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The Enforceability of Adhesion Contracts

See Also:

Contracts of Adhesion


Whether we realize it or not, we’ve agreed to hundreds of contracts of adhesion over our lifetimes.[1] When you downloaded the latest operating system for your smartphone, you agreed to an adhesion contract. Other examples of adhesion contracts include residential mortgages, insurance policies, credit card agreements, and automobile purchase and rental agreements.[2]

Adhesion contracts share the following characteristics:[3]

·         They are based on standard printed forms and boilerplate language;

·         They are used to supply mass demands for goods and services; and

·         They are drafted for an indefinite number of people instead of a single person.

Adhesion contracts are drafted by one party and signed by another party rather than undergoing a negotiated drafting process.[4] Adhesion contracts’ central features are standardized forms and non-negotiability.[5] The party signing the contract cannot modify or negotiate over the contract’s terms because the contract’s drafters are offering the contract’s terms on a non-negotiable “take-it-or-leave-it” basis.[6]

            Adhesion contracts are prevalent because they are practical and efficient, help facilitate trade, and streamline business and commercial transactions. The transaction costs of transacting routine business like renting a car or hotel room would be extremely high if parties had to negotiate over every detail in the contract. Adhesion contracts are streamlined, predictable, provide uniformity, and cut down on negotiations that can draw out the time and cost of drafting contracts. 

These contracts, however, also come with several drawbacks, the most important being the lack of bargaining parity between the two parties to the adhesion contract. The party signing the contract gives up the bargaining power that she typically has under the traditional model of contract formation.[7]

The general rule is that an adhesion contract is valid and fully enforceable, unless it’s unconscionable to the party that’s signing it.[8] Unconscionability, though an elusive term that is often hard to define,[9] can be determined by reference to the following factors:[10]

·         extreme inequality of bargaining or economic power between the drafter and signer;

·         contract phrasing or language that a non-lawyer signer would not understand;

·         exploitation of the underprivileged, unsophisticated, uneducated and the illiterate;

·         imbalance in the obligations imposed by the contract; or

·         contract provisions that are inconsistent with the signing party’s reasonable expectations.[11]

Courts will look to these factors to determine whether the contract is so unfair that its enforcement would be against public policy.

The 2016 Delaware case, James v. National Financial, LLC, is a case study in unconscionability of an adhesion contract. Here, the plaintiff, Gloria James, was a part-time housekeeper at a local hotel. She had dropped out of high school and had neither a savings account nor a checking account.[12] To make ends meet she signed an agreement for a $200 consumer loan that was a standardized, boilerplate agreement that was provided to her on a take-it-or-leave-it basis. It was clearly an adhesion contract.

The contract’s terms called for James to make twenty-six, bi-weekly, interest-only payments of $60, followed by a twenty-seventh payment comprised of $60 in interest plus the original principal of $200. The contract required her to pay $30 per week in interest, the total payments adding up to $1,820. The annual interest rate came out to a whopping 838.45%. 

A day after obtaining the loan, she broke her hand while working.[13] As a result, she could no longer work, could not repay her loan, and had to default. When James and National Financial couldn’t reach a settlement, she filed a lawsuit to rescind the loan.

The court agreed with James and held that the loan agreement, a standard adhesion contract, could not be enforced because it was fundamentally unfair. The facts demonstrated unconscionability. First, there was an inequality of bargaining power because the loan company and the plaintiff didn’t negotiate over the loan’s terms: it was a standardized, boilerplate contract. Second, the Loan Agreement could not be easily understood by a non-lawyer because while it was only six-pages long, the first five pages had substantive, financial terms that required a level of sophistication not possessed by the plaintiff who didn’t have a high school education. Finally, the obligations had an overall imbalance because of the 838% annual percentage rate, a level of pricing that the court wrote “shocks the conscience.”

The James case crystalizes the controversy over “payday loans,” which are short term loans at high interest rates meant to tide people over from paycheck to paycheck. Because the loans are small and short term, they are only viable business enterprises to the lenders if they contain high origination fees and/or interest rates. There is a political movement to restrict these loans on the grounds that they take advantage of low income people,[14] but for now, they remain very much a part of the American financial system.

The conclusion reached in James contrasts with the 1991 Supreme Court of the United States case, Gilmer v. Interstate/Johnson Lane Corp. The latter case reinforces the notion that it is rare for a court to find that an adhesion contract is unconscionable. There, the petitioner claimed that Interstate fired him from his job because of his age when it terminated his employment contract at age 62. Instead of going to arbitration to resolve this dispute as was stipulated in his employment contract, Gilmer wanted to go to court to make his age discrimination claims and resolve the dispute.

The Court disagreed with Gilmer and classified Gilmer’s claim of unconscionability as a “generalized attack” that would not withstand judicial scrutiny. To invalidate a clause in the adhesion contract, there must be evidence of actual coercion or fundamental unfairness, which did not exist in this case. There may have been “unequal” bargaining power between him and his employer when he signed his employment contract, but the clause requiring arbitration whenever a dispute arose was not unconscionable.

When initially reviewing an adhesion contract, one can be left wondering, ‘What benefits does this agreement provide? Why would I ever sign one?’ Though they are viewed with skepticism and the costs of one can be great, such a contract isn’t always so disadvantageous. Moreover, courts understand that in some cases, there must be “judicial meddling” with the contract[15] to protect the weaker party. As such, courts are willing to intervene and strike down portions of, or even invalidate the entire adhesion contract should there be overwhelming evidence that an adhesion contract is unconscionable.  


[2] Shroyer v. New Cingular Wireless Servs., 498 F.3d 976, (2007).

[3] Robert Effros, Current Legal Issues Affecting Central Banks (1998).

[5] Andrew Schwartz, “Consumer Contract Exchanges and the Problem of Adhesion,” 28 Yale J. on Reg. 313, (2011).

[6] Wheeler v. St. Joseph Hospital, 133 Cal. Rptr. 775, (Cal. Ct. App. 1976).

[7] W. David Slawson, “Standard Form Contracts and Democratic Control of Lawmaking Power,”

84 Harv. L Rev. 529, (1971).

[8] Monsanto Co. v. McFarling, 302 F.3d 1291, (Fed. Cir. 2002).

[9] E. Allan Farnsworth, Farnsworth on Contracts 7.1 (3d ed. 2004).

[10] Fritz v. Nationwide Mut. Ins. Co., (1990 Del. Ch.).

[11] Graham v. Scissor-Tail, Inc., 623 P.2d 165, (Cal. 1981).

[12] James v. Nat'l Fin., LLC, 132 A.3d 799, (2016 Del. Ch.)

[13] Id.

[15] Arthur Leff, “Unconscionability and the Code-The Emperor’s New Clause,” 115 U. Pa. L. Rev. 485, (1967).