Standard form contract
Encyclopedia
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
.
s 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.http://www.austlii.edu.au/au/legis/vic/consol_act/fta1999117/s32x.html 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:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=287819 http://ssrn.com/abstract=1105424
Standard form contracts are rarely read: Lengthy boilerplate terms are often in fine print
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. Sometimes a standard form contract may literally be dispensed from a vending machine to drivers sitting in line to enter a parking garage, which means that stopping to read the contract risks provoking road rage
.
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
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
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).
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.
against the party that drafted the contract, as that party (and only that party) had the ability to draft the contract to remove ambiguity.
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).
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:
s 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.
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
).
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.
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.
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
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
Unconscionability
Unconscionability is a term used in contract law to describe a defense against the enforcement of a contract based on the presence of terms that are excessively unfair to one party...
.
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 costTransaction cost
In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange . For example, most people, when buying or selling a stock, must pay a commission to their broker; that commission is a transaction cost of doing the stock deal...
s 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.http://www.austlii.edu.au/au/legis/vic/consol_act/fta1999117/s32x.html 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:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=287819 http://ssrn.com/abstract=1105424
Standard form contracts are rarely read: Lengthy boilerplate terms are often in fine print
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...
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. Sometimes a standard form contract may literally be dispensed from a vending machine to drivers sitting in line to enter a parking garage, which means that stopping to read the contract risks provoking road rage
Road rage
Road rage is an aggressive or angry behavior by a driver of an automobile or other motor vehicle. Such behavior might include rude gestures, verbal insults, deliberately driving in an unsafe or threatening manner, or making threats. Road rage can lead to altercations, assaults, and collisions...
.
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
Software license agreement
A software license agreement is a contract between the "licensor" and purchaser of the right to use software. The license may define ways under which the copy can be used, in addition to the automatic rights of the buyer including the first sale doctrine and .Many form contracts are only contained...
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
Gift
A gift or a present is the transfer of something without the expectation of receiving something in return. Although gift-giving might involve an expectation of reciprocity, a gift is meant to be free. In many human societies, the act of mutually exchanging money, goods, etc. may contribute to...
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).
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.
Common law status
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 proferentemContra proferentem
Contra proferentem is a doctrine of contractual interpretation which provides that an ambiguous term will be construed against the party that imposed its inclusion in the contract or, more accurately, against the party who imposed it. The interpretation will therefore favor the party that did not...
against the party that drafted the contract, as that party (and only that party) had the ability to draft the contract to remove ambiguity.
Generally
Standard form contracts are generally enforceable in the United States. The Uniform Commercial CodeUniform Commercial Code
The Uniform Commercial Code , first published in 1952, is one of a number of uniform acts that have been promulgated in conjunction with efforts to harmonize the law of sales and other commercial transactions in all 50 states within the United States of America.The goal of harmonizing state law is...
which is followed in most American states
U.S. state
A U.S. state is any one of the 50 federated states of the United States of America that share sovereignty with the federal government. Because of this shared sovereignty, an American is a citizen both of the federal entity and of his or her state of domicile. Four states use the official title of...
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
Harvard Law Review
The Harvard Law Review is a journal of legal scholarship published by an independent student group at Harvard Law School.-Overview:According to the 2008 Journal Citation Reports, the Review is the most cited law review and has the second-highest impact factor in the category "law" after the...
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
Supreme Court of California
The Supreme Court of California is the highest state court in California. It is headquartered in San Francisco and regularly holds sessions in Los Angeles and Sacramento. Its decisions are binding on all other California state courts.-Composition:...
endorsed adhesion analysis in 1962. See Steven v. Fidelity & Casualty Co., 58 Cal. 2d 862, 882 n.10 (1962) (explaining history of 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 InstituteAmerican Law InstituteThe American Law Institute was established in 1923 to promote the clarification and simplification of American common law and its adaptation to changing social needs. The ALI drafts, approves, and publishes Restatements of the Law, Principles of the Law, model codes, and other proposals for law...
's Restatement (Second) of ContractsRestatement (Second) of ContractsThe Restatement of the Law of Contracts is one of the most well-recognized and frequently-cited legal treatises in all of American jurisprudence. Every first year law student in every law school in the United States is exposed to it, and it is probably the most-cited non-binding authority in all...
, which has persuasive though non-binding force in courts, provides:
-
- Where the other party has reason to believe that the party manifesting such assent would not do so if he knew that the writing contained a particular term, the term is not part of the agreement.
- 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 unconscionabilityUnconscionabilityUnconscionability is a term used in contract law to describe a defense against the enforcement of a contract based on the presence of terms that are excessively unfair to one party...
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.)
- The doctrine of unconscionability
Shrink wrap contracts
Courts in the United States have faced the issue of shrink wrap contractShrink wrap contract
Shrink wrap contracts are license agreements or other terms and conditions of a contractual nature which can only be read and accepted by the consumer after opening the product. The term describes the shrinkwrap plastic wrapping used to coat software boxes, though these contracts are not limited...
s in two ways. One line of cases follows ProCD v. Zeidenberg
ProCD v. Zeidenberg
ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 , is a United States contract case involving a "shrink wrap license". One issue presented to the court was whether a shrink wrap license was valid and enforceable. Judge Easterbrook wrote the opinion for the court and found such a license was valid and...
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.
Canada
In Canada, exclusion clauseExclusion 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...
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
Tilden Rent-A-Car Co. v. Clendenning
Tilden Rent-A-Car Co. v. Clendenning , 83 DLR 400 is a leading Canadian contract law decision from the Court of Appeal for Ontario on standard form contracts. The Court held that a party can only be bound to a signed standard form contract when it is reasonable to believe that they consented to...
).
Australia
Standard form contracts have generally received little special treatment under Australian common law. A 2003 New South WalesNew South Wales
New South Wales is a state of :Australia, located in the east of the country. It is bordered by Queensland, Victoria and South Australia to the north, south and west respectively. To the east, the state is bordered by the Tasman Sea, which forms part of the Pacific Ocean. 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
High Court of Australia
The High Court of Australia is the supreme court in the Australian court hierarchy and the final court of appeal in Australia. It has both original and appellate jurisdiction, has the power of judicial review over laws passed by the Parliament of Australia and the parliaments of the States, and...
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.
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. Victorian Fair Trading Act 1999).United Kingdom
Section 3 of the Unfair Contract Terms Act 1977Unfair Contract Terms Act 1977
The Unfair Contract Terms Act 1977 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 important functions is limiting the applicability of...
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.
See also
- DuressDuressIn jurisprudence, duress or coercion refers to a situation whereby a person performs an act as a result of violence, threat or other pressure against the person. Black's Law Dictionary defines duress as "any unlawful threat or coercion used... to induce another to act [or not act] in a manner...
- Electronic Signatures in Global and National Commerce ActElectronic Signatures in Global and National Commerce ActThe Electronic Signatures in Global and National Commerce Act 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 ensuring the validity and legal effect of contracts entered into...
(ESIGN, USA) - Non est factumNon est factumNon est factum is a doctrine in contract law that allows a signing party to escape performance of the agreement. A claim of non est factum means that the signature on the contract was signed by mistake, without knowledge of its meaning, but was not done so negligently...
External links
- Joint Contracts Tribunal for United Kingdom Building Industry
- CLAB Data Base of the European Commission