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Adhesion contract

A standard form contract (sometimes referred to as an adhesion contract 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 is given a
contract 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.

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 inefficient, and
even unjust, 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. 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 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.

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 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.

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.

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 jurisdictions.

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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 the purchaser 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's which has persuasive
though non binding force in courts, provides.

Where the other party has reason to believe any 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.

Corporate law

Corporate personality as one of the key legal features of companies is their

separate legal
personality. However, it is now largely accepted throughout the world that
companies are legally separate and distinct entities.

Separate legal personality often has unintended consequences, particularly in

relation to smaller, family companies.

 In B v B [1978] Fam 181 it was held that a discovery order obtained by

a wife against her husband was not effective against the husband's
company as it was not named in the order and was separate and distinct
from him.
 In Macaura v Northern Assurance Co Ltd [1925] AC 619 a claim
under an insurance policy failed where the insured had transferred timber
from his name into the name of a company wholly owned by him, and it
was subsequently destroyed in a fire, as the property now belonged to the
company and not to him, he no longer had an insurable interest in it and his
claim failed.

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However, separate legal personality does allow corporate groups a great

deal of flexibility in relation to tax planning, and also enables multinational
companies to manage the liability of their overseas operations.

There are certain specific situations where courts are generally prepared to
pierce the corporate veil, to look directly at, and impose liability directly on the
individuals behind the company. The most commonly cited examples are:

 Where the company is a mere façade.

 Where the company is effectively just the agent of its members or
controllers.
 Where a representative of the company has taken some personal
responsibility for a statement or action.
 Where the company is engaged in fraud or other criminal wrongdoing
 Where the natural interpretation of a contract or statute is as a reference
to the corporate group and not the individual company.
 Where permitted by statute (for example, many jurisdictions
provide for shareholder liability where a company breaches environmental
protection laws).
 In many jurisdictions, where a company continues to trade despite
inevitable bankruptcy, the directors can be forced to account for trading
losses personally.

As artificial persons, companies can only act through human agents. As was
once memorably remarked, It has no body to kick and no soul to damn.

The main agent who deals with the company's management and business is the
board of directors, but in many jurisdictions other officers can be appointed too.
The board of directors is normally elected by the members, and the other officers
are normally appointed by the board. These agents enter into contracts on behalf
of the company with third parties.

Although the company's agents owe duties to the company (and, indirectly, to the
shareholders) to exercise those powers for a proper purpose, generally speaking
third parties' rights are not impugned if it transpires that the officers were acting
improperly. Third parties are entitled to rely on the ostensible authority of agents
held out by the company to act on its behalf. A line of common law cases
reaching back to Royal British Bank v Turquand established in common law that
third parties were entitled to assume that the internal management of the
company was being conducted properly, and the rule has now been codified into
statute in most countries.

Accordingly, companies will normally be liable for all the act and omissions of
their officers and agents. This will include almost all torts, but the law relating to
crimes committed by companies is complex, and varies significantly between
countries

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Members of a company generally have rights against each other and against the
company, as framed under the company's constitution. In relation to the exercise
of their rights, minority shareholders usually have to accept that, because of the
limits of their voting rights, they cannot direct the overall control of the company
and must accept the will of the majority (often expressed as majority rule).
However, majority rule can be iniquitous, particularly where there is one
controlling shareholder.

Accordingly, a number of exceptions have developed in law in relation to the

general principle of majority rule.

 Where the majority shareholders are exercising their votes to perpetrate a

fraud on the minority, the courts may permit the minority to sue.
 Members always retain the right to sue if the majority acts to invade their
personal rights, e.g. where the company's affairs are not conducted in
accordance with the company's constitution (this position has been debated
because the extent of a personal right is not set in law). Macdougall v
Gardiner and Pender v Lushington present irreconcilable differences in this
area.

In most jurisdictions, directors owe strict duties of good faith, as well as duties
of care and skill to safeguard the interests of the company and the members.

The standard of skill and care that a director owes is usually described as
acquiring and maintaining sufficient knowledge and understanding of the
company's business to enable him to properly discharge his duties.

Directors are also strictly charged to exercise their powers only for a proper
purpose. For instance, was a director to issue a large number of new shares,
not for the purposes of raising capital but in order to defeat a potential takeover
bid that would be an improper purpose.

Directors also owe strict duties not to permit any conflict of interest or conflict with
their duty to act in the best interests of the company. This rule is so strictly
enforced that, even where the conflict of interest or conflict of duty is purely
hypothetical, the directors can be forced to disgorge all personal gains arising
from it. In Aberdeen Ry v Blaikie (1854) 1 Macq HL 461 Lord Cranworth stated in
his judgment that:

“A corporate body can only act by agents, and it is of course the duty of those
agents so to act as best to promote the interests of the corporation whose
affairs they are conducting. Such agents have duties to discharge of a fiduciary
nature towards their principal. And it is a rule of universal application that no one,
having such duties to discharge, shall be allowed to enter into engagements in
which he has, or can have, a personal interest conflicting or which possibly may
conflict, with the interests of those whom he is bound to protect. So strictly is this
principle adhered to that no question is allowed to be raised as to the fairness or
unfairness of the contract entered into”
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However, in many jurisdictions the members of the company are permitted to

ratify transactions which would otherwise fall foul of this principle. It is also
largely accepted in most jurisdictions that this principle should be capable of
being abrogated in the company's constitution.

Liquidation is the normal means by which a company's existence is brought to

an end. It is also referred to (either alternatively or concurrently) in some
jurisdictions as winding up and/or dissolution.

Liquidations generally come in two forms, either compulsory liquidations

(sometimes called creditors' liquidations) and voluntary liquidations (sometimes
called members' liquidations, although a voluntary liquidation where the company
is insolvent will also be controlled by the creditors, and is properly referred
to as a creditors' voluntary liquidation).

As its names imply, applications for compulsory liquidation are normally made by
creditors of the company when the company is unable to pay its debts. However,
in some jurisdictions, regulators have the power to apply for the liquidation of the
company on the grounds of public good, i.e. where the company is believed to
have engaged in unlawful conduct or conduct which is otherwise harmful to the
public at large.

Voluntary liquidations occur when the company's members decide voluntarily to

wind up the affairs of the company. This may be because they believe that the
company will soon become insolvent, or it may be on economic grounds if they
believe that the purpose for which the company was formed is now at an end or
that the company is not providing an adequate return on assets and should be
broken up and sold off.

Some jurisdictions also permit companies to be wound up on just and equitable

grounds. Generally, applications for just and equitable winding-up are brought by
a member of the company who alleges that the affairs of the company are being
conducted in a prejudicial manner, and asking the court to bring an end to the
company's existence. For obvious reasons, in most countries, the courts have
been reluctant to wind up a company solely on the basis of the disappointment of
one member, regardless of how well founded that member's complaints are.
Accordingly, most jurisdictions which permit just and equitable winding up, also
permit the court to impose other remedies, such as requiring the majority
shareholders to buy out the disappointed minority shareholder at a fair value.

Where a company goes into liquidation, normally a liquidator is appointed to

gather in all the company's assets and settle all claims against the company. If
there is any surplus after paying off all the creditors of the company, this
surplus is then distributed to the members.