Exemption Clauses in Standard Form Contracts

EXEMPTION CLAUSES IN STANDARD FORM CONTRACTS

Dissertation submitted in part fulfillment for the requirement of the

Degree of

LL.M

Submitted by Supervised by

AISHWARYA SINGH DR. RISHAM GARG

NATIONAL LAW UNIVERSITY

DELHI (INDIA)

2016

DECLARATION BY THE CANDIDATE

I hereby declare that the dissertation entitled “Exemption Clauses in Standard Form Contracts” submitted at National Law University, Delhi is the outcome of my own work carried out under the supervision of Dr. Risham Garg, Assistant Professor, National Law University, Delhi.

I further declare that to the best of my knowledge, the dissertation does not contain any part of work, which has not been submitted for the award of any degree either in this University or in any other institution without proper citation.

Aishwarya Singh Roll No. 01 LLM 15 National Law University, Delhi New Delhi May 30, 2016

CERTIFICATE OF SUPERVISOR

This is to certify that the work reported in the LL.M dissertation entitled “Exemption Clauses in Standard Form Contracts” submitted by Aishwarya Singh at National Law University, Delhi is a bona fide record of his original work carried out under my supervision. To the best of my knowledge and belief, the dissertation: (i) embodied the work of candidate himself; (ii) has been duly completed; and (iii) is up to the standard, both in respect of content and language, for being referred to the examiner.

Dr. Risham Garg

Assistant Professor,

National Law University, Delhi

New Delhi

May 30, 2016

ACKNOWLEDGMENT

I would like to express my sincerest gratitude to my supervisor, Dr. Risham Garg, whose consistent guidance, support and patience kept me motivated throughout the dissertation writing process and helped make this dissertation a reality.

I would also like to express my gratefulness to Professor Stefan Vogenauer, interactions with whom during his course on “Comparative Contract Law and Practice” helped in having an international perspective on the use of standard terms and their treatment, along with other general aspects of contract law. Gratitude is also owed to Prof B.T Kaul, whose lecture on labor employment contracts was enlightening with respect to unfairness in labor employment contracts that are by and large Standard Form Contracts.

A heartfelt thank you to the library staff of NLUD is also expressed.

ABBREVIATIONS

& And

AIR All India Reports

Anr. Another ed(s.) Editors edn. Edition et. al. and others

Id Idem i.e. That is

J Journal

No. Number

Ors. Others p. Page pp. Pages

SC Supreme Court

SCC Supreme Court Cases

Supra See above

UCTA Unfair Contract Terms Act

UTCCR Unfair Terms in Consumer Contract Regulation v. Versus

Vol. Volume

LIST OF STATUTES

COMPETITION ACT, 2002

CONSUMER PROTECTION ACT

CONTRACT ACT, 1872

SALE OF GOODS ACT, 1930

SPECIFIC RELIEF ACT, 1963

LIST OF CASES

1. A.K. Ummat, Managing Director, Aptech Computer Education Centre,

Chandigarh v. Barinder Pal Singh (1998) 2 CLT 152 (UT)

2. Ailsa Craig Fishing Co. Ltd. v Malvern Fishing Co Ltd (1983) 1 WLR 964.

3. Alderslade v Hendon Laundry Ltd. [1944] 1 K.B. 189, 192.

4. B.V. Nagaraju v. M/s Oriental Insurance Co. Ltd., Divisional Officer, Hassan AIR

1996 SC 2054.

5. British Crane Hire Corp Ltd v Ipswich Plant Hire Ltd (1975) Q.B. 303.

6. Brooke Bond Lipton (I) Ltd. v. Desh Deepak, 1999 (2) CPJ 603

7. Canada Steamship Lines Ltd v The King [1952] A.C. 192.

8. Chapelton v Barry UDC 1940 1 KB 532.

9. Curtis v Chemical Cleaning & Dyeing Co. [1951] 1 KB 805.

10. Hollier v Rambler Motors [1972] 2Q.B. 71.

11. Interfoto v Stiletto Visual Programmes [1989] 1 QB 433.

12. J Spurling Ltd v Bradshaw [1956] 1 W.L.R. 461

13. L’Estrange v Graucob [1934] 2 KB 394

14. Lamport& Holt Lines Ltd v Coubro & Scrutton (M. & I.)Ltd.[1982] 2 Lloyd’s

Rep. 42,50

15. Lee(John) &Son (Grantham) Ltd v Railway Executive [1949] 2 ALL ER 581

16. Olley v Marlborough Court Ltd [1949] 1 K.B. 532

17. Parker v South Eastern Railway Co. [1877] 2 CPD 416

18. Rutter v Palmer[1922] 2 KB 87,92

19. Schroeder Music Publishing Co. V. Macaulay [1974] 1 WLR 1308

20. Skandia Insurance Co. Ltd. v Kokilaben Chandravadan 1987 2 SCC 654

21. Suisse Atlantique Societed’ Armement Maritime SA v. N.V. Rotterdamsche Kole

Centrale [1967] 1 A.C. 361, 482

22. The Central Inland Water Transport Corporation Limited v. Brojo Nath Ganguly

AIR 1986 SC 1571.

23. Thornton v Shoe Lane Parking [1971] 2 QB 163

TABLE OF CONTENTS

S. No PAGE TITLE NO.

COVER PAGE Declaration by the Candidate i Certificate of Supervisor ii Acknowledgment iii List of Acronyms and Abbreviations iv List of Statutes v List of Cases vi – vii

CHAPTER 1 INTRODUCTION 1 – 11 1.1 INTRODUCTION 1 – 5 1.2 REVIEW OF LITERATURE 5 – 8 1.3 STATEMENT OF PROBLEM 8 – 9 1.4 OBJECTIVES 10 1.5 SCOPE OF STUDY 10 1.6 HYPOTHESES 10 1.7 RESEARCH METHODOLOGY 11 1.8 CHAPTERIZATION 11

CHAPTER 2 EVOLUTION OF LAW OF CONTRCATS 12 – 29 AND PLACEMENT OF STANDARD FORM CONTRACTS IN ITS FUTURE 2.1 INTRODUCTION 12 – 13 2.2 THE REALM OF CONTRACT LAW 13 – 18

2.3 STANDARD FORM CONTRACTS IN LIGHT OF 19 – 25 THE CLASSICAL AND MODERN CONTRACTUAL THEORIES 2.4 INDISPENSABILITY OF CONTRACT LAW 25 – 29 2.5 CONCLUSION 29

CHAPTER 3 Standard Form Contracts 30 – 43

3.1 INTRODUCTION 30 – 31 3.2 STANDARD FORM CONTRACTS: MEANING 31 – 33 3.3 ADVANTAGES OF STANDARD FORM 33 – 34 CONTRACTS 3.4 DISADVANTAGES AND DRAWBACKS OF 34 – 37 STANDARD FORM CONTRACTS 3.5 TOWARDS BETTERING STANDARD FORM 37 – 44 CONTRACTS 3.6 CONCLUSION 45

CHAPTER 4 EXCLUSION CLAUSES 46 – 61

4.1 INTRODUCTION 46 4.2 EXEMPTION CLAUSE 46 – 47 4.3 JUDICIAL TREATMENT 48 – 6 4.3.1 Incorporation of Exemption Clauses 48 – 54 4.3.2 Interpretation of Exemption Clauses 55 – 64 4.4 CONCLUSION 64

CHAPTER 5 ATTEMPTS IN INDIA AT TREATING 65 – 73 UNFAIRNESS IN CONTRACTS

5.1 INTRODUCTION 65 – 67

5.2 13TH LAW COMMISSION REPORT 67 – 68

5.3 97TH LAW COMMISSION REPORT 68 – 71 5.4 103RD LAW COMMISSION REPORT 71 – 76 5.5 CONCLUSION 76 – 77

CHAPTER 6 TREATING PROCEDURAL AND 78 - SUBSTANTIVE UNFAIRNESS IN CONTRACTUAL TERMS 6.1 INTRODUCTION: 199TH LAW COMMISSION 78 REPORT 6.2 CRUX OF THE REPORT 78 – 79 6.3 CLASSICAL TAKE ON UNFAIRNESS AND 80 – 81 CONTRACTS 6.4 NEED TO CLASSIFY UNFAIRNESS INTO 81 – 82 PROCEDURAL UNFAIRNESS AND SUBSTANTIVE UNFAIRNESS 6.5 PROCEDURAL UNFAIRNESS AND 82 – 85 SUBSTANTIVE UNFAIRNESS IN CONTRACTS 6.6 FILLING THE GAPS 86 6.7 UNFAIR TERMS AND INDIAN COURTS 86 – 88 6.8 PRESENT SITUATION IN INDIA 88 – 89 6.9 CONCLUSION 89 CHAPTER 7 CONCLUSION 90 – 93 BIBLIOGRAPHY viii – x Annexure 1 xi – xix

CHAPTER 1 INTRODUCTION

1.1 Background

The establishment of civilized human society, marked with the coming into existence of the institution of State is premised on a “contract”, entered into between the Man and the State.1 Hence “contract” forms the very bedrock of human society. The importance of “contracts” has only increased overtime in both public and private life. With the march of society from status to contract,2 enhanced formality in human transactions and needs of industrial society, the nature of “contracts” has undergone multifold changes. The changes sometime seem so fundamental that the very foundations established by the classical theory of contacts seem to be jeopardized. While on the other hand, the change appears to be quite amenable to the existing understanding, defining the realm of contract law. All this leads to one conclusion if nothing else. The conclusion being that there needs to be an acceptance that contracts of yesteryear have undergone a change in both their nature and role. The modern day contract hence needs a modified understanding and treatment. The changes advocated by the Law Commission in its 199th Report, asking to deal with unfairness in contracts, by providing express provisions, treating substantive and procedural unfairness separately, is a recognition of the same.

In the era of specialization there has been a resultant standardization of contracts. By “standardization of contract”, it is not meant that they have lost their specificity in terms of applicability to contractual parties, rather what is meant is that their characteristic feature of being tailor-made, to suit needs of contracting parties, has been taken over by their new characteristic feature of “one-size-fits-all” model. This generalization of the contractual content, is highly specific in terms of the conditions and exclusions sought to be achieved by the drafting part but general in the sense that it is imposed upon all that

1 See, JEAN-JACQUES ROUSSEAU, THE SOCIAL CONTRACT: & DISCOURSES (JM Dent & Sons 1920). See also, PATRICK RILEY, WILL AND POLITICAL LEGITIMACY: A CRITICAL EXPOSITION OF SOCIAL CONTRACT THEORY IN HOBBES, LOCKE, ROUSSEAU, KANT, AND HEGEL (iUniverse 1999). 2 Henry S. Maine, From Status to Contract, ANC. LAW (1861).

12 enter this standardized contract. The difference in any of two such contracts is limited only to the extent of the name of the parties. Hence the personalized characteristic of contracts is given a go by.

This standardization is achieved by what have come to be ubiquitously known was Standard Form Contracts.3 The arrival of Standard Form Contracts in the Indian market scene, with a clear comprehension of their nature and potential, was acknowledged well in the 103rd Law Commission Report in the following words:

“The standardized contracts are really pretended contracts that have only the name of contract. They are called contracts of adhesion from the French term contracts & adhesion because, in these, a single will is exclusively predominant, acting as unilateral will, which dictates its terms not to an individual but to an indeterminate collectivity. The standard terms and conditions prepared by one party are offered to the other on a “take- it-or-leave-it” basis. The main terms are put in a large print, but the qualifications are buried in small print. The individual participation consists of a mere adherence, often unknowing to the document drafted unilaterally and insisted upon by the powerful enterprise: the conditions imposed by the document upon the customer, are not open to discussion, nor are they subject to negotiation between the parties, but the contract has to be accepted or rejected as a whole. The contracts are produced by the printing press. The pen of the individual signing on the dotted line does not really represent his substantial agreement with the terms in it, but creates a fiction that he has agreed to such terms. The characteristics, usually and traditionally associated with a contract, such as freedom to contract and consensus, are absent from these so called contracts.”4

The Standard Form Contracts are standard, for one that they remain same in content and character in all respects no matter what number and what type of party signs them and two, owing to the standard terms that they incorporate. And what makes Standard Form Contracts unfair or give them potentiality to become unfair can again be attributed to two factors. One is that their formation is often defined by lack of freedom of contract and two the terms incorporated in them, similarly called as “standard terms” are also

3It is also referred to as Adhesion contracts. 4Justice K.K. Mathew, Law Commission of India, 103rd Report, May 1984.

13 associated with unfairness owing to their liability exclusion content. The PICC UNIDROIT principle under article 2.1.19 provides for standard term in the following words: “standard terms are provisions which are prepared in advance for general and repeated use by one party and which are actually used without negotiation with the other party.”5 The 97th Law Commission Report6 attempted to turn attention to such clauses and referred to them as “Prescriptive Clauses”. As can be made out, prescriptive or standard terms are not unfair in themselves, but overtime they have earned for themselves a negative connotation of being unfair. They have invariably been found as means of exempting liability of party with superior bargaining power. Further, it can also be made out that there is no paucity in legal literature and understanding in India with respect to the unfairness in Standard Form Contracts and standard terms which can easily be referred to as exemption clauses as they invariably are found to be either limiting or excluding liability, in quite sly and unreasonable manner and grounds respectively.

These Standard Form Contracts can be taken to be understood as a specific category of Contracts.7 This Contract type was a response to the need of the fast changing commercial landscape of human societies, which were increasingly being marked by routine and similar transactions, ranging in huge numbers. Coupled with this, impersonal nature of transaction, carried on through subordinate employees across jurisdictions, and necessitated the need on account of economic and personnel efficiency to have form contracts.

There is no lack of justification or contradiction in the concept of Standard Form Contracts when seen from the utility perspective. However, the trouble begins when judged against the benchmark established by the classical contract theory. The Standard

5Article 2.1.19 (Contracting under standard terms) - Unidroit - International Institute for the Unification of Private Law - Institut International pour l’Unification du droit privè, http://www.unidroit.org/instruments/commercial-contracts/unidroit-principles-2010/415-chapter-2- formation-and-authority-of-agents-section-1-formation/897-article-2-1-19-contracting-under-standard- terms. 6Law Commission of India, 97th Report, March 1984. 7 Though, so far Standard Form Contracts are considered in law as “Contracts” are ordinarily understood in the classical contract law theory. However attention to their specific modalities, which often questions their credentials as contracts, for clear violation of certain fundamental principles of contract law such as negotiation, free consent etc. See, Russell Korobkin, Bounded Rationality, Standard Form Contracts, and Unconscionability, UNIV. CHIC. LAW REV. 1203 (2003).

Form Contracts give a go by, to a lot of procedural requirements, held mandatory by the classical theory contract law. The procedural requirements, at the least, help secure procedural fairness in the contract formation but the blatant disregard for same, employed in Standard Form Contracts, quite often lead to both procedural and substantive fairness. Though Standard Form Contracts have percolated in all possible areas, even in zones earlier considered as immune to such formality, and exist in both Business-to-Business and Business-to-Consumer relations, there detrimental effects are considered more harmful in consumer zone. Hence this fact both necessitates and mandates government intervention and regulation of same.

Standard Form Contracts have come to be associated with a coercive element against the fundamental voluntary nature associated with contracts. Standard Form Contracts represent the classic instance of a situation where the devil lies in the detail. The fine print conditions, impractical to both expect and to actually read and comprehend, contained in epic long Standard Form Contracts is where the intractable problem lies. The fine print clauses usually contain the exemption clauses via which one party, usually the one with superior bargaining power, limits or totally exempts its liability. Viewed thus, Standard Form Contracts containing exemption clauses appear to be as legal and logical and in full compliance with the established principles of contract. This latent unfairness continued without becoming patent for a long time. But overtime the unfairness inherent in Standard Form Contracts and the ingrained exemption clauses became patent. The lack of genuine choice with consumer8 owing to complete takeover of market by such contracts, coupled with lack of effective consent due to asymmetric information with the consumer, absence of legal help added with the attitude of helplessness in face of party with superior bargaining power and lack of effective legal recourse make the unfairness as an acceptable feature of commercial consumer contracts. The entire chain is today

8Though Standard Form Contracts and not so obvious exemption clauses are onerous and against equity for whosoever is the party with inferior standing in such a contract, but the consumer is at a greater disadvantage and the concern to treat unfairness in consumer contracts is more urgent because the consumer as a class represents a huge number, the well-being of public at large Is the premise upon which the existence of modern state rests, further the handicaps upon a consumer, related to symmetric information and other legal know how are more. Hence, in this dissertation, the Standard Form Contracts, lying in the category of B2C, is the object under consideration.

15 quite vicious and unhealthy when viewed against the socialistic ideals9 of a modern democratic polity.

Therefore, it can be safely mooted out that, Consumer Contracts and Commercial Transactions, involving general public at large, cannot be left unscrutinised completely. The defense under the classical theory of contracts, of contracts falling under the private law regime and hence subject to minimum intervention cannot hold ground in the existent realities. There is need to either reform the traditional principles so that they can provide for ways to address the unfairness that has pilferated unchecked by classical principles in modern “Form Contracts”. Or the other alternative is to devise new principles in cognizance with the new realities and market trends. With the world, long having moved away from the strict adherence to the invisible hand logic of market regulation offered by Adam Smith, steady government regulation so as to ensure smooth facilitation of commercial transactions is required. The safest was for achieving such corrective measures is through timely legislation. The 199th Law Commission Reports recommendations regarding the same seem to be offering an effective start however inaction over the same is quite a dampener.

