An adhesion contract is an agreement where one party has comparatively more power than the other one in setting in terms of the contract. For the adhesion to exist, the seller must supply the buyer or the consumer with reasonable terms and conditions identical to those offered to the consumers. These terms are mainly non-negotiable, which means the weaker party in the contract needs to agree to the contract as it is rather than just requesting a clause. These clauses can be added, changed, or removed. Adhesion contracts are also referred to as the boilerplate contracts or standard contracts.
Adhesion contracts are mainly used for insurance, leases, mortgages, vehicle purchases, and other transactions Where the customers in high volume will fall under the standard form of agreement. So, in an insurance contract, the company and its agent have the power to draft the contract, and in the meantime, the potential policy holders only have the right of the refusal. The customers cannot deny the offer or even create a new contract to which the insurer can agree. Therefore, it is important to read the adhesion contract very carefully.
Adhesion contracts are mainly used in the real estate situations, including consumer credit, Insurance leases, or even mortgages. Although, these contracts tend to increase the efficiency and later speed up the purchasing process.
While providing a standardized contract that lays out some non-negotiable terms and adhesion contracts reduces this need for the customized contracts which are specific to each consumer. On the other hand, transaction costs are the sunk costs that are accrued as the result of participating in the transaction or an exchange of a good. The list includes communication costs, enforcement costs, bargaining costs, etc. These adhesion contracts later reduce these costs by providing all the necessary information.
