India: Law Related To Standard Form Of Contracts

Last Updated: 4 November 2013
Article by Vandana Pali

Standard contracts are contracts which are drafted by one party and signed by another party without any modification or change. Though standard contracts present the advantage of preprinted standard format; they are essentially "take it or leave it" contracts with no room for negotiations. These contracts are criticized for killing the bargaining power of the weaker party and open up wide opportunity for exploitation.

In Cheshire's Law of Contract, 12th Edition 'Use of standard form contracts' is dealt with at page 21 in following terms:

The process of mass production and distribution, which has largely supplemented if it has not supplanted individual effort, has introduced the mass contract -- uniform documents which must be accepted by all who deal with large-scale organizations. Such documents are not in themselves novelties; the classical lawyer of the mid-Victorian years found himself struggling to adjust his simple conceptions of contract to the demands of such powerful bodies as the railway companies. But in the present century many corporations, public and private, have found it useful to adopt, as the basis of their transactions, a series of standard forms with which their customers can do little but comply.

ISSUES WHICH ARE GENERALLY INVOLVED WITH STANDARD FORM OF CONTRACTS RELATE TO:

- CONSENT

In the case of commercial contracts courts have repeatedly held that contracts even if entered into the standard format, are meant to be performed and not to be avoided. Unless it is shown that consent is obtained by fraud, mistake or duress a consent given by party to a contract cannot be vitiated. As defined under Section 13 of the Contract Act, 1872 two or more persons are said to consent, when they agree upon the same thing in the same sense. Consent, according to Section 14, is free, when it is not caused by coercion, undue influence, fraud, misrepresentation or mistake. Thus where the parties with equal bargaining powers have fairly consented to the terms of the contract without any fraud, duress or mistake courts have refused to interfere.

- UNFAIR TERMS OF THE CONTRACT

Courts have looked into the terms of the contract in relation to the bargaining powers of the parties and have interfered in cases where the bargaining power of the parties was not equal. In Life Insurance Corporation of India v. Consumer Education and Research Centre and others the Hon'ble Supreme Court has held that "if a contract or a clause in a contract is found unreasonable or unfair or irrational one must look to the relative bargaining power of the contracting parties. In dotted line contracts there would be no occasion for a weaker party to bargain or to assume to have equal bargaining power. He has either to accept or leave the services or goods in terms of the dotted line contract. His option would be either to accept the unreasonable or unfair terms or forego the service forever. With a view to have the services of the goods, the party enters into a contract with unreasonable or unfair terms contained therein and he would be left with no option but to sign the contract".

In Central Inland Transport Corporation Limited v. Brojo Nath, Hon'ble Apex Court while giving some illustrations of unreasonable and unfair clauses in contracts, based on unconscionable bargaining in para 90 of the decision and explaining the scope of expression "public policy", in para 93 held in para 94 that the type of contracts to which the principle formulated by us above applies, are not contracts which are tainted with illegality, but are contracts which contain terms, which are so unfair and unresonable that they shock the conscience of the court. It is apt to reproduce the relevant extract of para 90 as under:-

"90. This principle is that the courts will not enforce and will when called upon to do so, strike down an unfair and unreasonable contract, or an unfair and unreasonable clause in a contract, entered into between parties who are not equal in bargaining power. It is difficult to give an exhaustive list of all bargains of this type. No court can visualize the different situations which can arise in the affairs of men. One can only attempt to give some illustrations. For instance, the above principle will apply where the inequality of bargaining power is the result of the great disparity in the economic strength of the contracting parties. It will apply where the inequality is the result of circumstances, whether of the creation of the parties or not. It will apply to situations in which the weaker party is in a position in which he can obtain goods or services or means of livelihood only upon the terms imposed by the stronger party or go without them. It will also apply where a man has no choice, or rather no meaningful choice, but to give his assent to a contract or to sign on the dotted line in a prescribed or standard from or to accept a set of rules as part of the contract, however unfair, unreasonable and unconscionable a cause in that contract or form or rules may be. This principle, however, will not apply where the bargaining power of the contracting parties is equal or almost equal. This principle may not apply where both parties are businessmen and the contract is a commercial transaction. In today's complex world of giant corporations with their vast infra-structural organizations and with the State through its instrumentalities and agencies entering into almost every branch of industry and commerce, there can be myriad situations which result in unfair and unreasonable bargains between parties possessing wholly disproportionate and unequal bargaining power. These cases can neither be enumerated nor fully illustrated. The court must judge each case on its own facts and circumstances."