The present dissertation seeks to establish an understanding of the phenomenon of Standard Form Contracts, the associated exemption clauses and the attempts undertaken by the Indian legislators and the Law Commission in bringing in tune the Indian statute with the demands of the times.

1.2 Review of Literature There is no dearth of literature on Contract Law. In fact, the comparative studies in field of law were most extensively done in the field of contract law in the beginning.10 The reasons were many, and one of them being the utility of contracts in everyday life of man. This utility has only increased overtime as every other transaction, sale and purchase today is marked by use of contracts. Therefore contracts and contract law represent a never ending dynamism on one hand and a certain permanency on the other which lend it

9 The preamble and the DPSP of the Indian Constitution, both herald the Indian state to establish a society marked with equitable distribution of resources and one that is informed with economic justice. 10 WILLIAM REYNELL ANSON ET AL., ANSON’S LAW OF CONTRACT (Oxford University Press 2010).

16 a status quo spirit as well. The Standard Form Contracts and exemption clauses are not a novelty in the sense that they were made to concretize long established merchant practices so that each time there wasn’t a loss of resources in re-negotiating same terms again. This gave economic efficiency and established fairness. Today the bill of lading and other similar standard instruments don’t have an element of unfairness, despite parties being made to sign on dotted lines because the Standard Form Contract made, is result of involvement of wide range of stakeholders, resulting in not an unconscionable but a fair and equitable Standard Form Contract. This however is not the case of Standard Form Contracts that have come to dominate quite a large number of sectors. Also not that all Standard Form Contracts are vile but the present work is about the potential of it in Standard Form Contracts and exemption clauses. Contract law is said to be the child of commerce.11 More generally, it is the product of a business civilization. With movement of Human society from status to contract the relevance of contracts is a surety.12 With the increasing commercialization of human society, use of formal mechanisms of entering into transactions over informal barter exchange, and emergence of mass transactions of same nature with a vast multitude of general population by one party, there was seen an evolvement of contract types. The particular type of contracts that evolved was Standard Form Contracts. Such contract came to be called variedly across jurisdictions but was same in modalities.13 Standard Form Contracts came to be widely understood as “take–it-or-leave-it” contracts14 with inequality of bargaining power between the parties and the individual terns are non- negotiated an d mostly unread also.15 Contracts are judged, taking the presumption that the consumer is rational, while in reality he is an imperfectly rational individual whose biases and imperceptions are exploited by the specific designing of such Standard Form Contracts.16With these contracts falling short on lot of supposed pre-requisites of valid contract,17 such as equality of bargaining power,18 freedom of contract, reasonableness

11contract | law | Britannica.com, http://www.britannica.com/topic/contract-law. 12Maine, supra note 2. 13 HB Sales, Standard Form Contracts, 16 MOD. LAW REV. 318 (1953). 14 PATRICK BOLTON & MATHIAS DEWATRIPONT, CONTRACT THEORY (MIT press 2005). 15 RANDY E. BARNETT, PERSPECTIVES ON CONTRACT LAW (Aspen Publishers 2001). 16 OREN BAR-GILL, SEDUCTION BY CONTRACT: LAW, ECONOMICS, AND PSYCHOLOGY IN CONSUMER MARKETS (Oxford University Press 2012). 17 Donald B. King, Standard Form Contracts: A Call for Reality, 44 LOUIS ULJ 909 (2000).

17 etc probably led Prof Todd Rakoff to consider the question, as to whether these Standard Form Contracts can be accorded the same presumption of enforceability as is accorded to contracts in which the manifestation of assent is negotiated.19This is clear that Standard Form Contracts are not bad per se but there needs to be consistent oversight on the nature of unfairness seeping through exemption clauses in Standard Form Contracts. Exemption clauses are the liability limiting or excluding clauses or terms.20 They are like any other clause of a contract and hence must be enforced just like other terms.21 However, they invite non-enforcement when they violate the presumptions upon which rests the enforceability of terms of contracts.22 Often exemption clauses are not brought to the notice of party signing or are surreptitiously introduced so as to be devoid of any element of conscious consent to them or are misleading to their true nature or unconscionable and exploitative of the inequality of bargaining power of the party.23With judiciary having devised new techniques to check unfairness to creep in via exemption clauses, such as the red hand rule, contra preferentum rule, giving of due notice etc., the same can never substitute the need for legislative reform that recognizes and offers due protection against contractual unfairness.24 Though world over efforts are being made to check unfairness the same have been kept at a limbo in India. There have been four Law Commission Reports so far pertaining to contract law, but out of them three25 have only touched the periphery concerning unfairness in contracts while the fourth26 one, though not only attempts to be comprehensive in treating unfairness but is also a step ahead of other jurisdictions of the world in attending to the unfairness issue from both substantive and procedural aspects, seems to have gone to cold storage. The same is bad news for not only consumers but markets in general and even for the parties that seemingly gain from such unequal bargain. The need is to incorporate the changes suggested by the report so

18 ROGER BROWNSWORD, CONTRACT LAW: THEMES FOR THE TWENTY-FIRST CENTURY (Lexis Pub 2000). 19 See, King, supra note 21. See also, NILIMA BHADBHADE, CONTRACT LAW IN INDIA (Kluwer Law International 2010). 20 HUGH BEALE, CHITTY ON CONTRACTS 29TH EDITION (London: Sweet & Maxwell 2004). 21 ANSON ET AL., supra note 14. 22 GHL Fridman, Effect of Exclusion Clauses, The, 7 ALTA REV 281 (1969). 23 RICHARD G. LAWSON, EXCLUSION CLAUSES AND UNFAIR CONTRACT TERMS (Sweet & Maxwell 2011). 24 RYAN MURRAY, CONTRACT LAW: THE FUNDAMENTALS (Sweet & Maxwell 2008). 2513th , 97th , 103rdLaw Commission of India reports. 26199th Law Commission of India report.

18 as to bring the centuries old statute in pace with the modern day requirements and relevant.

1.3 Statement of Problem

Standard Form Contracts27 along with their bedfellow-Fine Print Clauses28 have become the standard feature of modern day contractual transactions, whether the dealing lies purely in the commercial arena or in non-commercial i.e. consumer field.29 Standard Form Contract is a contract like any other contract, as understood generally, under the Traditional Contract Law Theory, between two parties. What distinguishes such contracts from the ones envisaged under the Classical Theory is that the terms and conditions of such a contract are set by one of the parties, and the other party has almost no ability to negotiate more favorable terms and is thus placed in a disadvantageous position, which can be likened to “Take-it-Or-Leave-It” position.

While there is nothing illegal in the nature and form of Standard Form Contracts but the existence of a very real possibility of exploitation of one party by the other owing to its superior bargaining power is quite potent. While there can never be equality between two parties with respect to bargaining power owing to differences in such power determining factors like information symmetry, cognitive skills, economic might, etc. the threat posed by Standard Form Contracts needs redressal, due to the existence of an unacceptable degree of inequality between the parties and resultant of such a contract.30 Without disregarding the advantages of Standard Form Contracts, the concern is owing to

27 Also known as Contract of Adhesion, Form Contract, Leonine Contract, Take-It-or-Leave-it Contract 28 Exemption and exclusion clauses 29 It must be noted that the distinction between contracts as commercial and civil is of feature of civil law tradition. The common law legal system recognizes no such differentiation. However it must be noted that the common law countries have devised certain codes and principles that apply exclusively to contracts that lie in the consumer zone. Hence non-recognition of consumer contracts as a special category under common law jurisdiction is no longer of any consequence. However, the academic debate continues whether the differentiation made out in civil law traditions and the one indirectly achieved in common law tradition is a valid one or not. Justice however will be better served by acknowledging not only the difference in types of contracts but by also accepting the special exceptions that inform Standard Form Contracts and take it away from contracts understood generally. See, E. Allan Farnsworth, Comparative Contract Law, presented at The Oxford Handbook of Comparative Law 899 (Oxford University Press 2006), p. 906. 30 Standard Form Contracts existing in consumer transactions pose a more serious threat as compared to the ones lying in purely business and commercial transactions i.e B2B contracts.

19 violation of certain fundamental principles of equity and justice by such contracts. Standard Form Contracts have a considerable potential for inefficient and even unfair terms to be accepted by signatories. Such terms are unfair when they limit the liability of a party to utter disadvantage of the other or give unilateral modification power to one party only. Such unfairness cannot be exhaustively defined for the ways through which such unfairness is achieved are constantly evolving. Now an important aspect, often ignored in attempts to treat contractual unfairness, embedded in Standard Form Contracts, is that the unfairness in Standard Form Contracts is not only substantive and pertaining to its content but also procedural. Standard Form Contracts defy all the assumptions which are supposed as existent in contract formation. They are rarely read to full extent, and it is unreasonable to expect consumers to read same in their contextual setting. Further not only access to full terms is often an uphill task which frustrates the drive of consumer, but the boilerplate terms also are not the salient terms and hence often go ignored by the unsuspecting consumer. Lack of effective choice, owing to market monopoly, plus the consequent pressure to sign along the dotted lines, etc are few of the factors that underlie the conclusion of a Standard Form Contract, which is in quite disagreement with the established fundamental principles of contract law.

Hence, it is clear, that both from legal perspective and from economic perspective, Standard Form Contracts may end up resulting results, which are quite opposite to their stated purpose. Instead of informing contractual transactions with efficiency economy and justice they may result in prevalence of unfairness. Recognizing the beneficial potential of Standard Form Contracts, the need is to address their inherent possible unfairness, else the benefits be undone by the negatives. The beginning is to be made by acknowledging the true nature of Standard Form Contracts which is of being a special category of contracts and to treat them unlike the general contracts envisioned under the classical theory. This is to be achieved by interpreting the unfairness importing exemption clauses in Standard Form Contracts in a manner that resonates with the peculiar nature of Standard Form Contracts so established. Next effective check on possible unfairness from creeping in Standard Form Contracts is by providing a pre- emptive regulatory screening mechanism, having legislative backing.

1.4 Objectives

1. To study the nature scope and utility of “contract like” Standard Form Contracts. 2. To study the various aspects associated with Exemption Clauses and their related ability to introduce unfairness in contracts. 3. To analyze whether for effective treatment of unfairness in contracts generally and Standard Form Contracts in particular, there should be a separation between procedural unfairness and substantive unfairness.

1.5 Scope of Study The present work is a humble attempt to ascertain the contours associated with exemption clauses in Standard Form Contracts and the resultant unfairness. The dissertation aims to highlight the need to take up the suggestions of the 199th Law Commission Report and holds it as a first step in treating unfairness in contract generally and in Standard Form Contracts in particular.

1.5 Hypotheses 1. Standard Form Contracts are a particular type of contracts that require specific modifications in the rules of interpretation and understanding of concept of freedom of contract as held in relation to contracts generally. 2. Standard form contracts are not exploitative ratheratool for smart business management and justified for the risk taken by the big business enterprise. 3. Unfairness in Standard Form Contracts and Exemption Clauses has been addressed through judicial innovation and creativity. 4. There is an urgent need for legislative intervention in India, that provides for treating substantive and procedural unfairness in Standard Form Contracts and exclusion clauses separately.

1.7 Research Methodology Doctrinal method has been employed for the completion of this dissertation. Books, articles, commission reports and other related matter available online has been referred to while writing this dissertation.

1.8 Chapterisation The present dissertation is composed in a total of seven chapters. Chapter 1 offers a peek into the subject matter of dissertation. It is a brief as to what to expect in the given research work. Chapter 2 attempts to track down the origin, journey and placement of Standard Form Contracts in the evolving theoretical framework of Contract Law. Chapter 3 and Chapter 4 take up the discussion with respect to the two pillars of this dissertation i.e. Standard Form Contracts and Exemption Clauses, respectively. Chapter 5 and Chapter 6 deal with the attempts made at law reform in India in context of contract law. Last chapter, chapter 7 concludes the dissertation work, pitching for undertaking urgently required law reform in Contract Act, 1872 so as to answer the unfairness issues raised by use of Exemption Clauses in Standard Form Contracts.

CHAPTER 2 EVOLUTION OF LAW OF CONTRCATS AND PLACEMENT OF STANDARD FORM CONTRACTS IN ITS FUTURE

2.1 Introduction

Accepting that “Man is a social animal”,1 it follows as a corollary that he will enter into socio-political and economic transactions. With evolution of human societies, from primitive to feudal to industrial to present day IT dominated complex, the transactions have become highly complex, formal and commercialized. Such has been the mainstream understanding, that, contracts have been understood as lying outside the ordinary day to day dealings of man, relegated to purely commercial business transactions, under which was presumed that, there does not fall the class of consumer. However, even if this was true in primitive societies, in 21st century it is a non-existent feature. In contrast, the modern day man ends up entering multiple contracts in his entire lifetime, sometimes not even being aware of having signed such a document. Hence, law of contract, though acknowledged as belonging to private law regime, has overtime come to influence more than a minority, with its use having been consistently increased. This is to hold that the ramifications are so wide and pervasive that it concerns the public at large and hence line is blurred with it falling under public law. This fact, establishes, that the need to address the issues associated with Standard Form Contracts is quite pertinent and the unfairness of contracts in general and Standard Form Contracts in particular if untreated will harm not a minority but a majority.

This chapter aims to demystify the realm of contract law and establish the evolution of same. Thereby, the chapter seeks to develop an understanding that Standard Form Contracts are to be viewed in light of renewed and modified understanding that resonates with the present reality, since history of evolution of contract law shows that it has its guiding goal as to reflect the existential realities of contemporaneous society. The reality being referred to, is that, such Form Contracts, must not be interpreted while placing

1 Jiyuan Yu, Virtue: Confucius and Aristotle, PHILOS. EAST WEST 323 (1998).

23 classical principles as guiding light, because they lack some of the fundamental principles, that inform the contracts, as considered under classical theory. Hence, a treatment in sync with the true modalities of Standard Form Contracts, would be logical and natural, for the historical development of contract law shows that the journey of contract law, since classical era to modern times has undergone change in congruence with the changing political-economy of the world, i.e. matched the existential realities. Hence though contract law seeks to ensure due compliance of voluntarily entered obligations2 and certainty in transactions, the law to be of any practical utility and serve the very objectives of contract law needs to show dynamism. This justifies that there is a need to have an effective oversight of the unfairness inherent in Standard Form Contracts that seep through the exclusion clauses. The chapter attempts to establish that the theoretical aspects associated with the contract law need re-adjustment with respect of Standard Form Contracts since otherwise Standard Form Contracts must not be considered contracts as they fall of fulfilling the essential principles.

2.2 The Realm of Contract Law

French Law holds Contracts as “law of the Parties”. Being a Law, they are binding upon the parties, much like a statute law is binding upon the populace in general. Just like violation of statute law invited sanction so does default in private obligation. Hence it is clearly established that Law of Contract3 belongs to private law regime and concerns itself with “the obligations that people owe to others as result of the relations and transactions in which they became involved”.4 Contract law is not concerned with social, moral and other externally imposed obligations but with self-imposed obligations that are entered into with an intention of being legally bound. Hence, an informed consent forms the bedrock of a contractual obligation which is so missing in Standard Form Contracts quite often.

2 RYAN MURRAY, CONTRACT LAW: THE FUNDAMENTALS (Sweet & Maxwell 2008). 3Common Law treats Law of Contract while Continental Law treats Law of Contracts. India largely being a common law country follows the British practice where instead of law of contracts we have law of contracts i.e. we believe in one contract. All types of agreements enforceable by law fall under one category of contracts only. There is only one type of contract. 4 STEPHEN A. SMITH & PATRICK S. ATIYAH, ATIYAH’S INTRODUCTION TO THE LAW OF CONTRACT (OUP Oxford 2006).

To make a note further, so has been the development in the field of contract law, that default of contractual obligations may lead to sanction not under private law only but also under public law. Arrival of Law of Torts and of Doctrines like Unjust Enrichment developments concerning public law, primarily, can in some ways held to owe their origin to Law of Contract. They, as a result supplement the remedies under law of Contract.5 Hence, why unfairness resulting from Standard Form Contracts must be taken up upfront by the state is because the evolution of contract law overtime has linked the private with the public. This interconnection is so established now that it requires no further proof.

2.2.1 Essential Principles of Contract Law

It is common knowledge that to understand the present, past must be analyzed as well. Hence, to understand the Standard Form Contracts, which represents a modern trend in contract law, in entirety, the principles, rooted in classical understanding must also be given a look. Talking of history, it must be made clear at the outset, that the Standard Form Contracts cannot be likened to the Bill of lading and other standard contractual forms that were developed by traders as a result of years of established consistency in compliance and negotiation. The following are certain fundamentals features, having near universal acceptance, whose existence is mandated for a valid contract.

