What is an Accession Contract?
A contract of accession is a specific type of consumer contract, typically found in the context of insurance, banking and credit card agreements, that involves one party setting certain standard terms, to which the other parties adhere. There are few exceptions, but accession contracts are generally considered to be signed under conditions of marked inequality between the parties, with the large institutional party often known as the "adhereing party" or "accede party."
From a functional standpoint, an accession contract is contractual in nature and, barring specific provisions relating thereto in the applicable laws or governing instruments, is enforced in accordance with its written terms. The opposing view, however, is that the adhereing party is too often a dormant party, with little or no say in respect of the ultimate terms and conditions of the contract, and is often left sign here, sign there without a fair opportunity to appreciate the content of the document . This invariably gives rise to the question of the nature and degree of consumer protection afforded by the law in such circumstances.
Although there has undoubtedly been some limited success in contesting or reinterpreting the terms of accession contracts where unfair, nonsensical or against public policy, the extent to which any such contractual provisions might be upheld or otherwise, remains subject to the fundamental doctrines of contract law having regard to the material terms thereof.
It is submitted that it is virtually impossible to endow an adhesion contract with anything resembling autonomy: it must necessarily remain a creature of contract, to be construed in accordance with the general principles that govern construction. That said, the interpretation of the provisions of any such contract will very often be subject to consumer protection rights.
Accession Law Overview
The legal framework governing accession contracts can vary depending on the jurisdiction, the e-commerce regulatory framework, and the context in which the contracts are used. Accession contracts usually have a cross-border element, in addition to the customer’s location. This can make determining the law and jurisdiction applicable to the contract difficult. Examples below illustrate how different laws can determine the appropriate jurisdiction in which to bring a claim under an accession contract.
Italy has implemented Directive 2011/83, and its provisions in relation to consumers and e-commerce. The Italian Code of Civil Procedure provides that jurisdiction lies before the court of the place of residence of the consumer "when it is based on the existence of a contractual relation with the consumer" and "when the jurisdiction arises, regardless of the existence or not of a contractual relation between the parties." Consumer action must be brought in the place of residence of the consumer.
If the consumer is suing the relevant business only, jurisdiction will be with the court of the residence of the consumer. If the business is counter-claiming against the consumer for damages or otherwise, then jurisdiction will be with the court of the domicile of the consumer or the respondent. These rules are applicable only if the seat of the defendant is in Italy. With respect to suppliers and manufacturers, proceedings must be brought before the court of the place of residence of the defendant. Where the claim is being brought against a series of defendants, jurisdiction can be determined in accordance with the above rules or (if more favorable) defendants can bring proceedings against the other defendants in each court mentioned above.
In China, where an accession contract is signed and performed within China, China’s Contract Law rules apply. If the claim (or defense) is based on an ownership-based cause of action, China’s Property Law rules will apply. Ordinarily, the People’s Court where the defendant resides has jurisdiction, or the defendants agree to jurisdiction, or the people who are in the same place may be sued in the first-instance people’s court there. However, the People’s Court will not have jurisdiction over a defendant whose domicile is abroad, unless the defendant’s property is within China and is the object of the litigation.
Hong Kong has a similar position to China. The Hong Kong civil procedure rules do not specify any independent rules concerning arbitration. The Civil Procedure Rules in relation to the recognition and enforcement of awards are based on the Hong Kong Arbitration Ordinance and the International Arbitration Act, respectively. In practice, Hong Kong tends to (but is not obligated to) recognize awards – even if they were made in China. Similarly, although an award by the China International Economic and Trade Arbitration Commission ("CIETAC") is not binding on the Hong Kong courts, CIETAC and the Beijing Arbitration Commission are both bound by the Model Law on International Commercial Arbitration ("Model Law").
The applicable rules in the United States depend on whether the contract is for the purchase of goods or the provision of services. In the case of the purchase of goods, the Uniform Commercial Code, as adopted by the state in which the buyer is domiciled, will apply. If the purchase is a consumer contract, the general contract principles will be determined by the relevant jurisdiction’s rules on consumer contracts. In relation to a contract for services, the UCC does not apply. General contract principles will apply.
The applicable law and jurisdiction relating to an accession contract can be complex and can vary from jurisdiction to jurisdiction. How the courts in different jurisdictions will treat the contract can be unpredictable. For these reasons, ensuring that the terms of an accession contract are appropriate and that claims are managed correctly up front will help mitigate future disputes.
Pros and Cons of Accession Contracts
Notwithstanding their wide application in the industry, the use of accession contracts are not without potential drawbacks in the context of real estate transactions and project development.
One of the key advantages of accession contracts is their flexibility. Both parties have the option to negotiate each new transaction and to establish their own specific terms. Having said that, one question still remains: How can the negotiating power of each party be assessed in the light of the standard terms and conditions that are typically used? Indeed, even in situations in which the seller proposes its standard terms, it will tend to do so in connection with a more favourable offer than any other third party, leaving the buyer with little or no margin for negotiation. As a result, this mechanism can lead to significant market concentration and the development of a monopoly power.
