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Standard Form Contracts: An Overview

Introduction to Standard Form Contracts
In layman language, a standard form of contract is a 'take it or leave it' kind of contract. Here one party formulates all the terms and conditions, thereby reducing the complexity and number of procedures associated with drafting individual agreements every single time. The other party is not given an opportunity to negotiate. The party can either enter into the contract or opt-out of it. With a rise in business activities and trade worldwide, there is a need to enter into a contract more than ever. The most common standard form contracts are insurance company contracts, contracts associated with the purchase of a washing machine, signing up for e-mail, websites, etc.

Nature of Standard Form Contracts
A standard form contract does not provide room for any negotiations. It is entered into between partners with unequal bargaining powers. Strictly speaking, these are legally binding agreements entered into by the parties to perform or abstain from performing something, in which one party holds all the bargaining power and therefore employs it to write the contract principally to their advantage. Thus, the fundamental right to negotiate is affected by this type of arrangement.

Issues Concerning Standard Form of Contracts
  1. Mistakenly missing out to read clauses
    Courts have held several times that contracts, even if entered into in the standard form, are meant to be performed and cannot be set aside unless it is shown to be entered into employing fraud, misrepresentation, mistake or coercion. Thus under normal circumstances, the standard form contracts are valid, i.e., in the case of negligence from the side of the party is paying attention to the terms and conditions of the contract while signing it, they will get no remedy.

  2. Unequal Bargaining Powers
    Courts have strictly ruled against those standard form contracts that exploit the employees' position by the employers. In the case of employment agreements between the employer and employee, there is a general tendency to insert terms and conditions favourable to the employers, leaving no other option for the employees other than to accept it.

    In the case of Superintendence Company of India (P) Ltd v. Sh. Krishan Murgai[i], the court held that the employee's agreements should be carefully checked because the employers are advantaged. This gives rise to a situation of hardly any bargaining powers to the employees as they are conferred with a standard form contract to either accept or reject it.
  3. Irrational terms or unconscionable nature
    Courts have refused to interfere in cases where the parties' bargaining power was judged to be equal but otherwise.
    In the case M Siddalingappa v. T Nataraj [ii], the applicability of the clauses printed on the back of a laundry receipt which said the company is not responsible for the loss of the clothes delivered to them to get cleaned was in question. The Honourable court held that the laundry company acts as a bailee and thus has the basic responsibility not to lose the goods temporarily delivered to them.

Reasons to why people welcome a standard form contract
  • Mostly when given a standard form contract, a vast majority of people do not care to read through them. It could be in an expectation that all the conditions would be reasonable as it is the same for everyone, or people do not think it is worth spending time reading it through.
  • People considering their purpose of entering into the contract to be more important than the negative consequences it can create later on, while entering into the contract.
  • At times the party drafting the contract would have orally explained the major terms and policies of the contract to the other party, which might make it seem that it is not important to read the final draft of the contract.
  • Moreover, if people wish to benefit from the deal, even if they come across an unfavourable term, they have no other option; to go ahead and sign the contract or opt-out of it.
  • Tools and Mechanisms evolved to protect parties entering into Standard Form Contracts.
It is therefore easy to manipulate the party entering into a standard form contract, and hence there are certain rules laid down to protect the interest of the weaker parties. Specific procedures have been brought about to limit the exploitation in this type of contract.
  1. Due notification
    It is the duty of the party drafting the contract to notify the offeree, the printed terms and conditions duly. Otherwise, the acceptor is not bound by these terms.
    This was postulated in the case of Henderson V. Stevenson [iii] from the House of Lords. Here the claimant was entitled to recover damages for his luggage that was lost, and the company had a clause which exempted them in case of such loss in the backside of the ticket with no instructions to check the same.
    In Thornton V. Shoe Lan Parking Ltd.[iv], Lord Denning had clearly said that it is the duty of the party, which depends on the clause in the contract to its benefit, to make it clear to other parties the terms and conditions of the contract
     
  2. Notification to be provided before or during the event of entering into the contract

    According to this principle, a party to the contract has to be made clear of the exemption clauses while entering into a contract and not after. It means that notice shall be given before or at the time of entering into a contract. Any clause comprehended after entering into the contract will not constitute an acceptance.

    In the case Olley v. Marlborough Court Ltd.[v], a few of the claimant's articles went missing from her hotel room. She had seen a notice in the room absolving the hotel from any liability in case of loss of any belongings but had failed to put it on the contract. The court decided in the claimant's favour as she was not informed of this policy while entering the contract.
     
  3. A fundamental Breach of contractual obligations
    When a person makes a fall in performing the duty or delivers something other than what he is supposed to, the contract will be considered not to have been performed and, consequently, puts an end to it. This principle is commonly used to control unfair exemption clauses, as in the case of suppliers of goods and services.
    In Food Corporation of India Vs. Laxmi Cattle Feed Industries[vi], the Honorable
    Court held that in case of any breach in the contract signed, the plaintiff has to prove all its essentials. If he fails, it will not be considered a breach of contract.
     
  4. Tortious liability
    An exemption clause in a contract may extinguish their liabilities under the contract law but not under the law of torts. In the White v. John Warrick and Company Ltd.[vii] case, Warrick & Co. Ltd., Warrick Company had lent a cycle to Tom, who fell and got injured due to its defect. Though the exemption clause absolved them from any liability under contract law, they were held liable for the tort of negligence.
     