2.2.2 Freedom of Contract

Every man is presumed to know best where his optimum interests lie. Hence, law accords almost absolute6 freedom to him to enter into legally binding obligations with other legal entity. This presumption pays due respect to the notion of inherent rationality of man,7 and also gives expression to the demand of a market economy.8

5Stanley D. Henderson, Promises Grounded in the Past: The Idea of Unjust Enrichment and the Law of Contracts, VA. LAW REV. 1115 (1971). 6 Restrictions in interest of public, individual himself etc as perceived by state itself. Sec 10 of Contract Act 1872 imposes certain qualifications that act as restrictions. 7 Established post the enlightenment era, and also sides with the Natural school of jurisprudence. Lexis nexis student law series jurisprudence 8 It is an established trajectory that economies of countries, and so of human societies, moves from primary economy to manufacturing to service economy. Hence the primitive transaction based oninformalandbarter

Freedom of Contract is a natural corollary to liberal economic policies, defined by Laissez Faire doctrine, which accords almost absolute freedom to an individual to conduct his private affairs with minimal state intervention.9 And going by this logic, freedom of contract is a harmless and rather pro-individual doctrine. However, giving an ear to the Marxist understanding of law and the realities of life, Freedom of Contract can also be seen as a shield, under the garb of which unfairness can be played out by the party with superior bargaining party. It is this latter view, which Standard Form Contracts are associated to be giving expression to.

In theory, Freedom of Contract is understood as giving full party autonomy on matters of both, whether to enter or not to enter into a contract and upon which terms to enter in a contract. This holds man as a rationale being who can fully comprehend the consequences of his actions and is the best judge of his interests. Another inference drawn is that there can be no liability or compulsion to fulfill an obligation which is not consented to. Hence within freedom of contact is embodied both negative and positive freedom. An observation can be made out here, that when a dispute arises, whose foundation lies in a Standard Form Contracts, the positive obligation of having consented to terms is usually played out against the inferior party and the negative obligation of having excluded from possible liabilities is often taken advantage of by the party with superior bargaining power.

Originally Freedom of Contract was seen as serving primarily economic logic. Today, with increasing focus on Welfare State, it is seen as a “social ideal” that seeks to incorporate a reasonable level of equality of bargaining power between parties without affecting commercial interests of society at large. Therefore it will not be incorrect to hold that Modern version of Freedom of Contract today is highly restricted due to “development in modern social life and policy”10 when seen in comparison to its original form under the classical theory of contract.

system is bound to move to formalized transactions which require a scheme which today’s contract law provides effectively. 9 Robert L. Greenfield & Leland B. Yeager, A Laissez-Faire Approach to Monetary Stability, 15 J. MONEY CREDIT BANK. 302 (1983). 10 WILLIAM REYNELL ANSON ET AL., ANSON’S LAW OF CONTRACT (Oxford University Press 2010).

With increasing statutory regulation11 upon scope of content of contracts, a new nomenclature for contracts in light is that of “regulated contracts”. This is a feature of 20th century modern contract law theory and a response to Standard Form Contracts that sought to take to extreme the Freedom of Contract.

2.2.3 Sanctity of Contracts

This feature gives practical utility to Freedom of Contract. Contracts are mandatorily to be performed and are legally binding upon the parties.12 For otherwise what use will be contract law if it does not recognize compulsory performance of contracts entered into by parties and how will it be any different than other social and moral obligations.

Contract law however is not blind to the uncertainties that inform human life and hence the sanctity can be breached in certain circumstances. However consequent damages and restoration to pre-contractual state follow regardless. Though, such restrictions, which seem reasonable and necessary to curtail unconscionable transactions, are also viewed upon as encroachments upon both freedom of contract and sanctity of contract. Hence contract law shall in one sense ever continue in reach of the elusive goal of bringing about reasonability in contracts whether standard or particular for the fairness is a highly subjective and divisive concept.

2.2.4 Sanctions

Upon entering a contact there is a positive expectation in minds of contracting party that the promise will be performed. Contracts have interest of the parties embodied in them. The obligation contained maybe strict or qualified. Upon failure of performance, the interest of party suffers, who is provided with redressal in the form of compensation or specific performance in certain cases. It is these sanctions, which exist in law as default

11 JAN M. SMITS, CONTRACT LAW: A COMPARATIVE INTRODUCTION (Edward Elgar Publishing 2014). 12(a) A valid contract is binding upon the parties. It can only be modified or terminated by consent of the parties or if provided for by the law. The parties to a contract must, unless legally excused from performance, perform their respective duties under the contract ("pacta sunt servanda"). (b) A valid unilateral promise or undertaking is binding on the party giving it if that promise or undertaking is intended to be legally binding without acceptance. http://www.trans-lex.org/919000, accessed on 12th May, 2016

27 rule, which are attempted to be exempted and excluded by a party in Standard Form Contracts. This unilateral exemption achieved in Standard Form Contracts makes them unfair for the weaker party is left with no recourse to a remedy that was guaranteed by law13, since he was made to waive of such remedy, either by tacit coercion or by taking advantage of his ignorance

2.2.5 Informality

So long an intention to create legally binding obligation and consensus ad idem is proved, law is prejudiced in favor of acknowledging the existence of a contract and to giving expression to the will of parties. Doctrines like Parole Evidence, implying consent via conduct, recognition of oral contracts etc. are evidence of the same. Wherever written form is mandatory the same has to be explicitly made out. At least this is the position in India, the logic being that where stakes are greater, a written contract ensures greater proof of existence of legal intention to contract amongst other things. Standard Form Contracts are written and hence the leeway for courts to negate existence of acceptance of an exemption term or otherwise is highly restricted as a result.

2.2.6 Contractual Fairness

“Scientific rationalization has long been absent in English tradition”.14 Hence the concept of substantive fairness as such is not of much concern under common law. Also what little regard is given is given to procedural safeguards, least to substantive fairness. Moreover, fairness in itself also is not an easy concept to deal with, and hence attempts to deal with it are easily silenced owing to incomprehensibility of the same. Further, fairness, being a subjective term has varied perspectives. Probably recognizing this, the common law judges in judging fairness of a contract (which they do not venture much into) usually seem to be concurring with the following observation of English judge George Jessel in 1875’s case:“if there is one thing more than another which public policy requires, it is that men of full age and competent understanding shall have the utmost

13 Going by the principle of Ubi Jus,Ibi Remedium 14 SMITS, supra note 11.

28 liberty of contracting and that their contacts, when entered into freely and voluntarily shall be held sacred and shall be, enforced by courts of justice.”15

Hence the Indian Contract Act, 1872 too, though provides for procedural and substantive fairness, but its treatment of same is piecemeal and indirect and out of touch with mode realities. There is need to introduce provisions that provide for treating these head on. Recommendations of the 199th Law Commission Report can be a beginning.

It appears that the above principles are ideals to be aspired for increasingly though every contract may not be providing for these. The courts give a very literal and formalistic interpretation to these principles and even though the contracts entered into in the modern economic life do not possess these essentials they are routinely read as existing implicitly. Hence it may be concluded, though sarcastically, that these are ideals and not foundational essentials of a valid contract. Where the law today is not considered as merely detached a command of the sovereign but will of people, contractual principles too need to be given effective reading. There is need to ensure that these principles are not used to provide a veil for procedural and substantive unfairness

As noted above, Standard Form Contracts seem to err on all the above mentioned five minimum essentials that go on to constitute a fair and valid contract. The standardization of contracts across jurisdictions, irrespective of the legal system prevalent and the state of development of economy, is near universal. This uniformity is achieved because of existence of certain principles that form the defining elements of what is understood by a contract and what constitutes a contract. Though with increasing globalization the standardization is only strengthening, there is parallel modification in these principles also, making them more suited to the changing social, political and political conditions of the society.

15Printing and Numerical Registering Co. v Sampson (1875) 19 Eq 462

2.3 Standard Form Contracts in light of the Classical and Modern Contractual Theories

Within the private law, contract law is the most settled16 and yet it cannot still boast of a “theory for everything”.17 Contract law has neither a complete descriptive theory nor a complete normative theory.18 The reason is self-explanatory. The contours and types of contracts has been both expanding and evolving continuously and to provide a comprehensive description for all types is not possible. In the absence of one and all encompassing defining theory, the arena of theories of contract law is dominated by the classical theory of contract and the modern theory of contract. These theories more than explaining the realm of contracts establish how the contracts fit in the political economic realm of the time.

2.3.1Classical Theory of Contract

Understanding the theoretical issues behind “contact law” is important because they form the backdrop in light of which to interpret contracts. Despite a corpus of theories being developed for each aspect dealing with the world of promises and their enforcement, Classical law of contract continues to be the dominant approach.19This concept is primarily centered around the concept of freedom of Contract.

The classical theory20 of contract visualizes a contract with the following characteristics:

1. It is based on exchange of promises. 2. It is intended to be ultimately performed. 3. There exists mutuality. 4. There are enforceable by law and their enforcement and performance can be coerced by law.

16 MURRAY, supra note 2. 17 Alan Schwartz & Robert E. Scott, Contract Theory and the Limits of Contract Law, YALE LAW J. 541 (2003). 18Id. 19 Towards the latter half of the 19th century developed the concept of contract along with associated body of legal doctrine. Together they came to form the classical law of contract. See, RICHARD STONE, THE MODERN LAW OF CONTRACT (Psychology Press 2005). 20Carolyn Edwards, Freedom of Contract and Fundamental Fairness for Individual Parties: The Tug of War Continues, 77 UMKC REV 647 (2008).

5. The contract is interpreted in light of its terms, circumstances that existed at the time of conclusion of contract. 6. The exchange/circumstances and time when it was entered into and concluded. 7. The exchange represented by contract is discrete. 8. Dispute arising out of contract be settled by courts whose role is to settle the dispute by making parties comply with their agreement and promises. Court is to give effect to the intention of the parties as culled out from the terms (express and implied) of the contract.

It can be clearly made out from the above points, that the classical understanding is based on certain presumptions. Most fundamental of such presumption being, equal bargaining power of parties and the equal or at least comparable faculties cognitive of parties in assessing the nature of promise they are obligating themselves to. However, an ordinary consumer, reportedly falls short on these presumptions and hence having been forced to sign a Standard Form Contracts, he is actually been made party to a one-sided contract and hence an unfair contract.21

Classical theory primarily stresses upon three fundamentals. The first is its stress upon the “independence and distinctiveness of contractual obligation”22; second is its emphasis on party autonomy and freedom of contract; and third being the “ideal of a unified law of contract characterized by rules of general application”.23 These three represent the laissez faire market de-regulation principle that guided the late 19th century. Hence it can be argued that the classical theory was pro-commercial interests without giving much regard to the equity principles. It indeed saw contracts as tough, bargained-for-exchanges; presupposing that an outcome of such a bargain being played out within set rules will

21 Unfairness however may arise from more factors than just from the contract being a one sided one, such as by imposition of unfair terms, etc. 22 The distinctiveness of contractual obligation is that it is a chosen obligation and not enforced by default. This distinguishes contract from tort and fiduciary obligations. The good faith that is required in contract law is not in addition to the terms stated in the contract. The good faith/fiduciary element is to take away the element of discretion in performance of the contract from the parties, who must rather necessarily stick to the terms of contract. Contracts fall between the Tort obligations on one extreme and fiduciary obligation on the other hand. See, online at Daniel Markovits, Theories of the Common Law of Contracts, inSTANFORD ENCYCLOPEDIA OF PHILOSOPHY (Edward N. Zalta ed., Fall 2015 ed. 2015). 23 Donal Nolan, The Classical Legacy and Modern English Contract Law, 59 MOD. LAW REV. 603 (1996).

31 without fail leave both parties as better off. Hence the Standard Form Contracts seem to toe the line quite perfectly when seen with this superficial and theoretical understanding.

2.3.2The Modern Theory of Contract

“The modern law of contract contains much which can properly be explained only in the light of its history”.24The fundamentals and logic of making and then enforcing promises have not undergone much change. There thereby exists a continuum with the classical theory on most aspects. However, there has been a consistent reshaping of contract laws in the modern 20th century. However much change is owing to change in the attitude of courts towards and relevance attached to circumstances associated with contracts, when interpreting contracts whose performance is sought.25 This in turn has led to new understanding of foundational doctrines of contact law like consideration, freedom of contract etc. Hence what may be said is that there is modification in the contract law that on one hand appears as forming part of continuum and on the other as a break from the past.

In the latter part of the twentieth century, classical theory was subject to sustained attack. Court decisions also routinely gave evidence of a move directed away from strict compliance to classical theory formulations. However the evolving modern theory of contract law being rooted in classical theory itself is still similar though no longer a mirror image of the classical theory of contract.

In fact the modern contractual theory seeks to accommodate the very conditions mentioned in the preceding paragraphs that formed the presumptions in classical theory but were increasingly found to be fallacious and not representative enough of the real situations under which parties enter into contracts. As a consequence, modern theory is no different from classical theory, but in its application and interpretation of principles.

The evolutionary change in the theories from classical to modern can be reasoned as an outcome of the changing socio-economic-political scenario of the world. The journey

24 ANSON ET AL., supra note 10. 25Id.

32 from one extreme towards a middle ground (as aspired by modern theory) is detailed in the following part.

2.3.3Trajectory from Classical to Modern

Law of contract is the child of commerce.26 The life history of contract law brings out the close connection between contract law on one hand and commerce and polity on the other hand.27

A. Classical period (1770-1870)

This period can be called as the golden age of Freedom of Contract principle. In the background of increasing entrepreneurism, individualism, laissez faire, state became more of a facilitator than a regulator. With paternalism out of the window, rules made to protect those who entered into “foolish and imprudent bargains were whittled away by judges”. Rather than equity, principles intrinsic to contract law, prime being freedom of contract, and strict follow up on the voluntarily entered into obligations came to be the light under which contracts came to be interpreted. It is not to say however, that equity was wiped out from contract law.

B. The period from 1870 to 1980

During and by this period the Freedom of Contract had been utilized to the extent that it was beginning to be misused. The said freedom, clubbed with increasing inequality in societies across jurisdictions had lost its inbuilt and to some extent presumed fairness with continuous erosion of equal bargaining power amongst parties to contract, the return of pre classical era, that marked the intervention under the concept of parenspatriea commenced again. Traditionally understood freedom of contract was no guarantee that

26 The history of English contact law, upon which is premised the Indian Contract Act 1872, has grown in concurrence with the growth of the British society from agricultural to commercial to industrial society. This cycle is passed through by each nation though India being an anomaly has directly jumped from primary the tertiary sector missing the middle rung of secondary sector. This further necessitates the Indian Contract Act to incorporate changes with times among which providing for substantive and procedural unfairness is one such reform.

27 To study the changes that the contract law has undergone overtime, a classification has been made comprising three broad periods. See, SMITH &ATIYAH, supra note 4.

33 contracts entered were indeed concluded freely and voluntarily or that they were just and fair. The realization of problem of “externalities” arising out of Freedom of Contract was another potent reason behind increasing restriction on Freedom of Contract. These two aspects were first observed with respect to railways and public utilities. This period also saw increase of Standard Form Contracts. Here on one hand there was almost complete uniformity and dominance of contracts and Standard Form Contracts in market and on the other they were increasingly being made by individuals who did not possess legal know how to acknowledge and the gravity of the terms.

All this led to increasing realization that Freedom of Contract was nothing but a “chimera”. The declining belief in freedom of contract and use of freedom of co Standard Form Contracts coupled with the emergence of the consumer as a contracting party, lead the state to legislate provisions to deal with substantive and procedural unfairness. Specific legislations were the natural fallout of this period and just like Standard Form Contracts we also had legislated contracts that dominated certain sectors like employment, fixing minimum statutory safeguards. In an way the latter were an answer to the problem represented by former.

It is not that in classical era public policy28 concerns did not lead to holding unfair contracts as void, but the measures adopted in this era, were more diverse and more aggressive and pre-emptive.

This period was also marked by maturity of law of tort and unjust enrichment. Hence not only substantive and procedural provisions were incorporated in contract law to accord protection to unsuspecting party to contract from surprise and sudden shocks but also grounds for relief outside the law of contracts were provided.

When freedom of contract went for a downswing, the inherent consent element was one which was being questioned. What this era under welfare regime sought to ensure was to establish achieving substantive consent rather than procedural consent only. This attempt led to three developments. One was the increasing trend of legislations defining the scope of permissible obligations that can be entered into freely. Second concerned establishing

28Id.

34 general principles of contract that sought to ensure fairness not only in specific but in contracts across board. Third, the interpretation tools of classical era were to be suited to reflect the ideals of modern age. The interpretation was to be given keeping in mind not only intention of parties, as derived from terms of contract, but to read the same in conjunction and not isolation, with spirit to advance a policy, which was to have contracts necessarily fulfilling the condition of fairness.

C. The Contemporary Period: 1980 to the Present

The contemporary period is marked by two opposite trends. One wishes a return to classical era and the other to stick to the period that followed the classical era i.e. continue with what is existing and move with the same spirit. The advocates of former classical approach represent the breed that favors pro-market sentiments. They attempt to justify Standard Form Contracts and consent to exemption clauses sound economic principles and reasons. The contested unfairness, associated with the traditional understanding of Freedom of Contract can be addressed by not restricting the system but by setting market monopolies right which will happen automatically when the state withdraws and lets the invisible had of market get to work. The inequalities existing in market is however yet to be answered even by the defendants of the classical approach, which more or less consider it to be as necessary evil and the restriction imposed might do further injustice to weaker parties than freedom of contract would result in.

