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No-refund clause and its enforceability

Contracts form an indispensable part of both our personal and professional lives. The sheer volume of transaction that entails in our daily lives calls for a regulating code that can govern these transactions and ensure that none of the party takes unfair advantage at the cost of another party. Accordingly, law commission of India, 1861 forms the basis of the Indian Contract Act, 1872 (hereinafter ICA) which prescribe the law for making and executing contracts in India.

Apart from ICA, there are other legislations that ensure that parties to a contract like consumers are not exploited by other parties of a contract like producers and sellers. One such legislation is the Consumer Protection Act, 2019 (hereinafter COPRA). It imposes various restrictions to protect consumers from the deceptive or unfair methods adopted by the seller to deceive them. One such restriction is on refusing to refund after delivering defective goods to consumers.[i]

Before the researcher further delves into the topic No refund policy and its enforceability, it is important to understand the fundamental principle that regulates the notion of No refund clause. Legal rules, principally ICA, had developed a systematic body of rules and regulations, to promote justice and fairness in Contracts. However, because of the essential nature of society, often contracts are of nature, where contracting parties do not have equality in bargaining power.

As ruled by Supreme Court, in a contract where parties are not at equal footing concerning bargaining power, and if terms and conditions of contracts seem unreasonable and are inclined more towards one party, the contract is considered against the public interest.[ii]

The paper aims to delve deep into rules and policies related to No-refund clause and its enforceability in Indian jurisdiction and outside Indian jurisdiction. However, at the same time it is necessary to note, that as there is no particular law that exclusively forbids no-refund clause (unless there is certain circumstance like delivery of defective goods) or makes contracts void, judgements in these cases primarily depend on the discretion of court and circumstances of the particular case.

No refund clause and its prominence

The fundamental principle of a legally enforceable contract is that both parties should enter with free consent and should have consensus ad idem which means ‘Meeting of the minds'.[iii] The absence of the same can lead to a declaration of contract as void. Thus, from this it can be interpreted that if one party conceals an important fact or term of contract, it means that both parties are not agreeing on the same thing in the same sense.

Accordingly, it could lead to the declaration of contract as void. Conclusively, if there is a no-refund clause or forfeiture clause in a contract, it should be in the knowledge of both parties. In the recent judgement, Supreme Court ruled that, in case of forfeiture of amount, the party need to prove that he has incurred loss and forfeiture of the amount is necessary.[iv]

Thus, it is becoming largely apparent that the party that denies refund has the onus to prove that the clause is indispensable for the contract and to protect its legitimate interest. And if it can't prove the same, then the contract may deem to be void and this will possibly have potential commercial ramifications.

It is a very common practice of having a force majeure clause in the standard forms of contract. Under this clause, party majorly denies refunding or any guarantee to refund due to happening of some unforeseeable event, that can't be controlled by parties to contract. And although no-refund clause due to force majeure may seem unfair to the party, whose claim for refund has been denied, but it is accepted part of mostly all the standard form of contracts.

One of the examples could be travel agencies. They usually have a clause that relieves the agency from any obligation to refund the amount. In the standard form of contracts, most companies have a policy related to refunding of the amount depending on the time, the refund is claimed and cancellation of the goods or services has brought to the notice of seller or service provider. Therefore, they follow the policy of part-payment which is adjusted according to the time. For example, air services provide refunds due to cancellation depending on the time cancellation is done.[v]

However, in the event of a customer misses flight they do not have a refund policy and only pays airport taxes back. In case of missing a flight a customer only gates statutory taxes back.[vi] Thus, usually the amount of refund is calculated by considering acknowledged risk.

No refund clause and standard forms of contract

When a party signs contract, it is bound by its terms and conditions. However, more often the contract in the form of some ticket, document or receipt is made available to a party just before signing the contract. These are standard forms of contract.

The party to which such contracts are supplied often don't read terms and conditions because of lack of time or they might not consider it of much importance. Yet the standard form of contracts often has terms and conditions of nature, that explicitly exclude the liability of supplier of the document. Hence it is extremely important to determine whether these contracts are valid or not.

When the contract is made, it is essential for the party signing it, that terms and conditions have been notified to them. If they were not notified to them, until the contract was made, it will have no effect. In Olley v Marlborough Court Ltd[vii] property of complainant was stolen from a hotel bedroom because of negligence of hotel staff.

When he had arrived in the hotel, he had signed a contract but it did not mention any exemption clause. But in the hotel bedroom, there was a notice that discharge liability of hotel staff from any articles stolen or lost. In this case, it was held that the notice will be ineffective and hotel owners will be liable for their negligent actions.

Some of the conditions have been established by the court in order to determine when a party to the contract would be bound by the terms and conditions of the standard contract.
  • If the receiver of the document had no knowledge regarding printing or writing on the document, he will be not bound by the contract.
  • If the receiver knew that printing or writing referred to conditions of the contract, the supplier would be bound by it.
  • If the supplier claims that he had done reasonably enough to give receiver notice of conditions and if the receiver knew that there is writing or printing in the document but did not have the knowledge that these writing or printing refers to conditions, these conditions will be regarded as terms of the contract. And thus, the receiver would be bound by them.

It is the third rule that is most considered by courts in order to determine whether parties are bound by the contract. Cases in which there is an inadequate notice to parties for example when the terms are printed or written on the back of the receipt or document or ticket and there is no notice is given in front about the conditions mentioned in back, then it is not considered as adequate notice.[viii]

Thus, it can be concluded, that in the standard form of contracts it is important that parties had knowledge regarding terms and conditions agreed upon. And, as often standard form of contracts has a no-refund clause, thus parties should have knowledge about any such clause. If the receiver had no knowledge regarding the existence of such clause and if it was not notified by the supplier, the receiver can challenge the contract.