Similar clauses allowing the benefiting party (typically the seller) to unilaterally amend the terms and conditions of the contract for future transactions can also be found in many accession contracts. Such clauses are often labelled as "index clauses". In this case, the seller is allowed to unilaterally increase the price of the product/service it intends to sell by referencing the price of a publicly-listed index or index representing an agreed-upon benchmark. However, under the abovementioned Directive, any clause permitting such an increase in the price must be clear and precise. That being said, the challenge for the customer at this point becomes not so much the ability to challenge the legal validity of the index clause, but rather the practical question of whether or not the price increase is reasonable.
On a more positive note, accession contracts do offer greater certainty to the buyer through the ability to establish long-term relationships with the seller. Thus, where the supply of product/service in question requires heavy investments or long-term planning, it may be worth considering the option to utilise an accession contract. In fact, this long-term relationship between the parties, which gives rise to a sort of horizontal legal link of unlimited duration, may be even more important than the vertical link resulting from new transactions.
Finally, on a more technical level, when the seller is based in a different Member State from the buyer, the advantage to the latter becomes that it is able to freely choose applicable law and jurisdiction in every transaction. Such choice is extremely valuable for companies that have a network of suppliers and/or customers in multiple European countries. Indeed, the ability to include an arbitration clause in the accession contract or to set the jurisdiction of a certain court as competent to rule on the rights and obligations of the parties can serve to increase the speed and efficiency of proceedings should the need for a claim arise.
Common Uses
Accession contracts are commonly used in a variety of situations, particularly where there are networks involved, including energy, telecommunications, transport and industrial networks. This is largely because these sectors typically involve several players and challenges to achieving interoperability.
There are various examples of accession contracts being entered into within these sectors, for example:
- Interconnection agreements (see the CEG-Cello case, which is interesting as it illustrates how accession contracts can affect pricing structures for smaller market players);
- Landing Point interconnection agreements, where independent cable owners agree to an interconnection with their systems at an access (i.e. landing) point, to allow other suppliers to connect or gain access through it to a network; and
- Interconnectors, where national electricity companies invite other parties to connect to the relevant transmission system. These can be regulated/interim agreements which, while with transmission companies, permit other companies to access systems.
More generally, many types of supply chains involve accession contracts, including research and manufacturing; energy and motors; and even more niche sectors, such as listening devices/recording devices and control systems.
Accession contracts are most often used in the technology industry, particularly when it comes to software licensing, as they are a logical fit for providing technical compatibility to offer services. For example, a third-party cloud-based database service provider ("Company A") may enter into a contract to provide access to its computing resources and expertise to a database provider "Company B" who will hold the database (Company B usually has a lot less access to this kind of procurement ability in comparison to Company A). Company A and Company B will enter into a licensing contract which allows the latter to use the former’s cloud-based system on mainframe (the latter will enter into accession agreements with its partners at the data level in any case), but under the terms that access will only be open to the third parties with which Company B has secured a commercial agreement. Therefore, not all technology providers can have access to the database, but they have to enter into an agreement to get that access.
The idea here is that the cloud-based system will only be opened to technological collaboration between those licensed partners of Company B. The benefit here for Company A is less risk of leakage of proprietary information; the benefit for Company B is it can offer a far wider range of services in contrast to other licensees who may not have the same connectivity with a wider range of ICT services.
A form of accession contract is used in the automotive industry, where vehicle manufacturers grant suppliers a license to use their intellectual property (IP). A supplier’s right to use the IP is usually limited to those vehicles for which it provides parts or accessories.
To give an example, in the event a supplier designs an interior accessory to fit into a specific car model, the supplier is only permitted to use the license granted by the vehicle manufacturer in respect of that model. The license would restrict the use of the supplier’s licensed part or accessory to the vehicle manufacturer’s products only, unless the vehicle manufacturer permits the supply. This includes the restriction of the use of the pieces to which the IP relates.
An accession contract can also be found in a joint venture agreement or an outsourcing agreement. For example, parties that enter into an outsourcing agreement may decide to hire an existing outsourcing centre rather than build their own. Consequently, in the latter they would have to enter into an accession contract with the outsourcing provider in order to gain access to the information and systems of the outsourcer.
Key Agreed Terms to Include in an Accession Contract
An accession contract will typically contain the same clauses and terms that are set out in an initial contract. Alternatively, a pure accession contract will either refer to the initial contract or to the accession itself, but will no longer refer to any other clauses from the original contract. This may be sufficient in cases where the sole purpose of the accession is, for example, the enforcement of a security.
In its most basic form, an accession contract must contain a reference to the initial contract and the parties to the initial contract, as well as the name of the new party. This reference by itself will suffice in many cases in the absence of any specific acceding clause, where the status of the new party depends on whether the initial contract so allows.
Some accession contracts may contain a clause enjoying the right of accession on any successor or acquirer of the asset which forms the subject matter of the initial contract. A standard loan contract will normally include an accession clause by which the borrower agrees to bind itself (or any successor who acquires title in the assets) to the terms of the loan.
This clause will be regarded as sufficient to bind a subsequent purchaser (as purchaser or collateral for financing) notwithstanding its non-accession to the initial contract . An accession contract may also be used to restrict the rights of the new party to transfer or encumber the asset or to otherwise limit the rights of the beneficiary of the lien to enforce it against the asset of the new party.
