A standard form contract (sometimes referred to as a ''contract of adhesion,'' a ''leonine contract'', a ''take-it-or-leave-it contract'', or a ''
boilerplate contract'') is a
contract
A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tran ...
between two parties, where the terms and conditions of the contract are set by one of the parties, and the other party has little or no ability to negotiate more favorable terms and is thus placed in a "take it or leave it" position.
While these types of contracts are not illegal ''per se'', there exists a potential for
unconscionability
Unconscionability (sometimes known as unconscionable dealing/conduct in Australia) is a doctrine in contract law that describes terms that are so extremely unjust, or overwhelmingly one-sided in favor of the party who has the superior bargaining ...
. In addition, in the event of an ambiguity, such ambiguity will be resolved ''
contra proferentem
''Contra proferentem'' (Latin: "against heofferor"), also known as "interpretation against the draftsman", is a doctrine of contractual interpretation providing that, where a promise, agreement or term is ambiguous, the preferred meaning shou ...
'', i.e. against the party drafting the contract language.
Theoretical issues
There is much debate on a theoretical level whether, and to what extent, courts should enforce standard form contracts.
On one hand, they undeniably fulfill an important role of promoting economic efficiency. Standard form contracting reduces
transaction cost
In economics and related disciplines, a transaction cost is a cost in making any economic trade when participating in a market. Oliver E. Williamson defines transaction costs as the costs of running an economic system of companies, and unlike produ ...
s substantially by avoiding the need for buyers and sellers of goods and services to negotiate the details of a sale contract each time the product is sold.
On the other hand, there is the potential for inefficient, and even unjust, terms to be accepted by signatories to these contracts. Such terms might be seen as unjust if they allow the seller to avoid all liability or unilaterally modify terms or terminate the contract. These terms often come in the form of, but are not limited to, forum selection clauses and mandatory arbitration clauses, which can limit or foreclose a party's access to the courts; and also liquidated damages clauses, which set a limit to the amount that can be recovered or require a party to pay a specific amount. They might be inefficient if they place the risk of a negative outcome, such as defective manufacturing, on the buyer who is not in the best position to take precautions.
There are a number of reasons why such terms might be accepted:
;Standard form contracts are rarely read:Lengthy
boilerplate terms are often in
fine print
Fine print, small print, or mouseprint is less noticeable print smaller than the more obvious larger print it accompanies that advertises or otherwise describes or partially describes a commercial product or service. The larger print that is us ...
and written in complicated legal language which often seems irrelevant. The prospect of a buyer finding any useful information from reading such terms is correspondingly low. Even if such information is discovered, the consumer is in no position to bargain as the contract is presented on a “take it or leave it” basis. Coupled with the often large amount of time needed to read the terms, the expected payoff from reading the contract is low and few people would be expected to read it.
;Access to the full terms may be difficult or impossible before acceptance: Often the document being signed is not the full contract; the purchaser is told that the rest of the terms are in another location. This reduces the likelihood of the terms being read and in some situations, such as
software license agreement
An end-user license agreement or EULA () is a legal contract between a software supplier and a customer or end-user, generally made available to the customer via a retailer acting as an intermediary. A EULA specifies in detail the rights and restr ...
s, can only be read after they have been notionally accepted by purchasing the good and opening the box. These contracts are typically not enforced, since common law dictates that ''all'' terms of a contract must be disclosed ''before'' the contract is executed.
;Boilerplate terms are not salient: The most important terms to purchasers of a good are generally the price and the quality, which are generally understood before the contract of adhesion is signed. Terms relating to events which have very small probabilities of occurring or which refer to particular statutes or legal rules do not seem important to the purchaser. This further lowers the chance of such terms being read and also means they are likely to be ignored even if they are read.
;There may be social pressure to sign: Standard form contracts are signed at a point when the main details of the transaction have either been negotiated or explained. Social pressure to conclude the bargain at that point may come from a number of sources. The salesperson may imply that the purchaser is being unreasonable if they read or question the terms, saying that they are "just something the lawyers want us to do" or that they are wasting their time reading them. If the purchaser is at the front of a queue (for example at an airport car rental desk) there is additional pressure to sign quickly. Finally, if there has been negotiation over price or particular details, then concessions given by the salesperson may be seen as a
gift
A gift or a present is an item given to someone without the expectation of payment or anything in return. An item is not a gift if that item is already owned by the one to whom it is given. Although gift-giving might involve an expectation ...
which socially obliges the purchaser to respond by being co-operative and concluding the transaction.
