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 believe 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.
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.
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.
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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