The latter trend that supports continuation of guided state intervention is different from its earlier version in respect of reasons it basis itself. it shows that the continuum it seeks to establish with the preceding period is not based on stale claims of unequal bargaining power and uncompetitive markets. But the logic it puts forward is more fundamental and not merely as a counter retort, that justify the continuance of approach represented by it in itself rather than as better alternative to other approach. The first reason put forward is that neither can market be ever perfectly competitive nor do people act as rationally as assumed by classical theory. Presence of Rescue mechanisms cannot be dispensed with by any corrective mechanism. In fact providing for inequities is as important, if not more, than ensuring Freedom of Contract. Imputing implied terms in contracts serves the same logic as does the use of Standard Form Contracts with exclusion clauses. Preventing

35 unfair terms and unfair contracts to come into existence serves substantive interests of both parties by limiting chances of litigation.

What can be made out is that though quite settled otherwise, the realm of contract will continue to be plagued by dynamism and the courts will undoubtedly have a lot of discretion to use. Discretion must be employed to interpret the contract not only keeping in mind the intention of parties but also the context in which it is made and sought to be enforced. The externalities can no longer be negated. Though a subject of private law and traditionally understood as affecting private transaction of individuals, the contracts have become more pervasive and omnipresent. The effect of contacts is no longer restricted to private life but is increasingly affecting public laws as well. The contract law cannot not provide for fairness quotient, which must not be only procedural and formalistic but also substantive.

2.4 Indispensability of Contract Law

Law of Contract is primarily concerned with three functions,29enforcing promises, regulating markets in the provisions of goods and services and facilitating exchanges. Further the existence of contracts is justified on both economic and moral stands.30 Utility of contracts in human society stands undisputed today. How contracts have become a regular feature of man’s life is made amply clear by the use of Standard Form Contracts. To a great extent it is these Standard Form Contracts that have introduced formal contracts in the ordinary transactions, owing to their characteristic feature of being standard and hence economically efficient. Contract hence, is both a need for continuing existence and functioning of society and result of the type of society we live in and have constructed for ourselves.31 Given the importance of contracts, the need is to constantly pluck out the weeds. The trend in contract law is quite positive in attempting to deal with unfairness associated with contracts in general and Standard Form Contracts in particular, however the outgrowth of weeds in form of Standard Form Contracts and exemption clauses is also quite persistent.

29 RICHARD STONE, THE MODERN LAW OF CONTRACT (Psychology Press 2005). 30 SMITH &ATIYAH, supra note 4. 31Whether the society represent Nordic social model or Anglo-American capitalist model or the Chinese socialist model. See, SMITS, supra note 11.

2.4.1 International Influence

Though the world legal system continues to be divided in two systems, one being the common law and the other continental, with both having quite considerable differences in terms of contract law32. Both have up till recent times maintained insularity from each other. But increasing telecommunications and connectivity, greater international trade, regional groupings like European Union (where countries following two different juristic systems of law have come together), have led to decreasing insularity and increasing infiltration of both, with each other’s principles and laws. Hence the good faith principle is increasingly being recognized in common law jurisdictions of which India is also a part of. Treating “unfairness” upfront is increasingly becoming an aspect of contract law. The Unfair Contract Terms Act, 1977 (UCTA,1977) and the Unfair Terms in Consumer Contract Regulation 1999 (UTCCR,1999) are reflective of reflect this trend. What to expect in the future, pertaining to trajectory of contract law and its treatment of unfairness, of which Standard Form Contracts embedded with exemption clauses, is represented by the following observation in an English case: “ openness requires that the terms should be expressed fully, clearly and legibly, containing no concealed pitfalls or traps… fair dealing requires that a supplier should not, whether deliberately or unconsciously, take advantage of the consumer’s necessity, indigence, lack of experience, unfamiliarity with the subject matter of the contract, weak bargaining position….”33

2.4.2 Confines of Contract Law

Freedom of contract has increasingly become less absolute. There are certain categorical agreements which are explicitly declared to be void34 and hence un-enforceable by law. Then there is also the category, of limited restrictions, on the said freedom, which leads to voidable contracts.35These restrictions usually address the perceived unfairness of

32 Common law does not recognize law of contracts like the continental system does, rather it only acknowledges law of contract. Hence the various categories of contracts are treated as one only. 33 House of Lords in case of Director General of Fair Trading V First National Bank plc; 2002)UK HL52 2002 1 ALLER97 34 Agreements by way of wager , those in restraint of trade, marriage and legal proceedings, those that are without consideration or for an unlawful object or unlawful consideration, or are of uncertain in nature, are held as void under the Contract Act of 1872. 35 In India, for instance, a contract is voidable if the consent of a party to contract is not free or if there was no meeting of minds

37 contracts, whether it is substantive or procedural. Though these restrictions don’t find acceptance under the classical theory but trend shows that both legislature and judges have moved away from literal approach to contractual theories.. The perceivable trend is that with increasing welfare functions of the state has shown greater concern for reasonability and fairness in contractual dealings amongst its populace.

The moot point to be considered now is not that whether state is justified to move away from strict and literal interpretation of established contractual principles or not, for that is settled in the affirmative. The question to be considered is how to ascertain the degree of interference and the mechanism guiding such interference. Should it see the alternatives available to parties, the effective bargaining power between the parties, the weight age to be accorded to the information asymmetry between the parties etc. The 199th law commission is a comprehensive answer to this conundrum. The suggestive scheme in the proposed Bill seems to be the Indian answer to contractual unfairness and Standard Form Contracts.

2.4.3 What to Enforce and Why to Enforce

From moralists to economists, from social-political theorists to lawyers, all have debated and commented upon the contracts. The importance in human life of contracts is not negotiable. As a consequence over the years there have been very competing and sometime complementing theories that provide justifications for contact law. One such theory is of Dean Pound according to which “all promises in course of business must be enforced”. Kantian’s too, in the same vein hold that the existence and continuance of rational society is due to duly fulfillment of obligations made between people. The intuitionist’s on the other hand use the logic of higher morality and sacredness of contracts as the reason behind their enforcement. This is a very forceful argument, though not so appealing to scientific reasoning. But on the fact that courts will be greatly influenced and pressured to uphold the ideals that form part of general morality of people and hence will rule favor of performance of contracts. The next theory, representing the classical view is the “will theory” of contract. According to this theory a contract represents meeting of minds of parties and hence none must be allowed to make a unilateral withdrawal. The contract must therefore be taken to its logical end. This theory

38 however is held to be unsound on a lot of grounds. One being that, subsequent to contract formation, breach or non-performance is sought by a party owing to certain unforeseen events or otherwise; what the court decides is according to the principles of equities and not by will of parties. Further more than will, contract law seeks to protect the declaration made by a party, for when post contract party seeks revocation which is disallowed then when contract is completed the same cannot be said to be based on meeting of minds. So contract law trumps meeting of minds of parties for social and general social interest. Hence contract law has reasons to enforce contracts than merely giving enforcement to meeting of minds. Instead of will it is certain acts that are worthy of compliance in eyes of contract law. Yet another theory that seems to resemble principle of estoppels is the “injurious-reliance theory”. Under this theory contractual liability should arise where one makes an exploit promise to another who relies upon it and suffers some loss. The theory is objective and serves common sense logic. However it has its own limitations. There are situations where there is no contractual obligation but reliance and injury were result of one’s acts to another and also where there is no injury and yet contractual liability. So it is a part of answer not the complete answer.

Modern contract laws seek to abandon primitive paternalism by enforcing material fairness within contracts. With individualism guiding the orders of the day, the parties are left to themselves in deciding what lies in their best interest. Hence this logic therefore does not lend much credence to the commonsensical “equivalent theory”. Theory of formalism in contract law is relevant for it seeks to establish an objective criterion for determining what contracts to be enforceable and what not. Modern practice is influenced considerably by this theory which that where a promise is made in compliance with formal essential requirement then such promises are wholly of worthy of enforcement by law.

An assessment of the above six theories and of the changing trajectory of freedom of contract go on to show that there is no one that can satisfy as to why promise must be enforced. There are contesting theories with respect to why and what promise to be enforced. Hence rather than giving by one ideal that for instance necessitates enforcing a promise, a discretion must be employed to ascertain whether the said promise stands up

39 to be a promise worthy of enforcement, one that confirms to human morality and business sense at the same time. To favor one over another seems to have no sound logic.

2.5 Conclusion

The end of the chapter brings to us the conclusion that like every other law, contract law too exists to further the ends of society. Where the law has itself been evolving to keep pace with the changing society, it must not only resonate the majority sentiment for that might not always be the just sentiment36. The prevalence of Standard Form Contracts represents the will of the economically might against the one with a weaker bargaining power. Hence in case of Standard Form Contracts the law needs to set a trend by balancing the contesting interests of business and individual. The common law approach, under influence of continental approach, may look at contract law as law of contracts and treat Standard Form Contracts as a specific category requiring special treatment. The unfairness in contracts whether procedural or substantive, needs to be addressed. This is necessitated by the changed realities of human society where contracts are no more relegated to purely commercial transactions, but now fall equally, under the consumer transactions also.

36Criticism of historical school of thought.

CHAPTER 3 STANDARD FORM CONTRACTS

3.1 Introduction

Laws are made to make human co-existence peaceful and mutually beneficial. When the foundations of traditional contract theory were being laid down the commercial relations between people informed by theories of utilitarianism and liberty; were marked by individualism and freedom to contract. Contracts were presumed to be based on active consent of two reasonable individual’s, where the sign signaled intention of parties to be bound by all the stated terms and condition. However with increasing economic development and commercialization there came about the existence of modern Standard Form Contracts. The Standard Form Contracts was the answer, to the changed need of new economy reality marked by mass production where profit margin depended upon efficiency and cost reductions. However, where traditional theory continued being influenced by Adam Smith favored enforcement of a voluntarily entered contract between two contracting parties,1 the Standard Form Contracts developed in years dominated by Keynes principles, has led to protective interventions by the state and judiciary alike. Where non-interference was developed as public policy logic2 by courts in heydays of traditional contract theory, today public policy is increasing used by judiciary to interfere in standard form contracts and discreet terms on grounds of unreasonableness/ unconscionability3 / unfair terms/fundamental breach4.

However, despite efforts being made at both ends of the spectrum, the field of Standard Form Contracts continues to be marked by uncertainty, paradoxes, anomalies and contradictions. This gives the discussion on Standard Form Contracts its relevance and urgency at the same time.

1 George Gluck, Standard Form Contracts: The Contract Theory Reconsidered, 1789 REVOLUTION (1962). 2Id. 3 A doctrine with traces as early as 18th century but revived by lawyers in 20th century again to bring the consequences of real bargaining in line with industry reality. See, Id. 4This doctrine has its origin in US. Under this a court sees the main purpose of the contract and if the exclusion clause results in nullifying the main purpose in entirety then the said clause wil be held as void and unenforceable by law. Karsales (harrow) Ltd v. Wallis is an illustration. See, Id.

This chapter seeks to take forward this discussion, which has been lying on the periphery since long, on Standard Form Contracts and establish the understanding of its various contours.

3.2Standard form contracts: Meaning

“Standard form contracts are agreements that employ standardized, non-negotiated provisions, usually in reprinted forms”. Boiler-plate clauses embedded contracts, take-it- or-leave-it contracts, contracts of adhesion5 are all different names that are necessarily premised on Standard form contracts format.

Standard form contracts pervade trade practices and have infiltrated all possible sectors, starting form industry and commerce to consumer, travel agreement, insurance, hire and purchase, employment, courier service etc. what is interesting that even the government is guilty of employing them in their public and commercial dealings.6

Following peculiarities associated with Standard Form Contracts make calling them “contracts” a misnomer:

1. Unequal bargaining power with no scope of negotiation. 2. Requirement of Consensus ad idem maybe missing in part or wholly due to contract being in a language wholly unfamiliar to the party signing or due to any other cause. 3. The presence of fine print and exemption clauses those are so unfair that no man in right frame of mind would agree to them7. These features make Standard Form Contracts more akin to a dictate of an autocratic ruler.

In the case of Schroeder Music Publishing Co. V. Macaulay8, Lord Diplock while laying forth the genesis of Standard Form Contracts, brought out beautifully as to how the

5 Since conditions are imposed on one party without ever being put to discussion. The party is only to fill in the blanks. 6Law Commission of India, 199th Report, 2006. 7 E.g. in employment contracts the employer may add that his own employee or consultant etc. will act as the arbitrator.

Standard Form Contracts in the two ages (mid-Victorian and now) are contrastingly different in their fundamentals. The ancient version of Standard Form Contracts was more like a consensus driven standardization, one that brought to words the unsaid tradition and customs that were in practice within the trade. These Standard Form Contracts stood up to the test of fairness by virtue of concretizing the already existing practices amongst the involved parties. However, with Standard Form Contracts they seem to have brought in practices that are expression of only one party and beneficial only one way. It is the result of “concentration of particular kind of business in relatively few hands”. Their terms are not negotiated nor standardization of existing practices. Rather they are best suited to needs of the superior party and is applied indiscriminately across board.

A contract is ultimately to be enforced and what is to be enforced in the contract is the intention of the parties. This intention is to be gathered from the text of the contract, reading the text as a whole. Where the terms are clear and unambiguous then the same must be given expression too.9 However, where the terms are one sided and non- negotiated then giving expression to such terms which more often than not are unreasonable is quite an unjust affair despite being legally valid and very much required. The quest is to find an effective answer to this conundrum of legally valid and yet illegal contracts. The decision of Supreme Court in few cases10 has made it clear that it is not willing to nullify commercial contracts on grounds of apparent unconscionability or arbitrariness.

That we cannot do away with Standard Form Contracts is a fact we must accept to begin with. They are not septic body parts which need to be done away with. Rather they represent the “Jaipur Foot”, which serves its own distinct purpose and is rather necessary and corrects an existing shortfall. Also the menace afflicting their working, of tacitly introducing binding unfair terms upon unsuspecting parties, brings out the need to provide for checking unfairness in contracts entered into by individuals.

8 [1974] 1 WLR 1308 9 WILLIAM REYNELL ANSON ET AL., ANSON’S LAW OF CONTRACT (Oxford University Press 2010). 10 AIR 1974 SC 555, AIR 1986 SC 1571, AIR 1991 SC 101

In the light of existing conditions, it seems logical to empower courts with more power to step in to check the unfairness that have become a defining element of Standard Form Contracts and also exist in many individual-to-individual contracts but to which no recourse is possible.

3.3Advantages of Standard Form Contracts

Rise of and continuing relevance of SFC reaffirms the theory of evolution of Darwin11 and survival of the fittest. SFC indeed scores quite high on serving the real needs of the business enterprises and to a great extent of the individual consumer too. The outstanding feature of Standard Form Contracts is that on one hand they are highly standard i.e. uniform in wordings/ texts /clauses and on the other end quite customizable12. Business sentiment is primarily guided by profit maximization and Standard Form Contract attempts to serve this in every possible way with no externality13 attached. It increases the profitability by increasing efficiency on one hand and by decreasing cost in engaging afresh with each individual. The use of Standard Form Contract also in fact makes the modern business model sustainable for any other way of conducting mass commercial transaction seems implausible. Thinking in this vein, Standard Form Contract in fact caters to two economic pressures. One is that it reduces transaction cost and second it streamlines the business dealings conducted on part of the agents/employees of the company on a massive scale. Hence SFC helps the senior management to effectively check upon subordinates, sustain the hierarchical order and also protect against any dishonest dealings from being conducted by the latter.14 Hence the use of SFC no doubt is invariably employed by business entities to consciously limit their liability but their use restricts the risk element in conducting business with a huge multitude of population via agents.15 Hence Standard Form Contract seems to serve both business and economic utility at one go.16What must be however noted is that Standard Form Contracts are

11 As SFC have been a product of the times and a panacea to the business that deals with mass commercial transactions. 12 Mostly the clauses that usually interests the consumer like price and quality are made negotiable, though a significant lot is left beyond the reach of the consumer. 13Opportunity cost or any other negative impact. 14 HUGH COLLINS, THE LAW OF CONTRACT (Cambridge University Press 2003). 15Some Solutions | fair contracts.org, http://www.faircontracts.org/some-solutions. 16For the business primarily.

44 handy made of the drafting party and given that Standard Form Contracts are by and large un-negotiated, the resultant contract is neutral at best and else the benefiting tilt is always towards the drafting party which is invariably the business organizations. Hence the advantages mentioned are for the drafting party which always is business entity.17 That is, in a way, to say that advantages are only for one of the two contracting parties.