;Standard form contracts may exploit unequal power relations: If the good which is being sold using a contract of adhesion is one which is essential or very important for the purchaser to buy (such as a rental property or a needed medical item) then the purchaser might feel they have no choice but to accept the terms. This problem may be mitigated if there are many suppliers of the good who can potentially offer different terms (see below), although even this is not always possible (for instance, a college freshman may be required to sign a standard-form dormitory rental agreement and accept its terms, because the college will not allow a freshman to live off-campus).
Some contend that in a competitive market, consumers have the ability to shop around for the supplier who offers them the most favorable terms and are consequently able to avoid injustice. However, in the case of credit cards (and other oligopolies), for example, the consumer while having the ability to shop around may still have access to only form contracts with like terms and no opportunity for negotiation. Also, as noted, many people do not read or understand the terms so there might be very little incentive for a firm to offer favorable conditions as they would gain only a small amount of business from doing so. Even if this is the case, it is argued by some that only a small percentage of buyers need to actively read standard form contracts for it to be worthwhile for firms to offer better terms if that group is able to influence a larger number of people by affecting the firm's reputation.
Another factor which might mitigate the effects of competition on the content of contracts of adhesion is that, in practice, standard form contracts are usually drafted by lawyers instructed to construct them so as to minimize the firm's liability, not necessarily to implement managers' competitive decisions. Sometimes the contracts are written by an industry body and distributed to firms in that industry, increasing homogeneity of the contracts and reducing consumers' ability to shop around.
Common law status
As a general rule, the common law treats standard form contracts like any other contract. Signature or some other objective manifestation of intent to be legally bound will bind the signor to the contract whether or not they read or understood the terms. The reality of standard form contracting, however, means that many common law jurisdictions have developed special rules with respect to them. In general, in the event of an ambiguity, the courts will interpret standard form contracts ''
contra proferentem
''Contra proferentem'' (Latin: "against heofferor"), also known as "interpretation against the draftsman", is a doctrine of contractual interpretation providing that, where a promise, agreement or term is ambiguous, the preferred meaning shou ...
'' (against the party that drafted the contract), as that party (and only that party) had the ability to draft the contract to remove ambiguity.
United States
Generally
Standard form contracts are generally enforceable in the United States. The
Uniform Commercial Code
The Uniform Commercial Code (UCC), first published in 1952, is one of a number of Uniform Acts that have been established as law with the goal of harmonizing the laws of sales and other commercial transactions across the United States through UC ...
which is followed in most
American states has specific provisions relating to standard form contracts for the sale or lease of goods. Furthermore, standard form contracts will be subject to special scrutiny if they are found to be contracts of adhesion.
Contracts of adhesion
The concept of the contract of adhesion originated in French civil law, but did not enter American jurisprudence until the ''
Harvard Law Review
The ''Harvard Law Review'' is a law review published by an independent student group at Harvard Law School. According to the ''Journal Citation Reports'', the ''Harvard Law Review''s 2015 impact factor of 4.979 placed the journal first out of 143 ...
'' published an influential article by Edwin W. Patterson in 1919. It was subsequently adopted by the majority of American courts, especially after the
Supreme Court of California
The Supreme Court of California is the highest and final court of appeals in the courts of the U.S. state of California. It is headquartered in San Francisco at the Earl Warren Building, but it regularly holds sessions in Los Angeles and Sacra ...
endorsed adhesion analysis in 1962. ''See'' ''Steven v. Fidelity & Casualty Co.'', 58 Cal. 2d 862, 882 n.10 (1962) (explaining the history of the concept).
For a contract to be treated as a contract of adhesion, it must be presented on a standard form on a "take it or leave it" basis, and give one party no ability to negotiate because of their unequal bargaining position. The special scrutiny given to contracts of adhesion can be performed in a number of ways:
*If the term was outside of the reasonable expectations of the person who did not write the contract, and if the parties were contracting on an unequal basis, then it will not be enforceable. The reasonable expectation is assessed objectively, looking at the prominence of the term, the purpose of the term and the circumstances surrounding acceptance of the contract.
*Section 211 of the
American Law Institute
The American Law Institute (ALI) is a research and advocacy group of judges, lawyers, and legal scholars established in 1923 to promote the clarification and simplification of United States common law and its adaptation to changing social needs. ...
