parties and prevent the enforcement of unfair terms. In the future, it will be important for both the law and how it is applied by the courts to keep evolving, ensuring that adhesion contracts can be used for their intended purpose without harming consumers or employees.
REFERENCES
- LIC of India v. Consumer Research Center (1995)
- Central Inland Water Transport Corporation Ltd. V. Brojo Nath Ganguly (1986)
- Delhi Transport Corporation v. D.T.C. Mazdoor Congress (1991)
- Usha International Ltd. V. United India Assurance Co. Ltd. (2012)
