lawyers in India

Standard Form Contracts

Written by: Vidhan Maheshwari - NLIU, Bhopal
Personal Law
Legal Service
  • The law of contract has in recent time to face a problem, which is assuming new dimensions. The problem has arisen out of the modern large scale and widespread practice of concluding contracts in standardized form. People upon whom such exemption clauses or standard form contracts are imposed hardly have any choice or alternative but to adhere. This gives a unique opportunity to the giant company to exploit the weakness of the individual by imposing upon him terms, which may go to the extent of exempting the company from all liability under contract. It is necessary and proper that their interests should be protected. The courts have therefore devised some rules to protect the interest of such persons.

    A valid contract requires offer and acceptance. It is in the essence of acceptance, that such acceptance must be a valid acceptance, that is to say, an acceptance made, fully conscious of and alive to the terms and conditions of the proposal. of course, this is not to say that a man who signs an agreement blindfolded will be relieved from his obligations under that agreement, simply because he later chooses to discard the blindfold. However, what Section 2(b) does require is that the acceptor must have a real opportunity to review the proposal and decide on whether to accept it or not.

    Lord Denning MR pointed out in Thornton v. Shoe Lane Parking Ltd. He cannot alter those terms or even discuss them; they are therefore him to take or leave. He therefore does not undertake the laborious and profitless task of discovering what the terms are.

    The battle against the abuse has fallen to the courts. The courts have found it very difficult to come to the rescue of the weaker party particularly where he has signed the document. In such cases courts have been constrained to hold that he will be bound by the document even if he never acquainted himself with its terms.

    The first and primal argument in favour of the enforcement of standard form contracts is that a standard form contract must be respected and honored by the parties to it, just as any other contract. To refuse to do so, would be to introduce an element of uncertainty in mercantile relations, which is to be avoided at all costs. One of the earliest decisions requiring strict enforcement of a standard form contract was that of the Court of Exchequer in 1860, in Lewis v. Great Western Rly. In this case, the Court of Exchequer rejected a plea of the plaintiff that a printed form in a contract was not binding on him since he could not be expected to have read so lengthy a document, which was presented to him in printed form. Speaking for the Court, Baron Bramwell said: A person who signs a paper like this must know that he signs it for some purpose, and when he gives it to the Company must understand that it is to regulate the rights which it explains. I do not say that there may not be cases where a person may sign a paper, and yet be at liberty to say, I did not mean to be bound by this', as if the party signing were blind, and he was not informed of its contents. But where the party does not pretend that he was deceived, he should never be allowed to set up such a defence.

    The strict enforcement theory is not a satisfactory means of resolving the issue, as it requires for its applicability, a valid contract. The Madras High Court has held that printed forms are not directly enforceable in view of the absence of consensus as to the terms thereof. There are many other examples of courts refusing to apply this strict enforcement theory.

    Section 23 of the Contract Act

    Under our legal system, Section 23 of the Contract Act deals with the issue of when contracts may be struck down. The third clause of Section 23 deals with agreements, which are immoral or opposed to public policy. The Supreme Court in Central Inland Water Transport Corpn. Ltd. v. Brojo Nath Ganguly held that an unfair or an unreasonable contract entered into between parties of unequal bargaining power was void as unconscionable, under Section 23 of the Act.
    Thus Indian courts have, since then, shown a marked willingness to interfere with printed form contracts where there is evidence of unequal bargaining power. It has been held that the courts would relieve the weaker party to a contract from unconscionable, oppressive, unfair, unjust and unconstitutional obligations in a standard form contract. The Supreme Court has also held that standard form contracts drawn up even by the Government must be fair, and that these contracts are open to judicial review on grounds of unreasonableness or unfairness. The Supreme Court has upheld a plea that a printed form contract was void on grounds of coercion, where the parties had unequal bargaining power. A printed form in a dry-cleaning contract, exempting the dry-cleaner from any liability in the event of loss or damage to the clothes concerned has been held to be contrary to public policy and therefore void. The Bombay High Court has followed this view of the Madras High Court.

    The National Consumer Disputes Redressal Commission after referring to copious case- law, refused to enforce an onerous clause in a printed form contract and accordingly relieved a consumer from the terms found thereon.

    The doctrine of unconscionability doctrine steps in and strikes out any contracts, which the court found to be unconscionable, as understood by the judicial decisions of that country. The doctrine gives the courts a very powerful tool with which to look into contracts and adjudge their validity on the basis of the ability of parties to consent on the terms thereof.

    However, in India at least, the strength of this doctrine is its very drawback. Founded as it is, in the bedrock of the Indian Contract Act, its flexibility to adapt to circumstances not envisaged in Section 23 of the Act is very limited. The Supreme Court in Central Inland Water Transport Corpn. case, has held that an answer to an unconscionable contract can be found only in Section 23 of the Act and accordingly refused to apply this doctrine where the parties were not in unequal bargaining positions. This view of the Supreme Court has been refined in a later decision wherein it has been laid down that standard form contracts which are settled over the years and widely adopted by parties whose bargaining power is fairly matched are presumed to be fair and reasonable.

    Judged by the Central Inland Water Transport Corpn. standard, most consumer contracts would escape the applicability of this doctrine. However, the modification provided by Green Rubber case provides a more sound footing for the unconscionability doctrine, making standard form contracts binding where they have additionally derived legitimacy through the force of trade usages.

    However, a study of the authorities would reveal that it is Central Inland Water Transport Corpn. case which has been repeatedly followed by successive Benches of the Supreme Court and not Green Rubber case. The Notice Theory: The "notice theory" is a principle evolved by common law jurisdictions as an exception to the strict enforcement theory. This principle states that a clause in a printed form is not binding unless the attention of the other party is drawn thereto, and such clause is brought to his or her notice.

    In one case, the Calcutta High Court held to be binding, the conditions of carriage applicable to an air ticket, which were printed in small font, on the inside of the air ticket. The High Court was of the view that sufficient steps were taken by the airline company to bring these conditions of carriage to the notice of the customers Similarly, the Madras High Court held to be binding, certain conditions limiting the liability of a carrier, which were printed on the consignment note. The High Court was of the view that these were the conditions that the customer could reasonably expect to be bound by in the course of such transactions.
    The question as to what constitutes sufficient notice of a particular clause varies from case to case. In cases of mass issuance of a printed form, such as in the case of a ticket, the consumer may notice the clause but still feel unable to negotiate the clause. Thus, there are cases where a party is either aware of, or is deemed to be aware (by constructive notice) of a clause, and yet, the contract would still not truly represent the terms of the understanding between the parties. The notice theory fails to address this problem.

    The Standard Form Contracts are standardized contracts that contain a large number of terms and conditions in ?fine print? which restrict and often exclude liability under the contract. This gives a unique opportunity to the giant company to exploit the weakness of the individual by imposing upon him terms which often look like a kind of private legislation and which may go to the extent of exempting the company from all liability under the contract. The battle against abuse has fallen to the courts. The courts have found it very difficult to come to the rescue of the weaker party.

    The courts have evolved and applied certain rules to protect the interest of the consumer, customer or passenger, as the case may be upon whom standard form contracts or exemption clauses are imposed, like reasonable notice should be given, notice should be given, notice should be contemporaneous with contract, theory of fundamental breach, contra proferentem interpretation of the contract, liability in tort, exemption clauses and third parties etc.

    These modes, along with other Acts help the courts in dealing with the problem of Standard Form Contract.

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