's
Restatement (Second) of Contracts
The Restatement (Second) of the Law of Contracts is a legal treatise from the second series of the Restatements of the Law, and seeks to inform judges and lawyers about general principles of contract common law. It is one of the best-recognized and ...
, which has persuasive though non-binding force in courts, provides:This is a subjective test focusing on the mind of the seller and has been adopted by only a few state courts.
*The doctrine of
unconscionability
Unconscionability (sometimes known as unconscionable dealing/conduct in Australia) is a doctrine in contract law that describes terms that are so extremely unjust, or overwhelmingly one-sided in favor of the party who has the superior bargaining ...
is a fact-specific doctrine arising from
equitable principles. Unconscionability in standard form contracts usually arises where there is an "absence of meaningful choice on the part of one party due to one-sided contract provisions, together with terms which are so oppressive that no reasonable person would make them and no fair and honest person would accept them." (''Fanning v. Fritz's Pontiac-Cadillac-Buick Inc.'')
Shrink wrap contracts
Courts in the United States have faced the issue of
shrink wrap contract
Shrinkwrap contracts or shrinkwrap licenses are boilerplate contracts packaged with products; usage of the product is deemed acceptance of the contract.
Web-wrap, click-wrap and browse-wrap are related terms which refer to license agreements in ...
s in two ways. One line of cases follows ''
ProCD v. Zeidenberg
''ProCD, Inc. v. Zeidenberg'', 86 F.3d 1447 (7th Cir., 1996), was a court ruling at the United States Court of Appeals for the Seventh Circuit. The case is a significant precedent on the matter of the applicability of American contract law to new ...
'' which held such contracts enforceable (e.g.
Brower v Gateway'), and the other follows Klocek v. Gateway, Inc, which found them unenforceable. These decisions are split on the question of assent, with the former holding that only objective manifestation of assent is required while the latter require at least the possibility of subjective assent.
Canada
In Canada,
exclusion clause
An exclusion clause is a term in a contract that seeks to restrict the rights of the parties to the contract.
Traditionally, the district courts have sought to limit the operation of exclusion clauses. In addition to numerous common law rules limi ...
s in a standard form contract cannot be relied on where a seller knows or has reason to know a purchaser is mistaken as to its terms (''
Tilden Rent-A-Car Co. v. Clendenning'').
Australia
Standard form contracts have generally received little special treatment under Australian common law. A 2003
New South Wales
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, es ...
Court of Appeal case (''Toll (FGCT) Pty Limited v Alphapharm Pty Limited'') gave some support for the position that notice of exceptional terms is required for them to be incorporated. However the defendant successfully appealed to the
High Court so currently there is no special treatment of standard form contracts in Australia.
Since 1 January 2011, the
Australian Consumer Law
The Australian Consumer Laws (ACL), beinto the ''Competition and Consumer Act 2010'', is uniform legislation for consumer protection, applying as a law of the Commonwealth of Australia and is incorporated into the law of each of Australia's stat ...
has been enacted in Australia at the national level, and due to a
Council of Australian Governments
The Council of Australian Governments (COAG) was the primary intergovernmental forum in Australia from 1992 to 2020. Comprising the federal government, the governments of the six states and two mainland territories and the Australian Local Go ...
(COAG) agreement this legislation is now part of each jurisdiction's (state's or territory's) Fair Trading laws.
India
In India leonine contracts are generally deemed unconscionable contracts (though not all leonine contracts are unconscionable contracts) and are voidable. Th
199th Law Commission report (2006) on "UNFAIR (PROCEDURAL & SUBSTANTIVE) TERMS IN CONTRACT"deals with it. The unfairness can be procedural or substantive. However, standard form contracts are ubiquitous in India and especially in the digital age, standard form contracts are used much more frequently than any other form. They can be legally valid if reasonable notice has been given and if the terms are not unreasonable. Unfair terms in non-negotiated agreements are often held void.
Legislation
In recognition of the consumer protection issues which may arise, many governments have passed specific laws relating to standard form contracts. These are generally enacted on a state level as part of general consumer protection legislation and typically allow consumers to avoid clauses which are found to be unreasonable, though the specific provisions vary greatly. Some laws require notice to be given for these clauses to be effective, others prohibit unfair clauses altogether (e.g
.