3.4 Disadvantages and Drawbacks of Standard Form Contracts

Treating Standard Form Contracts as contracts can be likened to attempting to fit in a square shaped block inside a box meant to take in triangle shaped block. This is because even when there admittedly no consensus18 with regard to true nature of the Standard Form Contracts, which have been in existence now for over two centuries, what is quite openly acknowledged is that the attributes of the Standard Form Contracts are quite contrasting with the essentials principles that have over the years come to define what constitutes a valid contract. Standard Form Contracts escape much scrutiny since falling under the category of contracts the presumption of being a “bargained-exchange” guides the courts while dealing with the in utter disregard to the statistics which show that 99 percent contract are marked by absence of bargaining process.19 The greatest disadvantage of Standard Form Contracts is that not only in judging their validity, courts by and large turn a blind eye to the real inequality between the two parties20 but an even more disturbing fact is that the continuing increase in pervasiveness of Standard Form Contracts is increasing the difference in the bargaining power between the two.21 Standard Form Contracts are in fact a devise to make use of the weaknesses of the consumer behavior. With increasing market economy, there has been an increase in purchase and variety of goods and services. An ordinary atomistic individual, in view of

17 When the transaction is between business and consumer then it is the business entity which is the drafting party and the one that walks away the advantages to be had from SFC. However SFC’s are also present in business to business dealings. Hear the party with superior bargaining power has the might to enforce its will and terms and hence then again it is only one whose will is dominant or in fact the sole will running through the contract. 18 Prof Todd Rakoff has observed that “the subject of adhesion contracts is inherently intractable”. See, D. Rakoff Todd, Contracts of Adhesion: An Essay in Reconstruction, 96 Harv, 1173 REV 1179 (1983). 19Gluck, supra note 1. 20Consumer and business entity. 21Wayne Barnes, Toward a Fairer Model of Consumer Assent to Standard Form Contracts: In Defense of Restatement Section 211 (3), 82 WASH. LAW REV. 227 (2007).

45 his limited legal understanding and paucity of time and money, rarely attempts to question the long list of terms and conditions attached to items of his ordinary purchase. When the purchase item involves a significant amount22 , even an attempt to negotiate is frustrated either by lack of access to authority capable of bringing a change in Standard Form Contracts or by clear refusal of the drafting party to budge. The Standard Form Contracts on one hand also appear to be a consciously deceptive work at play. Actual dealings involving Standard Form Contracts show that consumers rarely bother to read all the fine print terms contained in the Standard Form Contracts and the “duty to read” doctrine which is applied even on these contracts highly prejudices the non-drafting party because his act of not reading is not owing to negligence or indifference on his part but rather expecting him to read is in some conditions not possible23, in others outrageous24. A unique but obnoxious psychological effect of the use of Standard Form Contracts is that it has made the consumers, to a certain extent indifferent to the Standard Form Contracts they sign. The non-drafting party is increasingly made aware of its inferior bargaining power that he begins to consider even contemplating negotiation as a futile attempt and rather develops a false satisfaction that the situations that are contained in the non-negotiated terms are rare occurrences to the extent of not happening and hence there is no utility in negotiating. The said impact is quite obnoxious for the existence of consumer welfare. It is not hard to fathom that ultimately the freedom of contract in general may go down the drain. The harm from perpetuation of one sided contracts as valid contracts is both short and long term. The logic of conducting business25 cannot be served at the cost of consumer interest or on principles that make the human society just and fair and neither at the risk of undermining contractual principles. With regard to latter part of the previous sentence an interesting disadvantage that requires mention is that on one hand Standard Form Contracts are recognized by courts as valid as long as consent through signature or any other express/implied conduct can be imputed, however they in fact undermine the contractual principles in essence because there is no effective consent to name of and nor is there at play the freedom of contract, in reality, because of the very

22Of money. 23At ticket counter, with a long queue behind. 24E.g. to be though later. 25Profit maximization.

46 real and of consequential magnitude difference in bargaining power. Hence one of the greatest disadvantages of Standard Form Contracts is that they ostensibly preserve contractual principles but apparently undermines them in very fundamental ways.

Donald b king26 brings out a scathing critique of Standard Form Contracts in the most beautiful and lyrical way. He uses the haiku verse27 to present the entire character sketch

26King, supra note 21. 27Standard from contract

Disguised in contract clothes

So seen by the law;

Imposed by one party

Drawn with terms one sided

It becomes a tyrant;

Tyranny begets

Form contracts now abound

In business and life;

How to treat something

That’s not what is seems

Realty or fiction ?;

Created in fictions

The answer of the law

The “emperors clothes”;

Reality covered

Doctrine of “blanket assent”

Truth is lost;

Commentator fictions

They all cloth it well

Will no one tell;

“it had no clothes”

47 of the Standard Form Contracts. He pinpoints that to term form contracts as contracts is a misnomer as the very fundamental elements of free consent and mutuality are missing and their continuance is continuing injustice. Hence there is a section that calls for raising voice against this ludicrous illegal arrangement of things represented by Standard Form Contracts.

The case of one sided agreements is aggravated when they refer to those terms that give unilateral power to drafting party to modify the terms of contract at any time, so long the period of contractual relationship continues28. These clauses show the one sidedness and the possible oppression on the consumer in the best way. The sad part is that change of clause terms are considered very much lawful.

3.5 Towards Bettering Standard Form Contracts

Given the apparent utility of Standard Form Contracts the right approach demands not their elimination but only to make certain alterations in them, which are a bit more than the mere cosmetic attempts done so far but not so extreme and fundamental that their distinctiveness is lost. Though the solution in form of achieving this idyllic sounding balance appears to be wishful thinking, but even if attempting to achieve this renders a new approach in jurisprudence that seeks to balance the market interests with societal interest will be a gain worth boasting.

The truth sets us free

We are the tailors;

Clothes are clothes

Agreement is agrrement

Truth is truth;

Unfair form terms

Replaced with law made ones

Justice and truth27

3.5.1 Duty to Read

The most preliminary step towards achieving the elusive balance is to move away, when dealing with Standard Form Contracts, from the presumption that being a contract the “duty to read” applies, which imputes a consent to all the terms, whether occurring in fine print or broad print, completely discounting considering the possibility of the terms having been coerced upon the non-drafting party. There must be acknowledgment of the unequal bargaining power between the consumer and business entity to begin with.

3.5.2 Acknowledgement of Ordinariness of a supposedly Rational Man.

Next there must be presumption with regard to not of equality between contracting parties but of inferiority of consumer in respect of legal know-how, understanding of resultant self-damaging consequences, lack of availability of alternatives and the demanding realities of daily life with respect to cost and time, that influence the consumer behavior and put him at a great disadvantageous position. These realities must be kept by both judiciary and legislature when dealing with the question of treating/addressing the issues pertaining to Standard Form Contracts.

3.5.3 Check on Unilateralism

Probably the worst attribute of Standard Form Contracts is their giving a carte blanche to the drafting party via the “change of terms” clause. The said clauses allow the drafting party to change the terms of Standard Form Contracts at any future date id business realities so demand. This in reality means that the drafting party can alter the terms at its whim and fancy, acting blatantly in opportunistic ways while undermining welfare provisions. This power of unilateral modification29 corrodes the sanctity of Standard Form Contracts as contracts for there will no longer be fulfillment the requirement ad idem/meeting of minds. Also the logic of having reposed such power by signing a contract that contained such clause seems to be unconscionable on the face of it for why will any reasonable man forsake his rights, that too in such a detrimental manner. The

29Oren Bar-Gill & Kevin E. Davis, Empty Promises (2010). Electronic copy available at: http://ssrn.com/abstract=1554966

49 problem is that courts apply the doctrine of unconscionability30 very strictly and only in extreme cases.31 Hence there is need to shift from an attitude of non-interference with Standard Form Contracts considering them to be lying in the private domain and guided by party autonomy. Consumer contracts are very much of public nature and needs to be closely monitored with benefit of doubt to lie in favor of the consumer.32

3.5.4 Legal Capacity and Real Capacity

When dealing with contracts, it is presumed that a party knows best as to what is in his interest. Hence so long as there is no fault regarding the “capacity”33 requirement and there is “free consent” which is implied by signature mostly or some other express or passive act, there are very limited ways of challenging the validity of the contracts. The existing remedies are quite sartorial and do not provide effective defense against the deceptive ways of Standard Form Contracts. Just as there is protection against enforcing a contract against a minor on account of his incapacity of judging his best interests the same logic seems to hold ground for consumers too. The “feeling of lost” by an ordinary consumer on face of legal jargon is self-explanatory and also often self-experienced too.34 Where Standard Form Contracts have been silently accepted as contracts, giving recognition to the needs of the modern industry, the same benevolence can be shown to

30 In USA at present there seems to be three devices to address the issues that arise by use of Standard Form Contracts : Section 237 of the second restatement of contracts, Article II of uniform Commercial Code, and Unconscionabilty. See, Ronald C. Griffin, Standard Form Contracts, 9 NC CENT LJ 158 (1977). 31 In case of India too, the said doctrine can be applied only in a very specific case and where two requirements need to be proved simultaneously i.e. existence of apparent authority and the use of that authority. In consumer contracts, courts move with the presumption of existence of a competitive market with no dearth of choices with the consumer. There is complete disregard of the existing lack of choices for the consumers for the business in any given sector are highly aligned with respect to their common interests such as standard framing of Standard Form Contracts. 32 Is not the third party insurance made mandatory, on the comparative position of advantage between the involved parties? So a similar logic must guide in giving benefit of doubt to consumers given their weak position in comparison to business entity. 33 Most jurisdictions primarily satisfy two things under this. Compliance of minimum age, depending upon jurisdiction, which is presumed to attribute due cognitive skills to a person so as to hold him liable for his contractual acts. The next protection it seeks to accord is to mentally infirm people. Hence agreement with a minor, insane person cannot be enforceable by law an become a contract. It is void. 34 It is outrageous to expect an individual consumer with limited means to match the legal expertise eployed by the business entity and neither is it just to expect him to shell out loads of money before engaging in day to day contracts.

50 consumers. The latter deserve it equally, if not more, for their objective is only protection.35

3.5.5 Social welfare and Policing of Standard Form Contracts

The said protection if not accorded will lead to decrease in social welfare and increased litigation or expenses for the ordinary man in taking recourse to legal advice every now and then. A society that has high rate of litigation on one hand can represent a very active and aware society but at the same time a society with increased rate of litigation owing primarily to differences over Standard Form Contracts is not a good sign. Hence societies usually aspire to have less litigation for it does represent loss of money, time and effort. The same can be used to have further developmental activities. If Standard Form Contracts lead to increased litigation the case for their continuance gets weakened. Hence the onus to come up with the solution, to the ills afflicting Standard Form Contracts from consumer perspective, lies equally on the industry for else if the use of Standard Form Contracts is leading to inefficiency and loss of security for the consumers in place of them then the result of Standard Form Contracts comes out to be in negative. This is so because on one hand the net benefits to society turn out to be zero, as their gain is equivalent to loss of consumers and on the second hand there continuance is a continuing reminder to the literal application of contract rules against their purposive application. Also the way out derived by Standard Form Contracts drafters to keep them from coming under scrutiny is by inserting mandatory arbitration clause36 and preventing class actions. This is no way to reduce litigation. The situation needs to be permanent, by removing the rout afflicting completely rather than doing piecemeal37 and temporary arrangements. We can put the onus on the drafting party to prove that the term disputed by the consumer is not unfair rather than having the present system where the burden of proof lies upon the consumer. Also in the alternative the standard of proof required to be fulfilled by the consumer to require court holding a term to be onerous can be lessened. The idea is to have make business more accountable in their conduct and not infiltrate the market with usurious tendencies. This is because the market logic is allowed to prevail because it is

35Where the industry seeks existence of Standard Form Contracts for profit maximization. 36Bar-Gill & Davis, supra note 28. 37Ad hoc treatments won’t help.

51 thought that the ultimate benefit will trickle down to consumer, but if that is not served then there is no point in having Standard Form Contracts in the first place.

3.5.6 Ensuring Procedural Fairness

The more procedural solutions to the conundrum of Standard Form Contracts are for them to be fair, accessible and comprehensible to the consumer. The Standard Form Contracts being employed by a business must be put up in the public discourse so that their assessment can be done if not by individual consumer,38can be done by civil society organizations, press etc. Where via inserting terms in Standard Form Contracts inhibit class actions the option of exercising collective bargaining might is restricted by drafters, the same unfair mechanism can be reduced to a nullity by this.

The mandatory disclosure requirements imposed by governments must not be allowed to be a mockery by adding voluminous text burdened with legal jargon. A positive obligation must be read upon the drafters to make the disclosure real and effective. It must be guided by reasonability. The objective is to poke the industry to indeed become fair in its dealings.

3.5.7 Consumer Education

Consumer education needs to be done on a consistent and parallel basis. In attempt to provide for consumers via suggesting changes in Standard Form Contracts, the legal maxim that law does not come to aid of one who sleeps over his rights and the buyer beware principle is not sought to be completely given a go by. The attempt is not to make the consumer more lax but to give him protection till the time he is not brought at par with the other part superior on all counts.

Consumer protection act, 1986 is the foremost Act providing for consumer protection and redressal of grievances. Introduction of the act itself holds that in the globalised and industrialized world we have come to live in, consumer sovereignty has taken a back seat. The inequality of positions between the consumer/purchaser and the trader/manufacture/seller is quite established. Need for a specific legislation seeking to do

38 Owing to obvious limitations

52 justice to consumers is needed as the existing provisions under Civil Procedure Code,1908, the Indian Contract Act, 1872, the Sale of Goods Act, 1930, the Indian Penal Code, 1860, the Standards of Weights and Measures Act, 1976 and the Motor Vehicles Act, 1988, MRTP Act,1969, could not achieve much for the ordinary consumer. Hence recognition of need to address the possible unfairness in consumer dealings was acknowledged in the enactment of Consumer Protection Act,1986.39

Today the act has been in practice for almost 30 years and there have been a great piling of needed reforms in the Act, to better meet the challenges encountered in the implementation of the Act. The most serious being the lack of awareness of the consumers of their rights itself.40 Two attempts have been made so far to amend the Act so as to widen its extent of application. Out of these, the attempt made in 201141 lapsed while the second one is still pending.42 Hopefully, this second attempt will reach its logical conclusion and make the act address the presently unaddressed issues, of which the one of concern to us is the introduction of treatment “unfair consumer contracts”. The 199th law commission report, like the Consumer Protection Act,1986 takes cognizance of the increased possibilities of unfairness in today’s market place. Hence it had suggested treating unfair contracts by treating unfair terms. The suggestions made in 2006, to be implemented by amending the Contract Act, 1872, were still in abeyance when the suggestions were attempted to be incorporated into the Consumer protection Act. The Consumer Protection Bill, 201543 provides that a consumer, or anyone on his behalf, may file a complaint on matters pertaining to “unfair contracts”. The Bill provides for six features, which if present in a consumer contract shall render the same as an unfair contract. A contract is said to be unfair if it contains any one of the following six terms: (i) payment of excessive security deposits, (ii) payment of a disproportionate penalty for a breach in contract, (iii) refusal to accept early repayment of debts, (iv) right to terminate

39Introduction, Statement of objectives as contained in the Consumer protection act,1986. 40 However consistent efforts have been made by Ministry of Consumer Affairs, to increase consumer awareness, most visible in form of the famous “Jaago Grahak Jagoo” campaign 41The Consumer Protection (Amendment) Bill, 2011.http://www.prsindia.org/uploads/media/Consumer/SCR%20Summary- Consumer%20Protection%20%28A%29%20Bill,%202011.pdf (accessed on May 28, 2016) 42The Consumer Protection Bill, 2015.http://www.prsindia.org/billtrack/the-consumer-protection-bill-2015- 3965/ (accessed on May 28, 2016) 43 The Bill introduced in 2011 containing similar amendments lapsed.

53 the contract without reasonable cause, (v) transfer of a contract to a third party to the detriment of the other party, without that party’s consent, or (vi) imposing of any unreasonable charge or obligations which put the consumer at a disadvantage.44The plight of the 2015 Consumer Protection Bill and the 199th Law Commission Report prove that good intentions alone are not enough to achieve results. They need to be acted upon, and this action is what seems to be missing in India.

Cases under the consumer protection act fall under a wide category and though delayed but ultimate hearing and redressal under consumer forums has gone a long way in giving a sense of fair play in its transactions to the individual consumer. Though in the present Consumer Protection Act,1986 there is no express provision dealing with treatment of unfair contracts; there is recourse against unfair trade practices. In case of A.K. Ummat, Managing Director, Aptech Computer Education Centre, Chandigarh v. Barinder Pal Singh45, changing of Degree course into Diploma Course unilaterally which was not recognized by any university during the pending of the course was held to be an unfair trade practice under the Consumer Protection Act. A mismatch in the quantity mentioned in the cover of a Dalda pouch and its actual quantity, was also held to be an unfair trade practice under the Act.46

3.5.8 Change Approval Boards

To check the practice where assent to negotiated terms is read as blanket assent to all the terms the solution suggested by Kevin Davis appears to be quite relevant47. He suggests48having a “CAB” i.e. change approval boards. There would be a body of neutral professionals who would have the authority to sit in judgment whether the suggested change can be allowed. This arrangement would also shift reliance on consumers own judgment, ad hoc legislations or judicial discretion. Similar suggestion however were rejected by an earlier law commission report,49 what we can have is a body of professionals that are neutral and entrusted with the task of dealing with the issues

44 Consumer Protection Bill, 2015 45 (1998) 2 CLT 152 (UT) 46 Brooke Bond Lipton (I) Ltd. v. Desh Deepak, 1999 (2) CPJ 603 47 Though, it is not the first of its kind. A system on these lines exists in Israel. 48 Suggestion is specific to US system but we can generalize it to suit various jurisdictions. 49Law Commission of India, 103rd Report, March 1984.

