A standard form contract (sometimes referred to as an adhesion or boilerplate contract) is a contract between two parties where the terms and conditions of the contract are set by one of the parties, and the other party is placed in a "take it or leave it" position with little or no ability to negotiate terms more favorable to it.
Examples of standard form contracts are insurance policies (where the insurer decides what it will and will not insure, and the language of the contract) and contracts with government agencies (where certain clauses must be included by law or regulation).
While these types of contracts, in and of themselves, are not illegal per se, there exists a very real possibility for unconscionability.
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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 costs substantially by precluding the need for buyers and sellers of goods and services to negotiate the many 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.[1] 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:[2] [3]
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 consumer's ability to shop around.
As a general rule, the common law treats standard form contracts as 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 against the party that drafted the contract, as that party (and only that party) had the ability to draft the contract to remove ambiguity.
Standard form contracts are generally enforceable in the United States. The Uniform Commercial Code 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.
The concept of the contract of adhesion originated in French civil law, but did not enter American jurisprudence until the Harvard Law Review 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 endorsed adhesion analysis in 1962. See Steven v. Fidelity & Casualty Co., 58 Cal. 2d 862, 882 n.10 (1962) (explaining history of concept).[1]
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:
Courts in the United States have faced the issue of shrink wrap contracts in two ways. One line of cases follows ProCD v. Zeidenberg 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 consent, with the former holding that only objective manifestation of consent is required while the latter require at least the possibility of subjective consent.
In Canada, exclusion clauses 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).
Standard form contracts have generally received little special treatment under Australian common law. A 2003 New South Wales 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 1st January 2011, a new Consumer law has been enacted in Australia at the National level, and due to a Council of Governments Agreement (COAG) this legislation is now part of each jurisdiction's Fair Trading Laws (States and Territories of Australia). http://www.comlaw.gov.au/Details/C2011C00003 Download at http://www.comlaw.gov.au/Details/C2011C00003/Download (PDF or DOC or ZIP available) Also refer to each State and Territory Fair Trading Department's websites.
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. Victorian Fair Trading Act 1999).
Section 3 of the Unfair Contract Terms Act 1977 limits the ability of the drafter of consumer or standard form contracts to draft clauses which would allow him to perform in a substantially or totally different manner than would be reasonably expected.