Thus courts will not enforce and will, strike down an unfair and unreasonable contact or an unfair and unreasonable clause in a contract, entered into between parties who are not equal in bargaining power. This principle, however, will not apply where the bargaining power of the contracting parties is equal or almost equal or where both parties are businessmen and the contract is a commercial transaction.

Further cases where the terms of the contract are unreasonable as to the nature of the contract courts have struck them out following the principles as laid down under Contract Act or under common law. In M Siddalingappa v. T Nataraj , where applicability of the clause printed on the back of the laundry receipt which read as:

"All articles for cleaning and dyeing are accepted on conditions that the company shall incur no liability in respect of any damage which may occur and for delay or in the event of loss for which the company may accept the liability which shall in no case exceed eight times the cleaning charges." was in question Court held that petitioner is, undoubtedly, a bailee in respect of the sarees given to him and there is a minimum duty of care imposed upon all bailees under Section 151 of the Contract Act which they cannot contract themselves out of it is not subject to any contract to the contrary between the parties. Under that section, in all cases of bailment, the bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence would in similar circumstances take of his own goods of the same bulk, quality and value as the goods bailed. Once that minimum duty is imposed upon the bailee by the law, a breach of that duty undoubtedly clothes the party affected with the right to recover damages commensurate with the consequences".

- UNCONSCIONABLE NATURE OF THE CONTRACT

Basic test of "unconscionability" of contract is whether under circumstances existing at time of making of contract and in light of general commercial background and commercial needs of particular trade or case, clauses involved are so one-sided as to oppress or unfairly surprise party.

Precursors of Unconscionability: Courts of equity did not share the reluctance of common law courts to police bargains for substantive unfairness. Though mere "inadequacy of consideration" alone was not a ground for withholding equitable relief, a contract that was "inequitable" or "unconscionable" one that was so unfair as to "shock the conscience of the court" would not be enforced in equity.

In Ferro Alloys Corpn. Ltd. v. A.P. State Electricity Board and another, Supreme Court of India refused to interfere in adhesion contract on the ground that it was not unconscionable so as to "shock the conscience of the court"

- INEQUALITY OF BARGAINING POWERS

Courts have strictly ruled against those standard contracts which exploit the position of an employee vis a vis the employer. They have repeatedly held that in case of employment contract between the employer and employee, there is a universal tendency on the part of the employer to insert those terms, which are favorable to him in a printed and standard form, leaving no real meaningful choice to the employee except to give assent to all such terms. In such a situation the parties cannot said to be in even position possessing equal bargaining power. Where the parties are put on unequal terms the standard form of contract cannot be said to be the subject-matter of negotiation between the parties and the same is said to have been dictated by the party whose higher bargaining power enable him to do so.

In Superintendence Company of India (P) Ltd v. Sh. Krishan Murgai, Hon'ble Supreme Court held that

"It is well settled that employees covenants should be carefully scrutinized because there is inequality of bargaining power between the parties; indeed no bargaining power may occur because the employee is presented with a standard form of contract to accepts or reject. At the time of the agreement, the employee may have given little thought to the restriction because of his eagerness for a job; such contracts "tempt improvident persons, for the sake of present gain, to deprive themselves of the power to make future acquisitions, and expose them to imposition and oppression."

Such a protection is also given against the action of the state where the Courts have ruled that that the action of the State in contractual field also must be fair and reasonable. The requirement of Article 14 of the Constitution should extend even in the sphere of contractual matters for regulating the conduct of the State activity. Applicability of Article 14 to all executive actions of the State being settled, the State cannot cast of its personality and exercise unbridled power unfettered by the requirements of Article 14 in the sphere of contractual matters and claim to be governed therein only by private law principles applicable to private individuals whose rights flow only from the terms of the contract without anything more. It is not as if the requirements of Article 14 and contractual obligations are alien concepts, which cannot co-exist. Therefore, total exclusion of Article 14 non-arbitrariness which is basic to rule of law - from State actions in contractual field is not justified. This is more so when the modern trend is also to examine the unreasonableness of a term in such contacts where the bargaining power is unequal so that these are not negotiated contracts but standard form of contracts between unequals. Bringing the State activity in contractual matters also within the purview of judicial review is inevitable.