Other clauses that may be included in an accession contract are provisions relating to the particulars of the collateralisation of the original asset. The creditor may also want to base its right to proceed against the asset of the new party on the original asset. Such clauses allow the creditor to take possession of the asset of the new party and proceed against it in accordance with its right as beneficiary of the lien over the original asset.
On the other hand, the creditor may wish to also take possession of the original asset or to have recourse to the proceeds of the sale of both the asset of the new party and the asset of the initial party. Such clauses should be construed in conjunction with those that deal with granting security.
An accession contract is therefore an important instrument which, depending on the exact clauses used, will allow an acceding party to bind itself to the terms of the original contract and its obligations in respect thereof. The contracting party must therefore consider the clauses used and their practical application in light of the nature of the acceding party (e.g. whether it is an individual or a legal person), the nature of the asset and the rights of the original party in relation thereto.
How to Draft and Negotiate an Accession Contract
In the previous section, we discussed the basic mechanics of an accession and explained some of the main legal issues arising from acceding to an agreement. We now look in more detail at some of the factors to consider when drafting or negotiating these contracts.
Accession contracts should be prepared and distributed among the parties to the agreement on an early basis (even at the RFP stage), preferably at the same time as the distribution of the draft master services agreement. This will allow the vendor to prepare and submit an appropriate bid/quotation for the work that reflects the costs of performing the work on the basis of the parties’ signed agreement.
A common problem is that vendors will simply insert a statement that the master agreement is acceptable or propose amendments of a general nature. This does not help the process.
An excellent example of what is required is found in the International Association of Commercial Administrators ("IACA") International Registry Website Access Agreement for the e-Registry for Aircraft Mortgages and Liens commonly used in the context of registrations under the Cape Town Convention. In the related "e-Registry for Aircraft Mortgages and Liens Matching Service Provider Agreement" (which applies the same document structure as the International Registry Website Access Agreement), the section entitled "Additional Terms and Conditions" provides clear guidance on the additional terms and conditions that the service provider is required to add and the manner in which they should be presented.
This is essential to ensure that the potential discrepancies between the two sets of terms are identified to the parties for consideration. It will then be up to the parties whether to address them as new terms or by amendment to existing terms. Of course, the level of detail provided in the examples does not need to be so extensive but the clarity as to where new terms are proposed and the provision of some form of wording is essential.
The problem of simply inserting the phrase "no inconsistencies" or "in the case of conflict" without being clear as to which terms or provisions are inconsistent or conflict is a common problem in many forms of contracts where acceding parties have simply added a statement to the effect that the terms of the agreement are fine as they stand. Those statements often simply serve to create potential contractual risk for the acceding party and missed negotiation opportunities to the advantage of the existing parties.
In practice, many acceding parties to an agreement are required to sign and return an accession contract without any negotiated changes or amendments. There is nothing wrong with this provided it is clear to the parties that the contract is being accepted in that limited manner. The accompanying contract should make this clear and may provide that this is subject to future amendments where all parties to the agreement agree.
Where the parties are required to execute an accession without comment or amendment, this will often be for reasons of strict adherence to the terms of the original agreement. If this is the case, the commentary and guidance provided above will apply equally to that situation.
Of course, acceding parties may be required to take the contract "as is". However, it is increasingly likely that acceding parties will seek some level of amendment to the contract terms to reflect their position. Examples of the types of amendments that are often sought by acceding parties include removal of liability caps and limitations on liability. Parties should be aware of the manner in which their terms and conditions might be changed by this type of amendment.
Potential Legal Disputes
One potential legal challenge regarding accession contracts is the interpretation of the "acceding party" concept. In particular, disputes may arise over which provisions of the contract are binding on an acceding party that did not provide its consent and whether such acceding party has any ability to influence or participate in the decision making process with respect to the applicable contract. That lack of influence and participation could, for example, extend to provisions that would govern the adjustments that the acceding party would receive to assure it shares with other parties to the bond issue in the benefits of any refunding that’s done by the "opting party" or other issuers on the refunding escrows funded with bond proceeds. It is recommended that the structure of each acceding contract be explicitly set forth and referred to within the initial contract so that there is no dispute as to what acceding means for each party and how such acceding occurs .
With respect to the acceeding contract mechanics of a continuing contract, another area of potential litigation is whether the fact that all provisions of the original contract are incorporated by reference into the continuing contract agreement, including amendments, or whether the continuing contract only incorporates the specific portions of the original contract that are appropriate to the acceding party, i.e., will there be a need for a contract interpretation trial.
There are also potential contractual disputes as to whether the acceding continuing contract, or the continuing contract agreement, supersedes the original or whether the original terms remain in place. It is critical to identify the version of the contract in question, and if it has been amended how it has been amended, so that there is one agreed to version of the master contract that spells out the acceding mechanics and the governing contract language and amendments are clear and unambiguous. Care should also be taken to spell out the rules for amendment and effectuation to avoid the situation where one party considers it an amendment and another party does not.
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