54 pertaining to interpreting non-negotiated terms, change of clause terms etc. What further can be had is that a gradation of Standard Form Contracts can be made according to their degree of fairness or extent to which they limit liability. What would be achieved by this would be that at least consumer would be making an informed choice and can make proper arrangements50 in case the exempted occurrence actually happens. Also then the neutral body of professionals will accordingly give a strict and lenient interpretation. It however has a tendency towards tribunalization which is not proving to be very effective and there also exists consumer forums for that matter. The effect would be that the full and complete disclosure directive of court will get effective. Also a penalty should be imposed on industries employing Standard Form Contracts but not making such disclosure. Further competition commissions plus industry specific government regulators must look and inspect the content of Standard Form Contracts so as to see the trend on a regular basis. Standard Form Contracts must be guided by its objective of having efficiency and economy which must not be obfuscated with consumer oppression. One way out can also be by making taking advantage of consumers as a tort.51 Under this the standard of proof can be reduced, the arbitration clauses will not have value and a positive judgment in tort case will though be a sanction enough upon the business entity to mend his ways but not so consequential as to affect its image.

2.5.9 Legislation as Safeguard

Lastly it can be pointed that the solution presented by the 199th law commission report to firstly divide between procedural and substantive terms and then list out a detailed but inclusive list of guidelines to act in aid of courts, indeed sound quite comprehensive encompassing all the above suggested solutions. The 2006 report is yet to see light of the day however. It is a fact that ever one has to fight for their rights and not just depend on state largesse. So the consumer, most negatively affected by Standard Form Contracts must voice their demand to have the report discussed and implemented.52

50 Taking insurance cover 51 Gaddy Wells, Doctrine of Unconscionability: A Sword as Well as a Shield, 29 BAYL. REV 309 (1977). 52 Sec 23 that can be said to provide some teeth to judiciary to check unconscionability of Standard Form Contracts however there the word unconscionable does not appear as it does in the German civil code. Also

3.6 Conclusion

Though change is the only constant but yet the human tendency to resist change is also as constant a feature as change itself. The lobby that seeks maintenance of status quo is equally strong. Any more interference in Standard Form Contracts they say will amount to “legislated contracts”53 and undoing of freedom of contract. Also it is argued that too much scrutiny may make it difficult for consumers as drafting parties might either curtail their business dealings which at present they do with greater impunity for they have little to worry on the liability front. This is to say an over cautious business community will not only end up making less profits but the effect on consumers too will be negative.54 Also promoting recourse to courts in commercial disputes has long been done away with and arbitration is the buzz word. So the attempt by Standard Form Contracts framers must not be seen as deliberate act meant to perpetuate injustice but is rather a genuine and honest practice in tune with current practices.

What can be made out from the above discussion is that while attempting to cure the rot afflicting the Standard Form Contracts we must not end up throwing the baby with the water.

Italy explicitly provides for one sided agreements. Consumer Protection act is one such legislation though. See, Gluck, supra note 1. 53Id. 54Id.

CHAPTER 4

EXCLUSION CLAUSES

4.1 Introduction

On the ground of economic efficiency and ease of doing business, the standard form contracts stand out as the best solution. However, as is the human treatment of law, which is to twist it so as to maximize his profit even if it undermines law itself, the same has happened with the standard from contracts. From their benign origin and existence they are increasingly being reduced to a double edged sword. The venom to standard form contract is added in the form of apparently legal and harmless looking exemption clauses. This chapter attempts to bring out the scope of exemption clauses, as found usually in Standard Form Contracts and their judicial treatment so far.

4.2 Exemption Clause

Exemption clauses are the ones that intend to exempt –wholly or partially, the liability, of one of the parties, in event of certain contingencies happening. Exemption clauses therefore take within their ambit limitation clauses also. Viewed from another angle, exemption clauses aim to establish rights and obligations between the contracting parties so as to best allocate the possible liabilities. Viewed this they seem to be outside any blame of relieving one of his liabilities. Defendants of exclusion clauses are justified in upholding them as tools representing good contractual planning and on that count there is nothing inherently objectionable in them. Also as pointed out above, the clause rather than been looked upon as a devious attempt to limit liability can also be looked as mere allocation of obligations between the parties and with each having the onus to protect oneself against the burdensome obligation via means such as insurance, there isn’t any unfairness in such limiting clauses.

However it is the fact that such allocation of obligations is either not negotiated or imposed without due notice or with an absence of effective choice is what makes them devious and what makes them subject to mandatory judicial and legislative control. As a

57 result the courts have tended to view such limiting or liability excluding clauses as a separate category and have developed specific rules for their treatment. Exemption clauses are usually frowned upon by judiciary in consumer contracts, where unlike in commercial contracts, parties are generally of unequal bargaining power.1

The benefit of such excluding out exemption clauses from the general realm of contractual terms and employing greater judicial scrutiny to them serves the purpose of maintaining the dignity of the freedom of contract intact. It must be noted again that that the purpose behind controlling such exemption clauses is not to prevent parties from limiting their liability but to check the unfairness of these terms.

Chitty on law on contracts, provides for existence three types of exemption clauses, which are:

1. Clauses which intend to limit or reduce the defendant’s substantive obligations and duties. This can be achieved for instance by excluding the application of implied terms in the contract under consideration. 2. Clauses which tend to limit or exclude the liability which would otherwise attach to a breach of contract. Example: a clause that takes away from the other party the right to treat as repudiated or rescinds the contract. 3. Clauses which intend to exclude or limit the duty of the party in default fully to indemnify the other party. For instance by limiting the maximum amount that can be claimed under damages or the time limit within which such a claim can be made.2

Such exemption clauses are governed by both common law and statutory law3 in England4 while in India there is yet to be a law, which treats such clauses upfront.

1 PAUL LYNDON DAVIES, INTRODUCTION TO COMPANY LAW (Oxford University Press 2010). 2 Such misuse has been rectified by 1997 amendment of section 27 of Indian Contract Act, on the lines of recommendations suggested by law commission report. 3 20th century developments have been incorporated in UK in the form of 1977 and then 1999 Acts. 4 RICHARD STONE, THE MODERN LAW OF CONTRACT (Psychology Press 2005).

4.3 Judicial Treatment

The statutory control, where it exists, explicitly provides for the content it seeks to hold as out of permissible scope of exemption clauses. However the approach under common law, as developed by judiciary, to check the unfairness of exemption clause, has been of devising lateral methods, so as not to undermine the freedom of contract principle. The rules devised to deal with this were primarily two:

I. Incorporation

II. Construction

These two acts as tools in the hands of the judiciary to check the possible travesty of justice from being carried out.

Ryan Murray in his book5 poses a three stage treatment of exclusion clauses. The first test to pass for an exclusion clause to have any effect under law is that it shall be duly incorporated. The next test is that it must pass the test of construction, evolved overtime by judiciary. And the last test is to stand justified in eyes of any statutory limits that may be imposed explicitly by the legislature.

4.3.1 Incorporation of Exemption Clauses

Parties to a contract are held bound by the terms of a contract. However, where terms are contained in a contract in standard form6 whether the terms limiting the obligations have become sufficiently the part of contract is judged at a higher threshold. There are three ways7 in which a clause can be incorporated in a contract and judiciary so far has used these very as tools of lateral entry to its intervention in contracts containing exclusion clauses.

5 RYAN MURRAY, CONTRACT LAW: THE FUNDAMENTALS (Sweet & Maxwell 2008). 6 Tickets ,receipts, Standard Form Contracts 7 MURRAY, supra note 5.

Signature

In the case of L’Estrange v Graucob8 how incorporation via signature is sealed was established. L’Estrange a café owner purchased a cigarette vending machine from the defendant Graucob, and signed an agreement without reading the same. The said agreement contained an exclusion clause in small print. It stated: “any express or implied condition, statement or warranty, statutory or otherwise not stated herein is excluded”. The machine purchased proved to be defective and upon claim of damages by the plaintiff, the defendant relied upon the exclusion clause.

The divisional court held the award to be enforceable even though the same was in small print and not read by the claimant. Scrutton LJ. commented:“ when a document containing contractual terms is signed, then in the absence of fraud or misrepresentation…the party signing it is bound, and it is wholly irrelevant whether he has read the document or not”.

The decision in the Graucob case is though harsh but at the same time it is also justified on ground that unless the law be strict and certain, every other contractual dealing will lie pending in courts, adding subjective tests over objective ones and thereby rendering commercial dealings as near impossible.

A case that mellowed down the strictness and probably took account of the real man over the presumed legally reasonable man is that of Curtis v Chemical Cleaning & Dyeing Co.9 in this case the plaintiff took her white satin wedding dress trimmed in beads and sequins to the defendant dry cleaners. She signed a receipt which was informed to her as containing exclusion of liability of defendants, pertaining to any damage to beads and sequins. This information came through the shop assistant and relying upon it she signed without reading it herself. In reality the exclusion clause was wider and read: “accepted on condition that the company is not liable for any damage howsoever arising”. Upon delivery the plaintiff found the dress to be badly stained. The claim for damages was denied by the defendant by reason of exclusion clause.

8 [1934] 2 KB 394 9 [1951] 1 KB 805

Court of appeal held that such there was non-application of the said exclusion clause owing to the misrepresentation by the shop assistant.

Hence the scope of rule in Graucob case is severally limited by a lot of exceptions employed overtime.10 This is good in context of consumer contracts for it gives recognition to the not so rational consumer that pervade.

Notice

Contracts, written or unwritten, usually find acceptance across jurisdictions. Hence the requirement of ad idem is the bedrock and whether established orally or in writing is not of any particular detriment. Having a written contract is more pragmatic however when it comes to proving the terms.

The burden of proof lies on the party relying on the term and clause. The threshold to be passed is of satisfying the courts of having undertaken reasonably sufficient measures to bring the notice to the notice of the other party. The test is an objective one. Whether the other party read or understood the terms is not a concern of the party relying on them so long as he fulfills his part of obligation. Nor will the courts hold the party relying upon the exemption clause as responsible for lack of reasonable care of comprehension on part of the opposite party. Courts take into consideration certain common-sensical factors in judging whether notice was reasonably made or not, such as, point of time of making the notice, place of location etc.11

The following are two requirements to be fulfilled at the least, to constitute due notice:

1. Reasonable notice must be given as to the existence of the clause 2. Reasonable notice must be given before or at the time contract is made (but not after).12

Therefore even an unwritten clause if brought to the notice of the party shall be binding upon him. In the case of Parker v South Eastern Railway Co.13 the plaintiff submitted

10 RICHARD STONE & JAMES DEVENNEY, TEXT, CASES AND MATERIALS ON CONTRACT LAW (Routledge 2014), p. 377. 11Id. 12 MURRAY, supra note 5.

61 his bag in the station cloakroom. He paid some amount for same and was handed over a ticket that had printed conditions on the back of it, which was highlighted by use of words “see back”. There was an exclusion term on the back which read as: “ the company will not be responsible for any package exceeding the value of 10 pounds”. Notice of same condition was also placed on the premises of the cloakroom. The bag of plaintiff was lost and upon making a claim for damages the defendant company used the defense of the exclusion clause. The court held in favor of the defendant company. The case brought out that in such cases where incorporation is claimed by giving of notices, what needs to be proved is that party relying upon the clause had taken reasonably sufficient measures to bring the same to notice f the other party. So long this is proved the clause stands incorporated.

Olley v Marlborough court ltd14 is the classic case which established that if any term is brought to the notice of the party, signing a pre-drafted contract, after conclusion of such contract, shall not be bound by any such surprise clause. Only those clauses form part of contract that have been brought to notice at the time of conclusion of contract. in this case a couple after having concluded a contract, at the reception of hotel itself, regarding renting a room, upon entering the room were met by another disclosure that the hotel shall not be responsible for any loss of the customers during their stay. Upon loss of their luggage from their room, the defendant hotel was not allowed to rely on the said clause on ground that the liability limiting clause had not been incorporated in the contract

Also if a clause though mentioned at the time of concluding a contract but the content is misrepresented and the consumer signs relying on the words of the agent or the party himself.15

In case of Thornton v Shoe Lane Parking,16 clauses informed about post conclusion of contract were held to be non binding upon the other party.

13 1877 2 CPD 416 14 [1949] 1 K.B. 532 15 Curtis v chemical cleaning & dyeing co 1951 I KB 805 16 1971 2 QB 163

Without relieving the other part of its duty to read the terms, the party incorporating an onerous clause is required to notify the other of such terms. Three rules have been laid down by courts in this regard:

1. “If a person receiving the document did not know that there was writing or printing on it, he is not bound”. 2. “If he knew that the writing or printing contained or referred to conditions, he is bound.” 3. “If the party tendering the document did what was reasonably sufficient to give the other party notice of the conditions, and if the other party knew that there was writing or printing on the document, but did not know it contained conditions, then the conditions will become the terms of the contract between them.” This point invites a lot of discretion to be employed by courts.17

Document being relied upon must be Capable of Considered as a Contract

Not every receipt, slip containing conditions can be regarded as a contractual agreement. In Chapelton v Barry UDC18, the plaintiff, rented two deck chairs from the defendants. The defendants had placed a notice regarding same that bore two facts, one that deck chairs can be rented from then and the second that the same to be given upon receiving a receipt. There was no mention of any exclusion of liability. The plaintiff took the chairs and the receipt which incidentally had the exclusion clause printed at the back of it which read as “the council will not be liable for any accident or damage arising from the hire of the chair”. When the plaintiff sat on the rented chair it gave way. The plaintiffs claim for damage was denied as covered by the exclusion clause. However court of appeal denied the exclusion clause has having any effect for receipt was a mere voucher for the money paid for hire of chair and any conditions that could be held as biding were those put up on notice where none were there. Hence the defendants were liable.

17 HUGH G. BEALE, CHITTY ON CONTRACTS. VOL. 1. GENERAL PRINCIPLES (Sweet & Maxwell 1999). 18 1940 1 KB 532

Red hand rule for Unusual Conditions

This rule was devised by Denning L.J. In the case of J Spurling Ltd v Bradshaw19 he suggested that some clauses: “would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient.”20The crux of this rule is that the more unusual or onerous the clause be, greater the threshold of notice required so as to have the clause duly incorporated.

The red hand rule was probably put to use at best in the Interfoto v Stiletto Visual Programmes21 case. In this case, Stiletto Visual Programmes was an advertising agency that required certain photos for a presentation. They engaged with Interfoto, asking them for photos, they being a photo library. The contract was sealed on phone and the engagement between the two was first of its kind. Interfoto sent out the photos along with a delivery note that had written upon it a list of conditions, visible and readable but nevertheless in fine print. One of the conditions stated: “a holding fee of five pound plus VAT per day will be charged for each transparency which is retained…longer than…14 days.” Stiletto failed to read the conditions and was delayed in returning the photos, by a period longer than 14 days. As a result they were subject to an overwhelming late fee which was challenged by them.

Court ruled in favor of stiletto and held that the charge was far too greater than the rates prevailing in the market. It was held that the party seeking to rely on such an onerous clause must have specifically brought to the notice of the other party such clause.

Previous Dealings/Common Course of dealings

Every contract has its independent existing. So, even though same parties have entered into more than one contracts on previous occasion or occasions, there will not be an automatic importation of terms of prior contract into new one or vice versa. Also the defense that in course of dealings the terms had to be interpreted in light of the previously entered contract needs to establish regularity of practice and expectation. However the

19 1956 1 W.L.R. 461 20 MURRAY, supra note 5. 21 1989 1 QB 433

64 trend is not always to exclude imputing terms not expressly made out. Terms that form part of trade and can be presumed reasonably to be expected by contracting parties cannot be denied incorporation.22

Two requirements must be fulfilled before expecting a term to be assumed to be incorporated based on previous dealings between parties:

1. There must be sufficient notice of the clause. 2. There must be consistency in the previous dealings.23

Justified Higher Threshold

It is an established principle in contract law that courts are to give effect to the intention of parties and not impute its own understanding. Hence the courts premise their treatment of contracts between parties on a lot of presumptions, which favor implementation and upholding the contract. Though, the attitude is quite justified in ideal textbook conditions, but appears as turning a blind eye to apparent unfairness when viewed in context of the practical world of contracts. So long a contract bears the formal and minimalist evidence of willful consent of parties to be bound by a contract the courts presume that the parties have entered a contract that was negotiated at length with each party having fully comprehended the contractual terms in entirety. The presumption is that parties to a contract have read the contract they have signed. However Standard Form Contracts are an exception, which don’t fit well these presumptions.

Seen especially in context of consumer contracts, the consumers rarely read the terms they are made to put their signature to, and hence here the standard defense that each party must be held liable for the contracts it enters into voluntarily, cannot be justified, for reasons that do not require reiteration again. Hence the judicial innovation of requiring a greater degree of onus upon the party to bring to notice to the other party the terms of contract, is instance of judicial creativity modifying general rules so as to serve the specific requirements.

22Britsh crane hire corp ltd v Ipswich plant hire ltd (1975) Q.B. 303 23 MURRAY, supra note 5.