  5. Unreasonableness of terms
    Terms are understood as unreasonable if they are opposed to public policy or are irrational to the extent that it defeats the very purpose of any law.
    It can be seen in the case of Lilly White vs R. Munuswami[viii]. Lilly had given a few of her clothes to the defendant for dry cleaning, which unfortunately went missing. The company's policy in paying only fifteen per cent of the value of the lost good was declared unreasonable by the court as it was opposed to the public policy and violated the basic principles of the contract.
     
  6. Liability towards a third party
    A third party can neither suffer nor enrich themselves from a contract to which they are not a party. Applying this general principle of contracts to the standard form contracts, it can be understood that the exception clause will not exempt the party from their liability to a third party who gets injured while availing their service as in the case of Haseldine v C.A. Daw & Son Ltd.[ix] Here, the owner employed an independent contractor to undertake the maintenance and repair works of an elevator under a clause that exempted him from any liability. But when a third party got injured due to bad repairs, he was held liable.
     
  7. Clarity of clauses
    While putting down exemption clauses in an agreement, there should be no confusing terms; if any found will be resolved in favour of the weaker party, as in Hollier v. Rambler Motors (AMC)[x].
    In the case, Lee (John) & Sons (Grantham) Ltd v Railway Executive[xi], the railway company was held liable for the destruction of the complainant's goods, which were kept in the railway warehouse, even though they had a clause that exempted them from any liability.

Legal Status of Standard form of Contract in India
The Indian Contract Act of 1872 does not have any specific differentiation between Standard Form Contracts and general contracts, as these are also the type of contracts governed by the laws provided for general contracts. The 199th law commission report of 2006 on "unfair (procedural & substantive) terms in the contract" deals with this subject. However, standard form contracts are omnipresent, especially in the digital age and are used much more frequently than any other type of contract. This has led to a demand for the formulation of rules on the standard form of contract to safeguard the rights of the weaker party in the standard form contract. They can be legally valid if reasonable notice is given and if the terms are not too irrational.

Advantages of standard form contracts
  • The cost of contracting is significantly reduced as there is no need for drafting a new contract every time.
  • Since there is no opportunity for negotiation, the whole process becomes fast.
  • Since the terms and conditions do not change often, it will be easier for people to comprehend and familiarise themselves with it.
  • Even though there is no specific legislation governing standard form contracts, the precedents set by courts over time has established a body of case laws that can be referred to by parties in case of disagreement over any issue.

Disadvantages of Standard from contract
  • People might miss out on specific terms and conditions, which can put them at a disadvantage even if their side is just.
  • Being offered a standard contract with the prices for products printed as part of the text is price-fixing. Similarly, being offered fixed terms and conditions put one at a disadvantage as one is denied a chance to negotiate.
  • The language used could be confusing and difficult to comprehend, which makes people not wanting to read through them or, even if they do, fail to understand what exactly it is asserting.
  • This clearly favours one party leaving the other in a disadvantaged position.
Conclusions
A type of contract entered into under the rules provided by the Indian Contract Act, where one party drafts the contract, fixing the terms and conditions all by themselves, is called a standard form contract. Here the other party do not have a space to negotiate more favourable terms and thus are at a disadvantage.

Due to its ease and simplicity and being one of the most popularly used contract types, it is not possible to replace them with other forms of contracts either. What can be done is to make aware people entering into these contracts, to care to read and understand and clarify any ambiguous clauses that they find.

Even in the absence of any particular legislation governing this type of contract, the legal system has evolved to bring up different mechanisms and tools to protect the primary right of the weaker parties.


Reference:
  1. Avtar Singh. Law of Contract (a Study of the Contract Act, 1872) and Specific Relief. 10th ed. Lucknow: Eastern Book Co., 2008.
Cases Referred:
  1. Superintendence Company of India (P) Ltd v. Sh. Krishan Murgai, 1980 AIR 1717, 1980 SCR (3)1278)
  2. M Siddalingappa v. T Nataraj, AIR 1970 Kant 154, AIR 1970 Mys 154, ILR 1969 KAR 776)
  3. Henderson V. Stevenson, (1875) 2 Sc & Div 470: (1875) 32 LT 709 (HL)
  4. Thornton V. Shoe Lan Parking Ltd., (1971) 2 QB 163: (1971) 1 All ER 686 (CA)
  5. Olley v. Marlborough Court Ltd, (1949) 1 KB 532: (1949) 1 All ER 127 (CA)
  6. Food Corporation of India Vs. Laxmi Cattle Feed Industries, (2006) 2 SCC 699: AIR 2006 SC 1452
  7. White v. John Warrick and Company Ltd. Case, (1953) 2 All ER 1021
  8. Lilly White vs R. Munuswami, AIR 1966 Mad 13
  9. Haseldine v C.A. Daw & Son Ltd., [1941] 2 KB 343 186
  10. Hollier v. Rambler Motors (AMC), [1972] 2 QB 71, [1972] 2 WLR 401, [1972] 1 All ER 399
  11. Lee (John) & Sons (Grantham) Ltd v Railway Executive, (1949) 2 All ER 581 (CA)

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