Applicability of No-refund clause in foreign jurisdiction

Australia

Like India, Australia also has provisions to protect its citizen from any sort of exploitation. It introduced unfair terms and thus cast doubt upon the validity of no refundable clause.[ix] Therefore, it essentially depends on the discretion of the court. However, usually such cases where there is a no-refundability clause and there are very fewer chances that claim for refund would be successful unless it is blatantly unfair.

The relatively recent authority that had declared no-refund clauses as void is Ferme & Ors v Kimberley Discovery Cruises Pty Ltd [x]. Kimberley cruise was in a business that offers trips of the coast in Western Australia, in the Kimberley region. In March 2012, nine tourists contracted with Kimberley cruise and booked a cruise. However, the cruise got cancelled at short notice due to a cyclone. At that particular time, no one criticised Kimberley cruise's decisions as they performed according to their terms and conditions.

All the tourist had an insurance policy and thus were compensated by the insurer. However, later the insurer filed a claim against Kimberley cruise claiming it is ‘unfair' under Australian Common Law (hereinafter referred to as ACL). The insurer claimed for restoration for all the fares disbursed to the tourists by the insurer and also additionally claimed damages.

Following are the observations that were made in the above judgement after considering the appropriate rule:

  • Section 27 of ACL refers to the standard form of contract and it does not refer to a standard form of terms. Thus, it was ruled that the whole contract need to be identified. The contract will consist of a brochure, a form for booking purposes and terms and conditions on that form.
  • It was established through the facts that tourists were not given enough opportunities to negotiate over the terms and conditions. Also, the contract's terms and conditions were not adjusted according to each tourist. There was a single contract for each of the tourists. The terms and condition were provided for tourists were offer like take it or leave it.

Lemon Laws- Singapore, USA

Consumer Protection Act (Fair Trading) (CPFTA) of Singapore includes a provision of ‘lemon law' which provides rights to all its consumers against non-conforming goods. This law ensures consumers a hundred per cent refund when the goods are not of satisfactory standards at the time of delivery.

This act covers all the purchase of physical goods (purchased both offline and online), Goods and vehicles purchased second hand, Sale items which are indicated as non-refundable or non-exchangeable. However, this act did not include Services, Rental or leased goods and Real estate property.[xi] Therefore, it can be said that this law will invalidate any non- refund clause for transactions covered under this Law, if the consumer is not satisfied by the quality of goods.

Similarly, In the USA the word lemon is generally used in relation to defective vehicles, however, there are other lemon laws that cover a variety of products. Various states in US have their own lemon laws and thus every state covers different goods. However, federal lemon law covers mainly mechanical defects. As contracts could be called as an express warranty, lemon laws are implied warranty that protects the buyer.[xii]

Conclusion
Some of the important revelations could be ascertained from this research paper. Firstly, for a contract to be valid in India, consensus ad idem is essential. Thus, if there is presence of No-refund clause in a contract, it has to be in knowledge of both the parties. Lack of knowledge of the same to a party would render the contract void.

Secondly, as a huge proportion of contracts are made by consumers on daily basis, and they primarily are exposed to the perils posed by producers and sellers, COPRA protects them. It obliges the seller to refund the payment to the consumer, if defective goods are delivered. Apart from it, COPRA also contains provisions against the unfairness of contract.

Thus, given the subjective nature of the meaning of the term, it majorly depends on the facts of the case. Thirdly, No-refund clause in the form of force majeure is often present in most of the standard forms of contract. Courts, across the jurisdictions, had ruled regarding the standard form of contracts in favour of party possessing low bargaining power.

Lastly, the researcher has delved into the applicability of No-refund clause into foreign jurisdictions like Australia, USA, Singapore. In Australia, a recent authority ruled against no-refund clause and ordered to refund of the payments by the service provider. Similarly, in US and Singapore, there is a concept called Lemon Laws, that nullifies no-refund clause if good delivered is not of appropriate standard of quality.

Conclusively, given that there is no particular law or section in ICA, that exclusively forbids no-refund clause, it would be a great step forward in legal context if an amendment would be introduced in ICA that could codify the same. This would ensure that parties enjoying more bargaining power, would not be able to exploit parties that have less bargaining power.

End-Notes:
  1. Consumer Protection Act 2019, s 2 (47) (viii).
  2. Central Inland Water Transport Corporation Limited and others v. Brojo Nath Ganguly and others, 1986 AIR 1571.
  3. The Indian Contract Act 1872, s 13.
  4. Kailash Nath Associates v Delhi Development authority, (2015) 4 SCC 136.
  5. Indigo last accessed on 11th April 2020.
  6. Indigo last accessed on 12th April 2020.
  7. [1949] 1 KB 532.
  8. Sweet and Maxwell, Chitty on contracts, Chapter 12, (30th edn, 2008).
  9. Are No-refund and force Majeure Clauses unfair,< https://www.millsoakley.com.au/thinking/are-non-refund-cancellation-and-force-majeure-clauses-unfair/> accessed on 12th April 2020.
  10. [2015] FCCA 2384
  11. What is the Lemon Law' last accessed on 13th April 2020.
  12. What is a lemon law' last accessed on 14th April 2020.

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