4.3.2 Interpretation/Construction of Exemption Clauses

The Realist School of Thought stands out against other Schools of Thought, for it brings out, the not so neutral role played out by the fulcrum (i.e. the courts) of the sea saw. In case of Standard Form Contracts, on one sides of the fulcrum sits the superior corporations, the drafting party while the other sits the consumer with unequal bargaining power. The fulcrum is represented by the judiciary, which though bent towards the side with a heavy should weight (i.e. one which is legally sounder) without applying any weight of its own, however in reality, its neutrality cannot be assumed. As per the realist school, the judiciary is influenced by its own very prejudices and reasoning and this is evident in judicial treatment of Standard Form Contracts too.

Standard Form Contracts, infamous as adhesion contracts, for there is no negotiation between parties, rather there is only adherence to the terms by the inferior party, upon whom terms are imposed, with no effective choice element in the said bargain being existent. Hence it is rightly pointed out that Standard Form Contracts is a misnomer in sense that no contractual relationship is established in any proper sense of the term rather a status24 can at best be accorded to the party which is usually of a consumer, as Standard Form Contracts usually pilferate consumer contracts.25

The canons of construction of contracts have by and large been settled for some time now. Unless there is any ambiguity in the express words of the contacts there shall be strict interpretation of same. The doctrine of rational man forms the premise of this assumption, where each man is considered to be the best judge of his own interest and hence so judicial intervention in name of equity is kept to a minimum no matter how unfair or unconscionable the contracts may appear to be. Though, overtime, with increasing acceptance of the fact that probably the rational man is not so reasonable, owing to factors both within and outside his control,26 there was an increase in statutory provisions that offered protection from unfair contracts. In the same vein, the attitude of judiciary, pertaining to interpretation of apparently one sided Standard Form Contracts,

24 WILLIAM REYNELL ANSON ET AL., ANSON’S LAW OF CONTRACT (Oxford University Press 2010). p. 163 25 Even in B2B contracts, Standard Form Contracts exists. 26Oren Bar-Gill & Kevin E. Davis, Empty Promises (2010). Electronic copy available at: http://ssrn.com/abstract=1554966

66 has been described as “desperate remedy invoked because it was considered necessary to remedy a widespread injustice”.27 The judicial creativity, pertaining to interpretation of Standard Form Contracts, where an attempt is made to alleviate the position of the mute recipient in such an unequal-exchange, which borders on judicial legislation, has been beautifully emphasized upon by Lord Denning in the following words:

“Faced with this abuse of power-by the strong against the weak-by the use of small print conditions-the judges did what they could to put a curb upon it. They still had before them the idol, “freedom of contracts”. They still knelt down and worshipped it, but they concealed under their cloaks a secret weapon. They used it to stab the idol in the back. This weapon was called “the construction of the contract”. They used it with great skill and ingenuity. They used it so as to depart from the natural meaning of the words of the exemption clause and to put upon them a strained and unnatural construction.”28

The tool of construction has been used by courts to limit the strict effects of freedom of contract.29 The rule of strict interpretation can be seen as an underhand way of avoiding the unfairness of freedom of contract exhibited blatantly in Standard Form Contracts.

Certain rules of construction stand out with respect to interpretation of exemption clauses.

Strict Interpretation

Exemption clauses must be expressed with utmost clarity, leaving no scope of ambiguity so as to have force of law. However where the words are clear, the same shall not be replaced by words that seek to limit their effect. Also exemption clauses are to be interpreted strictly. The degree of strictness will depend upon the variance the clause is attempting to obtain from the expected path or the extent of exclusion from liability sought.30This shows that principles of construction applicable to contracts generally apply to Standard Form Contracts containing exclusion clause as well and what other conditions are provided they are provided as additional mandates and not as alternates.

27 ANSON ET AL., supra note 14, p. 164. 28 George Mitchell (Chesterhall) ltd v Finney Lock Seeds Ltd (1983) Q.B. 284 29 MURRAY, supra note 5, p. 107. 30 Photo Production Ltd. v Securicor Transport Ltd [1980] A.C

Strict interpretation however must not be strained to illogical extent. The observation of lord Wilberforce31 make sit quite explicit: “whether a clause limiting liability is effective or not is a question of construction of that clause in the context of the contract as a whole. If it is to exclude liability for negligence, it must be most clearly and unambiguously expressed, and in such a contract as this, must be construed contra proferntum. I do not think that there is any doubt so far. But I venture to add one further qualification, or at least clarification: one must not strive to create ambiguities by strained construction, as I think that the appellants have striven to do. The relevant words must be given, if possible, their natural, plain meaning.

Clause must extend to event

“Each clause must be considered according to its actual wording, but it must clearly extend to the exact contingency or loss which has occurred if it is to protect the party relying on it”.32 Hence, an exemption clause must be worded carefully else it might be rendered as too narrow or too wide and thereby too vague, and ultimately being rendered as ineffective for all practical purposes.

Main Purpose Rule

This rule holds that the contract in totality and exemption clauses must be read as a whole and exemption clauses are to be read in light of the main contract and the latter cannot be read to defeat the purpose of contact only.

The purport of this rule is clearly brought out in the following observation as made out in the Suisse Atlantique Societed’ Armement Maritime SA v. N.V. Rotterdamsche Kole Centrale33: “one may safely say that the parties cannot, in a contract, have contemplated that the clause should have so wide an ambit as in effect to deprive one party’s stipulations of all contractual force to do so would be to reduce the contract to a mere declaration of intent.”

31 Ailsa Craig Fishing Co. Ltd. v Malvern Fishing Co Ltd (1983) 1 WLR 964 32 STONE &DEVENNEY, supra note 9. 33 [1967] 1 A.C. 361, 482

Two cases, decided by the apex court in India, that stand out as exemplary judgments in holding out the position with respect to this rule are the Skandia Insurance Co. Ltd. v Kokilaben Chandravadan34 and B.V. Nagaraju v. M/s Oriental Insurance Co. Ltd., Divisional Officer, Hassan.35 Exemption clauses are quite liberally employed in insurance contracts and when exemption from liability was sought in the above two cases relying upon exemption clauses the court ruled which gave expression to the doctrine of fundamental breach in India. It was observed that an exemption clause cannot render immunity from a liability that arises owing to fault in fulfilling the fundamental aspect of contract. Also the exemption clause needs to be seen in light of the main purpose, where the latter takes in precedence and an exemption clause shall have application only so long it is compatible to main purpose of the contract. In Skandia Insurance Co. Ltd. the Supreme Court held that “the exclusion of liability clause has to be “read down” so that it does not conflict with the main purpose of the provision enacted for the protection of victims of accidents so that the promisor is exempt when he does everything in his power to keep the promise.” It was emphasized that the exclusion of liability clause in insurance contracts should be to relieve the aggrieved party and not to cause more distress to the affected party. In the case of B.V. Nagaraju the Supreme Court made observations as to what constitutes fundamental obligation of an insured and of insurer, which shall come in handy when determining as to who has committed fundamental breach and who has not so as to determine the applicability of exemption clause. Supreme Court observed that “Every contract contains a core or fundamental obligation which must be performed. If one party fails to perform this fundamental obligation, he will be guilty of a breach of contract whether or not any exempting clause has been inserted which purports to protect him”. The court held that the insured in this case had not committed a fundamental breach of his obligation under the insurance policy but the insurer had indeed committed a fundamental breach by not acting upon its obligation which was stated as “The main purpose of the insurance contract is to put the insured in a position before the loss occurred, however if the insurer denies his liability, then such a denial shall result in fundamental breach of the insurance contract as there is no performance of the contract.”

34 1987 2 SCC 654 35 AIR 1996 SC 2054

Four Corners Rule

“Any damage or liability sought to be covered by an exemption clause must fall within the four corners of the contract and not outside it.”36 It is to say that the protection of exemption clauses extend only so far they were originally meant to cover.

The Contra Proferentem Rule

This rule holds that “any ambiguous or other doubt, in an exemption clause, must be resolved against the person who is seeking to rely on it, that is against the person who is proffering it”.37 This rule is used only as a last resort and when there is ambiguity in words. It “cannot be overstated to support extreme and unlikely interpretations”.38

In the case of Lee(John) &Son (Grantham) Ltd v Railway Executive39 the plaintiffs claimed damages against their landlords, owing to whose negligence, in allowing sparks from their engines, the plaintiffs goods were damaged, which were kept in the defendants warehouse. The defendants claimed exemption from liability by virtue of the exemption clause in the tenancy agreement. The court however applied the contra proferentum rule and held though the clause is capable of bearing a broader meaning but the same shall be, when two possible meanings can be given, will be given a meaning that goes against the landlord. The exclusion of liability was limited only to the ones arising by reason of landlord and tenant created by the tenancy.

Liability for Negligence

Though exemption clauses are in general subject to strict interpretation, where the exemption clause seeks to limit or exclude liability from negligence the strict becomes stricter. The reason probably is that it is unreasonable as to why a party to contact would let the other party obtain exemption from liability arising out of negligent acts. This leadsto an impression of existing inequality in bargaining power between the two40 and hence follows the strict interpretation. The principle, to be applied in such cases, was laid

36 BEALE, supra note 16, p. 1018 37 DAVIES, supra note 1. 38 Paul R. Ellington, Exclusion Clauses in English Law, INTL BUS LJ 513 (1985). 39 [1949] 2 ALL ER 581 40 MURRAY, supra note 5.

70 out by the Privy Council in the famous case of Canada Steamship Lines Ltd v The King41 , in the following words of Lord Morton.

“Their lordships think that the duty of a court in approaching the consideration of such clauses may be summarized as follows:

1. If the clause contains language which expressly exempts the person in whose favor it is made (hereafter called “the proferens”) from the consequence of the negligence of his own servants, effect must be given to that provision. 2. If there is no express reference to negligence, the court must consider whether the words used are wide enough, in their ordinary meaning, to cover negligence on the part of the servants of the proferens. 3. If the words are wide enough for the above purpose, the court must then consider whether “the head of damage may be based on some ground other than that of negligence”.

The first of the three pronged rules established is quite simple and recognizes the canon of interpretation that so long as the words employed in a statute are clear and unambiguous they shall be given effect to without any intermeddling. When there is clear and unmistakable reference to negligence or a synonym (carelessness) of it then test one of Lord Morton is satisfied.42 In monarch airlines ltd, Clarke J had held that the phrase “act, omission, neglect or default’ was clearly intended to include negligent acts.43

There are two points to be made clear with respect to the second rule laid out by Lord Morton. One is that where the exclusion clause is widely worded then effect shall be given to them. So where the words used are “howsoever arising”, “all liability whatsoever”, which are wide enough to cover both the negligence and strict negligence liability. Though the catch in the use of such wide worded exemption clause is that it may be ruled out as not covering negligence liability by a creative judge in case he sees apparent injustice. Hence the use of widely worded exemption clause comes with its own

41 [1952] A.C. 192

42 BEALE, supra note 1. 43 STONE &DEVENNEY, supra note 9, p. 463.

71 plus and minus. Second, the courts tend to eye leniently clauses that only limit liability arising out of negligence than the ones that aim to exempt liability arising out of negligence. The words of Lord Wilberforce in case of Ailsa Craig Fishing44 are indicative of this approach:

“Clauses of limitation are not regarded by the courts with the same hostility as values of exclusion: this is because they must be related to other contractual terms, in particular to the risks to which the defending party may be exposed, the remuneration which he receives and possibly also the opportunity of the other party to insure.”

Hence the type of limitation is an important factor determining the degree of strictness applied by courts in its interpretation.45 This was starkly clear in the case of Ailsa Craig Fishing Company.46 In this case an exemption clause in the contract restricted the liability of defendants to 1000 pounds. Upon loss of a boat kept in defendants harbor under an agreement, that entrusted defendants with responsibility of safekeeping the plaintiff’s boat, the plaintiffs sought compensation over and above the limit set in the clause. The court dismissed the contention of the plaintiff that the said exemption clause pertained to only negligence in providing service and not in upkeep of boats which represents a total failure to supply the services. The defendants were held entitled to claim the benefit of limited liability by virtue of said clause.

When judgment is to be made with respect to the third test laid out by Lord Morton, the “courts distinguish between two situations:

1. Where the only basis for liability is negligence 2. Where the party will be liable irrespective of negligence.”47

Where negligence is the only possible basis for liability, then there is no need to make a specific reference to it as in all consequences, exemption claimed from liability will be exemption from negligence. The third rule of Lord Morton has been derived from the

44 Ailsa Craig Fishing Co. Ltd. v Malvern Fishing Co Ltd (1983) 1 WLR 964.

45 MURRAY, supra note 5, p. 110. 46 Ailsa Craig Fishing Co Ltd v Malvern Fishing Co. Ltd [1983] 1 W.L.R. 964 47 MURRAY, supra note 5.

72 principle enunciated by Lord Greene M. R. in case law Alderslade v Hendon Laundry Ltd.48, in the following words: “where… the head of damage (liability for which is sought to be excluded) may be based on some other ground than that of negligence, the general principle is that the clause must be confined in its application to loss, occurring through that other cause, to the exclusion of loss arising through negligence.”49

In this case certain clothes were sent for by the plaintiff to the defendant’s laundry for laundry purpose. The same were unfortunately lost. An action was brought up by the plaintiffs claiming damages against which the defendants relied upon an exemption clause which stated that: “…the maximum amount allowed for lost or damaged articles is 20 times the charge made for laundering”. Here though again the words did not express inclusion of the term “negligence” but by an ordinary understanding it was made out that the limitation sought was against damages that may ensue out of negligent acts of the defendant. It is in this case that Lord Morton had added the qualification to the above principle of construction enunciated by Lord Greene M.R. which had resulted in his third principle. He added the qualification that the “other ground” must not be so fanciful or remote that the proferens cannot be supposed to have desired protection against it.50Here the defendants were held liable for failure to take reasonable care and skill in handling the handkerchiefs of the plaintiff and the exclusion clause was held to be applicable and the liability was hence ltd to 20 times the cost of laundering.

However, in Lamport & Holt Lines Ltd v. Coubro & Scrutton (M. & I.) Ltd,51 the following words of caution were added with regard to application of Morton’s third rule: “in seeking to apply Lord Morton’s third test, we should not ask now, whether there is or might be a technical alternative head of legal liability which the relevant exemption clause might cover and, if there is, immediately construe the clause as inapplicable to negligence. We should look at the facts and realities of the situation as there did or must be deemed to have presented themselves to the contracting parties at the time the contract

48 1944 1 K.B. 189, 192 49 BEALE, supra note 1. 50 It is logical and common-sensical to hold that the damage that can ensue to clothes sent for laundry would be invariably because there has been some neglect or default on the part of the laundry; it is too unreasonable to think that burglars breaking in a laundry store to damage clothes. 51 [1982] 2 Lloyd’s Rep. 42,50

73 was made, and ask to what potential liabilities the one to the other did the parties apply their minds, or must they be deemed to have done so.”

Where the first principle laid out by Lord Morton is quite straightforward the other two are equally problematic as they rest on “dubious assumption” that a party does not intend to exclude negligence unless he explicitly says so. In reality there express omission to put this explicitly for fear of jeopardizing the contract itself.52

Lord Morton’s third principle holds that exemption clause will be read as providing exemption from only non-negligent sources of liability unless negligently inflicted liability is the only loss likely to be suffered.53 This principle was seen in action in the Hollier v Rambler Motors54 case. In this case Hollier was a regular customer of rambler motors, who took his car for repair services. Each time an invoice was signed by Hollier that contained the terms and conditions, though, this time such an invoice was not signed by Hollier. One of the clauses, being an exemption clause, stated that: “the company is not responsible for damage caused by fire to customer’s cars on the premises”. On this very occasion, Hollier’s car got damaged by fire while in the garage, owing to the negligence of rambler motors. Hollier demanded damages for breach of implied term that imposed duty to take reasonable care upon the rambler motors. Rambler on the contrary relied on the exclusion clause.

The court of appeal held that the exclusion term had not been incorporated into the contract as there was no sufficient course of dealing. Second the court held that the language of the exclusion clause was not sufficient to exclude liability for their negligence.

The principle stated by Scrutton, LJ., in the case of Rutter v Palmer55, also make the process of ascertaining whether exemption for negligence is covered by an exemption clause or not, is beautifully worded in the following words: “…for the present purposes a rougher test will serve. In construing an exemption clause certain general rules may be

52 STONE &DEVENNEY, supra note 9. 53 BEALE, supra note 1. 54 [1972] 2Q.B. 71 55 [1922] 2 KB 87,92

74 applied: first the defendant is not exempted from liability for the negligence of his servants unless adequate words are used; secondly, the liability of the defendant apart from the exempting words must be ascertained; then the particular clause in question must be considered; and if the only liability of the party pleading the exemption is a liability for negligence, the clause will more readily operate to exempt him.”

4.4 Conclusion

Exclusion clauses have on one hand been defended as expressions of the freedom of contract doctrine and attacked on the other as means of oppression of inferior party and befooling of unsuspecting consumers. An angle, considered less, is the economic function of exclusion clauses. They can serve as an effective tool to allocate risk in a convenient and efficient manner, judged so by parties to contract.56 However such economic logic is served better when the parties are aware of such exemption terms and make an informed waiver of their right, for here they make for themselves other backups. But duping one to sign exemption clauses will not serve the economic purpose. It rather falls short on moral and social utility grounds as well.