United Kingdom
Section 3 of the
Unfair Contract Terms Act 1977
The Unfair Contract Terms Act 1977c 50 is an Act of Parliament of the United Kingdom which regulates contracts by restricting the operation and legality of some contract terms. It extends to nearly all forms of contract and one of its most impor ...
limits the ability of the drafter of consumer or standard form contracts to draft clauses which would allow him to exclude liability in what is termed an exclusion clause – the act does not per se render ineffective provisions in other areas which to the layman appear "unfair". Where a contract is negotiated the provisions of the act likely would not apply – the law protects from a lot of things but openly making a bad bargain is not one of them.
Israel
The Standard Form Contract Act 1982 defines a set of depriving conditions that may be canceled by a court of law, including unreasonable exclusion or limitation of liability, unreasonable privileges to unilaterally cancel, suspend or postpone the execution of the contract and to change any fundamental charges or pricing, transfer of liability for the execution of the contract to a third party, unreasonable obligation to use the services of a third party or to limit, in any way, the choice of contracting third parties, denial of legal remedy, unreasonable limitations on contractual remedies or setting unreasonable conditions for the consummation of the remedy, denying or limiting the right for legal procedures, exclusive rights to decide on the location of the trial or arbitration, obligatory arbitration with unilaterally control over the arbitrators or the location of the arbitration and setting the holder of the burden of proof contrary to common law. The act also establishes a Standard Form Contract Court, chaired by a district judge and consists of a maximum of 12 members, appointed by the justice minister, including an acting chairman (also a district judge), civil servants (no more than a third) and, at least, 2 consumer organization representatives. The court holds hearings regarding appeals against standard form contract clauses or approval of a specific standard form contract at the requests of a provider.
Lithuania
Standard conditions in Lithuania shall be such provisions which are prepared in advance for general and repeated use by one contracting party without their content being negotiated with another party, and which are used in the formation of contracts without negotiation with the other party. Standard conditions prepared by one of the parties shall be binding to the other if the latter was provided with an adequate opportunity of getting acquainted with the said conditions (Article 6.185. Standard conditions of contracts,
Lithuanian Civil Code
Civil Code of the Republic of Lithuania () is the Civil Code of Lithuania. It came into effect on 1 July 2001,Tinkoff Bank
Tinkoff Bank (russian: Тинькофф банк), formerly Tinkoff Credit Systems (russian: Тинькофф Кредитные Системы) is a Russian commercial bank based in Moscow and founded by Oleg Tinkov in 2006. The bank does no ...
after he altered the standard form contract he had received in the mail. The bank, failing to notice the changes, accepted the application and gave him an account based on the amended contract. The judge ruled that the bank was legally bound to the contract it had signed. Agarkov is further suing the bank for failing to comply with the terms he had added to the contract, which it had unwittingly agreed to by signing the contract. Agarkov's lawyer, Dmitry Mihalevich said – "They signed the documents without looking. They said what usually their borrowers say in court: 'We have not read it'."
Russian Man Who Got Bank to Sign Homemade Credit Card Contract Now Suing Them for Not Following Terms
, ''Yahoo News
Yahoo! News is a news website that originated as an internet-based news aggregator by Yahoo!. The site was created by a Yahoo! software engineer named Brad Clawsie in August 1996. Articles originally came from news services such as the Associate ...
'', 8 Aug 2013. Retrieved 9 Aug 2013.
See also
*Electronic Signatures in Global and National Commerce Act
The Electronic Signatures in Global and National Commerce Act (ESIGN, , ) is a United States federal law passed by the U.S. Congress to facilitate the use of electronic records and electronic signatures in interstate and foreign commerce by ensur ...
(ESIGN, USA)
*Hobson's choice
A Hobson's choice is a free choice in which only one thing is actually offered. The term is often used to describe an illusion that multiple choices are available. The most well known Hobson's choice is "I'll give you a choice: take it or leave ...
*Non est factum
(Latin for "it is not ydeed") is a defence in contract law that allows a signing party to escape performance of an agreement "which is fundamentally different from what he or she intended to execute or sign". A claim of means that the signatur ...
* Terms of service
Notes
References
External links
Joint Contracts Tribunal for United Kingdom Building Industry
CLAB Data Base
of the European Commission
{{DEFAULTSORT:Standard Form Contract
Contract law
Terms of service