Standard form of contract – Legal or Illegal?
By Kishan Dutt Kalaskar
Generally speaking, standard contracts are imbibed with the common ‘take it or leave it’ clauses. In such situations, the other party has almost no power to negotiate the terms laid down in the contract; they can either accept the terms as it is or reject the entire contract. Therefore, the basic right of negotiation is largely curtailed by a standard form of contract. Such contracts are generally entered into between a service provider and its customers, including insurance companies and other sale and purchase agreements.
Is a standard form of contract legal?
There is no distinction between general contracts and standard form of contracts under the Indian Contract Act, 1872. All provisions of the Act equally apply to all contracts. The reason for the popularity of standard form of contracts is the ever-expanding business activities of an organisation. Many issues have arisen as regards the negotiation power of the party. Such a party is in a disadvantaged position where it has to either accept the contractual terms or be deprived of the particular service. The party generally does not read the clauses fully and believes that they have no choice but to sign the contract. In light of such circumstances, the courts in India have, on multiple occasions, devised tests to protect the aggrieved party and ensure justice.
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Tests to protect the party in a disadvantaged position
A standard form of contract is legal and valid. However, in the interest of justice, the courts have devised measures to test the cogency of such contracts and prevent exploitation. In Life Insurance Corporation of India v. Consumer Education and Research Centre and ors., the Court held that in a standard form of contract, there is no opportunity given to the weaker party to bargain, and thus there is an imbalance of bargaining power between parties.
Firstly, a reasonable notice has to be served upon the party in a weaker position by the party framing the contract, which highlights the various terms and conditions of the contract, whether before or at the time of signing of the contract. In the case of M/s Prakash Road Lines (P) Ltd. v. HMT Bearing Ltd., a lorry receipt for the carriage of goods was issued. The receipt contained a clause that the goods will be delivered at the responsibility and risk of the owner and not the transporter/ carrier. The Court held that merely including such a condition will not be enough to release the carrier of his liability and obligations as it is unfair. Printing of lorry receipt is not enough to satisfy the requirement of the notice unless it can be shown that the plaintiff had the knowledge and gave his consent to such stipulations.
It is required that the terms of the agreement should not be unreasonable and intended to injure the other party. In Lilly White v. Mannuswami, it was observed that the terms of the contract would be declared to be unreasonable if it is contradictory to the purpose of entering into the contract or violates the public policy. Over time and again, courts have refused to enforce unfair and unreasonable contracts or clauses in contracts that are arbitrary and an abuse of position due to the inequality in bargaining power. In case it can be shown that the party was not in a disadvantaged position and was not prevented from bargaining the terms, the contract will be upheld.
SC precedent
This issue was discussed at length in the case of Central Inland Water Transport Corporation limited vs Brojo Nath Ganguly.
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In this case, the corporation was formed by the union government, and it was completely controlled by the government because it held all of the shares. Brojo worked for a corporation that was dissolved by court order, and he was thereafter enrolled into the plaintiff’s Corporation under the terms and conditions of the latter. He was elevated to Deputy Financial Adviser and Chief Accounts Officer after being selected as the corporation’s Deputy Chief Accounts Officer. Brojo’s employment was terminated without notice under the corporation’s rule 9(i), which states that the company has the authority to terminate a permanent employee’s employment by giving him three months’ written notice or paying him three months’ basic salary and dearness allowance.
Brojo raised an issue that Rule 9(i) is arbitrary and unconscionable and filed a complaint in the Calcutta High Court. The Corporation filed an appeal against the order by the HC.
Issue: Whether Rule 9(i) is unconscionable under Section 23 of the Indian Contract Act, 187?
Judgment: The apex court held that the Central Inland Water Transport Corporation Ltd’s rule 9(i), the Service, Discipline, and Appeal Rules of 1979, gave the company the authority to terminate a permanent employee’s employment by giving him three months’ written notice and a rule like Rule 9(1) in a contract of employment that agitates significant segments of the public is damaging to the public interest because it tends to produce a sense of self-doubt in the minds of those who are affected, and so it is against the public good. The SC judge dismissed the appeal and gave judgment against the Corporation stating that rule 9(i) is invalid, arbitrary, and unconscionable and opposes public policy under Section 23 of the Indian Contract Act, 1872.
Analysis: Subclause (i) of Rule 9 is against public policy and is unlawful under section 23 of the Indian Contract Act because it gives the company full and arbitrary authority. It is unclear who will exercise such power on behalf of the Corporation. There are no rules in place to determine when the Corporation may use the power granted by rule 9(i). There are no guidelines laid down to indicate in what circumstances the power given by rule 9(i) is to be exercised by the Corporation. If there is no bean of public policy to protect a case, then the Court must find the practice to be against public policy in accordance with public morality, welfare, and interest.
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Conclusion
In a standard form of contract, the terms and conditions are printed in fine print, which may be overlooked by the other party. These contracts are also known as dotted line contracts, and it is assumed that a weaker party may be exploited and injured as no specific laws govern the standard form of contracts. The party getting it signed is in a dominant position and can easily suppress the other party by compelling them to enter into the contract. Such contracts are being increasingly entered into, and higher standards of scrutiny are required. This practice also impinges upon the principles of natural justice that require both the parties to be heard.
A standard form contract is a reality of modern business setup. However, the Indian courts have failed to employ a uniform rule to unravel this difficulty, and hence, although the courts seem to be in favour of the less favourable, there is ambiguity in referring to the guidelines or the lack of it.
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