CONCLUSION

Despite absence of a specific legislation courts have shown a marked willingness to interfere with standard form of contracts where there is evidence of unequal bargaining power. Courts have given reliefs in cases where weaker party has been burdened with unconscionable, oppressive, unfair, unjust and unconstitutional obligations in a standard form contract. In D.C.M. Ltd. v. Assistant Engineer (HMT Sub-Division), Rajasthan State Electricity Board, Kota where the division bench had to consider the question whether the Rajasthan State Electricity Board functioning under the Electricity Act of 1910 and the Electricity (Supply) Act, 1948 could in exercise of its powers under Section 49 of the Supply Act require the consumer-appellant before them to pay by way of minimum charges at nearly three times the normal rate charged from other consumers being heavy industries consuming heavy demand of 25 MW. Even though the appellant before them, D.C.M. Ltd., had entered into such an agreement with the Board it was held that the said term in the agreement was unreasonable and consequently the demand of such excessive minimum consumption charges was not justified and could not be countenanced on the touchstone of Article 14 of the Constitution of India as the Electricity Board was an instrumentality of the State. The Court in this connection had to consider the nature of the written agreements entered into by the consumers of the electricity with the Board which was a monopolist and the further question whether an apparently inconceivable and unjust term in the written contract could be enforced by the Board against the consumer. Following pertinent observations were made by J.S. Verma, C.J in paragraph 24 of the Report:

...We may further add that for the reasons already given it is obvious that the giving of such an undertaking by execution of the agreement was no doubt a conscious act of the petitioner, but in the circumstances it cannot be held to indicate the petitioner's willingness to be bound by such an onerous condition, if it had the option; It is obvious that there was no option to the petitioner and, therefore, it cannot be said that the petitioner voluntarily and willingly chose and accepted the more onerous condition of a higher rate instead of the normal rate for payment of minimum charges. The willingness to accept such an onerous term with free consent can be assumed only where a consumer has an option or in other words he can get the supply of electricity he wants even without agreeing to any such term specified by the Board for being incorporated in the written contract without execution of which the consumer cannot insist on supply of electricity to him. It is not the Board's case that it was willing to honour the petitioner's requisition and make the supply even without the petitioner undertaking in writing to pay minimum charges according to Clause 16(c). How can it be said that the petitioner willingly accepted this term when the fact is that it had no option in the matter. It is further observed that Assuming that reasonably sufficient notice of a standard form contract has been given to the person who receives the printed document, we must now consider the way in which the terms of the document are to be construed. Such is the disparity between the bargaining power of large enterprises (both private and public) and the consumer that terms have often been imposed upon him which are onerous or unfair in their application and which exempt the party putting forward the document, either wholly or in part, from his just liability under the contract. This may be one of the reasons why, at common law, the Courts evolved certain canons of construction which normally work in favour of the party seeking to establish liability and against the party seeking to claim the benefit of the exemption. The impression should not be given, however, that the" application of these canons of construction render exemption clauses generally ineffective. If the clause is appropriately drafted so as to exclude or limit the liability in question, then the Courts must (subject to the powers now conferred on them by the Unfair Contract Terms Act 1977) give effect to the clause. Moreover, as between businessmen, exemption clauses can perform a useful function in that they may, for example, anticipate future contingencies which hinder or prevent performance, establish procedures for the making of claims and provide for the allocation of risks as between the parties to the contract. In a business transaction, the effect of an exemption clause may simply be to determine which of the parties is to insure against a particular risk. Exemption clauses in business transactions are not necessarily unfair or inequitable. But even in business transactions the Courts must be satisfied that the clause, on its wording, does have the effect contended for by the person relying on it, that is, the party seeking to exclude or restrict his liability. (a) Strict interpretation of the clause. 'If a person is under a legal liability and wishes to get rid of it, he can only do so by using clear words.' The words of the exemption clause must therefore exactly cover the liability which it is sought to exclude. So an exemption clause in a contract excluding liability for 'latent' defects' will not exclude the condition as to fitness for purpose implied by the Sale of Goods Act."

Footnote

1. MANU/SC/0772/1995

2. MANU/SC/0439/1986

3. AIR1969 Kant 154

4. (Black's Law Dictionary (Fifth Edition) at page 1367)

5. Farms worth on contract, 2nd Edn. 319,320 para 4.27

6. AIR1993 SC 2005

7. Unikool Bottlers v. Dhillon Cool Drinks, Pepsi Food Limited, AIR 1995 Delhi 25

8. AIR 1980 SC 171710. MANU/RH/0014/1988

9. Shrilekha vs. State of U.P, AIR 1991 SC 537

10. MANU/RH/0014/1988

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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