Standard form contract

A standard form contract (sometimes referred to as a contract of adhesion or boilerplate contract) is a contract between two parties that does not allow for negotiation, i.e. take it or leave it. It is often a contract that is entered into between unequal bargaining partners, such as when an individual has a contract thrust into her hand by the salesperson of a multinational corporation. The consumer is in no position to negotiate the standard terms of such contracts and the company's representative often does not have the authority to do so.

Contents

1 Theoretical issues 2 Common law status 2.1 United States 2.1.1 General standard form contracts 2.1.2 Shrink wrap contracts 2.2 Canada 2.3 Australia 3 Legislation 4 External links

Theoretical issues

There is some debate on a theoretical level whether, and to what extent, courts should enforce standard form contracts. On the one hand they undeniably fulfill an important efficiency role in society. 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 unjust, and even inefficient, terms to be accepted by those signing 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]. 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]:

• Standard form contracts are rarely read. Lengthy boilerplate terms are often in small 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.
• 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 end user license agreements, can only be read after they have been notionally accepted by purchasing the good.
• 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 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. As noted, however, 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 and not by managers making 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, courts will interpret standard form contracts contra proferentem (literally 'against the proffering person') but specific treatment varies between jurisdiction.

United States

General standard form contracts

The Uniform Commercial Code which is followed in most states in the US has specific provisions relating to standard form contracts. Standard form contracts will be subject to special scrutiny if they are found to be contracts of adhesion (Rudbart v. North Jersey District Water Supply Commission). For a contract to be a contract of adhesion it must be presented on a standard form on a ‘take it or leave it’ basis and give the purchaser no ability to negotiate because of their unequal bargaining position. The special scrutiny given to contracts of adhesion can be done 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 Restatement (Second) of Contracts , 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 unconscionability which 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 contracts in two ways. One line of cases follows ProCD v. Zeidenberg which held such contracts enforceable (eg. Brower v Gateway [3]) and the other follows Klocek v. Gateway, Inc which found them unenforceable (eg. Specht v. Netscape Communications Corp. [4]). 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, exemption clauses in a standard form contract must be brought to the attention of the purchaser for them to have effect (Tilden Rent-A-Car v Clendenning).

Australia

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 succesfully appealed to the High Court so currently there is no special treatment of standard form contracts in Australia.

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 (eg. Victorian Fair Trading Act 1999).

External links

Standard form contracts in the US