It can be made out that judicial treatment of exclusion clause has not been static over the years nor has it been utterly neutral. It gave strict interpretation to exclusion clause in B2C contracts and the attitude of disfavor at disclaimer clauses B2C contracts continues. The interpretation has been influenced also with changes in the understanding of laissez faire.

However is can also be made out that judicial innovation and creativity has its own limitations. There is a need for statutory provisions which clearly provide for dealing with unfair exemption clauses.

56 Leslie Kelleher, Exclusion Clauses in Contract, 14 MAN LJ 135 (1984).

CHAPTER 5

ATTEMPTS IN INDIA AT TREATING UNFAIRNESS IN CONTRACTS

5.1 Introduction

Contract law is a very peculiar kind of law for it does not define the rights and obligations of parties, unlike usual substantive law, but provides them the legal mandate to enter into agreement, letting them define their own rights and obligations. In short Contract Act lets people frame the law applicable to them with regard to a particular subject matter forming part of contract. So long the said agreement confirms to the minimum compliance required by it (i.e. the contract law), it accords the status of contract to a humble agreement1. Hence what is clear is that contract law retains with itself the oversight power, leaving the rest to the parties’ wisdom.

Now, in determining the “nature of contract law”, there are two repelling forces that exist. One seeks complete freedom of contract2 and the other regulation of the said freedom of contract3. A good contract law would achieve a fine balance between the two equally justified views and the consistent attempts of the Indian law commission beginning with its 13threport in 1958 to the 103rd report and the latest 199threport are efforts to bring this fine tuning of the antiquated Indian Contract Act with the changing times.

The words of Anson – “Law of Contract is a Child of Commerce”, have a lot of significance on a lot of fronts in today’s time. On one hand it shows that being the child of commerce it must act subservient and in furtherance of business interests and secondly that contract law being intrinsically linked to commerce must reflect the changing business trends and sentiments. On the other hand it also shows that though the business logic should weigh heavy when dealing with contract sanctity and its interpretation and

1 Sec 2(h) Contract Act 1872 : agreement enforceable by law is a contract 2Representing the pro-capitalist, laissez faire doctrine and the belief in Adam Smith’s logic which advocates minimum interference by the governments and to leave all to the invisible hand of the markets. 3 Representing the pro-socialist and leftists ideologies .

76 action but equally must it show that socialistic ideals of a polity are not stepped over. The latter logic is increasingly being subscribed to, since when contracts have deeply intruded the life of common man.

Where it is an established truism that that to have a valid contract the intention to enter into a legally binding contract is sine qua non4; an equally established fact5 (i.e.social and personal relationships are not governed by contracts) seems to have given way to a new understanding. Where marriages are now concluded and guided by pre-nuptial agreements and day to day consumer dealings are based on consumer contracts; contracts though may have been child of commerce but today the belong to areas other than commerce which erstwhile were held as purely social and personal.

Hence, Anson’s holding that contractual law is governed by a mix of both subjective and objective interpretations is very pertinent today6, and maybe more than what it would have been in past. Especially with regard to the socio-economic milieu7 that pervades Indian society, the Contract Act needs to provide provisions that empower judiciary to do a purposive and subjective interpretation of contracts8 rather than the accepted literal and strict one. The attempts of the law commission reports seem to be guided by this logic, though the same lacks implementation or often the acts are too delayed to be of any good.

This chapter takes a journey through the various Law Commission Reports made so far, concerning the Law of Contracts in India. The journey up till the 199th Report of 2006 showcases the baby steps made in reforming the Indian contract law and informing the same about the developments in foreign lands. The last such report, espousing change in

4In, Balfour v. Balfour, Lord Atkin observed that –“There must be an intention to be attended legal consequences i.e. party have in mind at the time of making agreement that they will follow legal consequences.” 5 Social engagements, private agreements are not subject of contracts. 6 With respect to existing applications of doctrines like consideration/privity of contract/quasi contracts; it was observed that there cannot be an exhaustive list of situation, hence this lends greater discretion with judiciary and leads to uncertainty for parties. This establishes that though contracts demand strict interpretation and quite justifiably so, but despite this the arena of contractual law is bound to be subjective and persistent attempts are required to make it more certain without causing injustice. The suggestions of the 1958 reports however have not been implemented and the interpretations continue to be case law dependent. 7 Illiteracy and ignorance on part of population with respect to its rights and duties, absence of legal knowledge and legal aid 8Especially, consumer and non-commercial contracts.

Contract Law is the one that came about in 2006. The report sought to equip the Contract Act and thereby the courts to check procedural and substantive unfairness in contracts generally. After the foregoing discussion, in previous chapters, it can be safely said that the said objective can go a long way in pre-empting unfairness in Standard Form Contracts.

5.2 13th Law Commission Report

This report was the first attempt by an independent government of free India to revise the British era contract laws contained in the principal statute: the Indian Contract Act of 1872.

The Indian Contract Act, heavily borrowed from the English Contract Act, was guided by the common law doctrines and the positivist attitude towards law. Continuing with the Austinian understanding of law, the said laws were inclined to give certainty rather be influenced by abstract principles of moral rights and wrongs. As was the prevalent sentiment of the 19th century, the Act contained provisions that furthered the Freedom of Contract above all. However, by 1958 the treatment of contracts had changed considerably which led Prof Keeton to remark, “Whether as a result of unceasing administrative encroachment, freedom of contract will survive at all to any noticeable degree”.

The Contract Act is stately comprehensive with regard to only those aspects with which it deals and the once not dealt have either become part of a special law/particular law or are then interpreted and void is filled by taking aid of English laws or principles of equity justice and good conscience. Where the law report had recommended codification of such doctrines as early as in 1958, the failure to do same has continued the element of uncertainty in contractual interpretation.

The field of contract has increasingly become highly specialized and the trend of separating specific contracts from the Contract Act began in the decade following the formation of contact act itself.9 The Contract Act overtime is increasingly left with those

9 Negotiable instruments act 1881.

78 provisions that provide for a general framework for all other contracts to base them upon to ensure their validity.

Hence in view of above point, an observation can be made that Contract Act which is not comprehensive and is increasingly being emptied by extracting specific contracts from it and placing them under independent legislations, the Contract Act 1872 can and should provide for codified doctrines and mandatory non-derogable skeletal framework for contract formation while the specific contracts can be separated from it. The said objective can very well be fulfilled by incorporating the suggestions in the 199th law commission report.

5.3 97th Law Commission Report10

As per section 2(h) of the Contract Act, an agreement not enforceable by law is said to void. The Contract Act provides for 7 conditions11 that make an agreement void. The most contentious of all the seven sections has been section 28. However the first law commission report dealing with Contract Act per se12 did not suggest any changes in the said section despite evidential contradictions in its interpretations by courts.13It held categorically that the difference in interpretations is primarily owing to case specific insurance policies and do not reflect issues in interpretation of section itself. The principle14 being quite steadfastly established requires no alterations in the section.

However the suo-moto effort of the law commission in form of 97th report that dealt with section 28 specifically, brought some clarificatory changes in the section a decade later by virtue of 1997 amendment in Contract Act. The 97th Report dealt with prescriptive15 clause in Indian Contract Act under section 28. Unlike descriptive clauses which give the substance of what law/legal rules is, prescriptive/permissive clauses are “those through

10 Section 28, Indian Contract Act, 1872; Prescriptive Clauses In Contracts, March 1984. 11 Section 24-30. 12 13th law commission report 13HirabhaiNarotam Das v The Manufacturer’s Life Insurance Co. ; Baroda Spinning and Weaving Co. Ltd. v Satyanarayanama. 14 “An agreement providing for the relinquishment of rights and remedies is valid but an agreement for relinquishment of remedies only falls within the mischief of section 28.” Para57 of 13th report of Law Commission of India. 15 In legislation three kinds of clauses are found – descriptive , prescriptive and a mix of the two.

79 which orders, prohibitions and permissions are conveyed to the recipients of the respective legal rules; express that something should be done/allowed.”16 In legal sense “prescription” refers to the “the expiry of rights of legal action because of the fact that too much time has gone by since your right to take legal action first arose.”17 For instance with regard to insurance policies, their contractual terms usually have prescription clause which mostly are of time barring nature. However there is often a visible clash in public policy acting behind section 28 and commercial sense18 of some businesses which require reduction of time during which a given right can be enforced.

Often it is these prescription clauses that tend to give a hue of unfairness to contracts especially insurance contracts.19 On one hand business logic require that the right to claim cannot continue for as long as the limitation act provides and on the other hand public policy necessitates contractual terms must not be so unconscionable as to violate the basic sense of justice and fair play thereby requiring that min cap must be provided for by legislature in case of special category of contracts. Prescription clauses are a potent defense with the debtor and deadly mistake for a creditor if he fails to act within the time limit. It is this misuse of the prescription clauses20 that the 199th law commission reports sought to check and add minimum standard of mandatory fairness.

Under the said report that aspect of sec 28 was dealt with which pertained to time limiting clauses in contracts. The original section explicitly pointed that agreements which restricts absolutely a party from enforcing his contractual rights by usual legal proceedings in ordinary tribunals or limits the time within which each party may enforce

16 Vijay K. Bhatia, Vagueness in normative texts. 17 http://www.osti.co.za/prescription-and-time-barring-clauses.html 18 As a result of Narismha Committee in 1998 and Andhyarujina Committee in 1999, an “exception has been carved out permitting banks and financial institutions to stipulate that rights under a guarantee shall be extinguished if no claim is made within specified period not being less than one year”, Banking laws (amendment) act 2012; http://www.lakshmisri.com/News-and- Publications/Publications/articles/Corporate/Restraining-legal-proceedings-Recent-trends The Carriers Act 1986, in section 10, provides for prescription clause and it is held as valid. Observation in 97th law commission report para 2.7. 19“ refers to the loss or weakening of a person’s right to recover a debt as a result of their inaction and the passing of time” ;http://www.nortonrosefulbright.com/knowledge/publications/77367/prescription-and- time-bar-clauses-in-short-term-insurance 20“Economic justice, avoidance of hardship to consumers and certainity and symmetry of the law”, 97th law commission report.

80 his contractual rights are void to that extent.21The said section22 was being interpreted to mean that so long as a contractual term is not extinguishing a remedy it is not violative of sec 2823 thereby providing an inference that prescription clauses are not invalidated by sec 28. However the said holding lead to, as pointed out in the report, anomalous conditions because it permits one to do indirectly what has been denied directly. It akins cheating the law. Also freedom of contract cannot allow people to become Shylock24 and hence it requires adherence to the basic minimum fundamentals of justice. The report mentioned that the way the law was being used was to limit a right and not the remedy, since the latter was expressly prohibited. It resulted in creation of prescriptive law by people themselves, which was not provided by the legislature and hence was as per the report a greater concern than limiting the time itself. Law of limitation and prescriptive clauses deal with same object i.e. time and limitation act is an active work of the legislature by which it is not only prescribing the time period but is also excluding parties to tamper with the prescribed time25. Hence such tampering with time is possible only when the legislature itself permits by creating special legislation.26Freedom of Contract cannot run amok and cause economic hardship to people as in the case of Kerala Electrical and Allied engineering Co. Ltd. v Canara Bank.27

The report acknowledged that as per terms of business the said interpretation of sec 28 seems okay, however from social and economic justice standpoint, the interpretation goes heavily against a hapless consumer who stands in unequal bargaining position with business a corporate with whom he is engaging on day to day basis. Hence the need to have substantial and procedural fairness in clauses/terms of contracts can be traced to 97th report.

21Sec 28, Indian Contract Act, 1872. 22 There is no section similar to sec 28 in English law. 23 Baroda Spinning and Weaving Company v. Satyanarayanam Marine Ins. Co. AIR 1914 Bom. 24Usurious lender, a character from the famous Shakespearean play ‘Merchant of Venice’. 25 An analogy cannot be drawn from the us law where it is held that “statutes of limitation prescribe what is supposed to be a reasonable period, so as to ensure promptness in the prosecution of remedies, but “there is nothing in their language or object which inhibits parties from stipulating for a shorter period within which to assert their respective claims”- 97th law commission report, para 3.12. 26 Like banking regulation , insurance act etc 27Kerala Electrical and Allied engineering Co. Ltd. v Canara Bank.

In this report, the reasoning of Punjab and Haryana high28 court validating the prescriptive clauses in contracts was also questioned. Most fundamental challenge to the reasoning being that when limitation on time is invalidated then how can an extinguishment of right can be justified. Again, the unequal position of consumer and business conglomerates came to forefront while considering the legitimacy of the prescriptive clauses. Also the commission hinted at the bigger menace underway in form of Standard form contracts and standard from terms, but left the same for future discussion which we have now in form of 199th law commission report.

The final recommendation of the commission which was incorporated in the Contract Act, 1872 in 1997 by way of amendment act, added two more grounds29 for holding the agreement as void, which did away with scope of introducing prescriptive clauses in the agreements pertaining to three areas. It is indeed true that when in a contract one party is left at the mercy of the other contracting party, it negates the very concept contract being a bargain for who would want to bargain for himself a losing position.

Note: Exclusion Clauses are a kind of prescriptive clauses only.

5.4 103rd Law Commission Report30

With India still having 6 years to go before entering the globalized economy, the law commission took up suo-moto discussion on the phenomenon that was increasingly become ubiquitous across liberalized and industrialized economies round the word; it being standard form contracts.

The report establishes that there isn’t any inadequacy in understanding of the “standard form contracts” in India. The report lays out characteristics of standard form contracts as devices that provide economy and certainty by putting the very fundamentals of contract law i.e. freedom of contract and consensus into abeyance. Thus standard from contracts

28Pearl Inc. Co. v. Atma Ram, AIR 1960 Bom. 29 In Sec 28, subclause (b) was added which laid that agreement would be void which : 1.extinguihes the contractual rights of a party on expiry of a specified period so as to restrict enforcement of rights by any party, or 2.discharges a party from his contractual liability on expiry of a specified period so as to restrict enforcement of rights by any party. 30Unfair Terms in Contract, May,1984

82 are rightly likened to a “legal fiction” where will of only one is predominant and the other parties application of mind is restricted to either sign on the dotted lines and accept the imbedded clauses in fine print without any scope of negotiation and enter into contract or to not sign and be left high and dry.

The problem with these Standard Form Clauses is that, one they don’t resemble contracts, since they do not fulfill the essential conditions of contracts. Second, they more often than not have exemption and exclusion clauses that are usually in favor of the party in superior bargaining power and are more often than not imposed on a party. The problem is confounded by the fact that overtime these contracts become a necessity for both consumer and business entity engaged in mass dealings and come to proliferate the market so heavily that they become the norm. This leads to possibility and tendency of continued exploitation of the hapless consumer/individual.

The cases31 discussed in the commission report bring to light the fact that Indian courts have been applying the same treatment to Standard Form Contracts as accorded to contracts per se32. Two reasons can be accorded for this approach. One is that legislature has not provided for any different set of interpretation rules for standard form contracts and hence courts are bound to apply the same interpretation rules to them as for contracts generally, given under Contract Act 1872. This implies that the courts are to give due recognition and enforcement to the unambiguously stated terms of the contract without reading into them anything from outside despite their not being always based on mutuality33. Two, since the Standard Form Contracts are to be dealt with the same set of rules, so it implies that the party autonomy, to write their own contractual terms exist and which must be respected. Hence despite the established unequal bargaining position between the parties court have no option, like to act otherwise in spirit of equity34, but to give due enforcement and recognition to the expressly, though one sided, and imposed

31Indian Airlines Corporation v. Jothaji Maniram (AIR 1959 Madras 285); Rukmanand v. Airways (India) Ltd. (AIR 1960. Assam 71) ; Indian Airlines Corporation v MadhuriChowdhury (AIR 1965 Cal. 252); Irrawali Flotilla Co. v. BugwanDass (1981) LR 18 IA 121; Singhal Transport v. Jasaram (AIR 1968 Raj 89). 32 Despite their being fundamental differences between the two, where one is anything but a contract in the traditional understanding of the term. 33 Courts are to maintain sanctity of contracts. 34 Except on a few occasions, that too provided by the ICA only

83 rather than freely accepted, terms in the standard form contracts. This situation gives an impression as if the courts are themselves a party in perpetuating injustice, though legally they are very sound in their acts. But, as was rightly said that justice must not only be done but must be seen too, so on that front the justice delivery system will be seen as lacking.

The 103rd law commission report titled “unfair terms in contracts” was an attempt to instigate the legislatures of the day to look into the concept of SFC and the way unfair terms are being incorporated and imposed on unguarded consumers/recipients35 via the SFC.

The report highlights that the issue of unfair terms has been recognized by the Indian judiciary as early as in 190936, however the Contract Act provides very restricted power to courts, that too in very limited and specific instances only, of doing away with the unfair clauses in contracts. Though there have been instances37where unjust clauses have been set aside by courts, however the reasoning is based on taking cue from English cases for instance rather than any specific substantive provision in Indian law. The need for a specific clause/section empowering the courts to deal with unfair terms in contracts is because till now the explicit mandate is only to maintain the sanctity of contract entered by individuals, consenting freely and possessing due capacity. So a court has no mandate to “look through” contractual terms even if they are explicitly disfavoring a party because the presumption that each individual is best judge of his own interests and private matters must be left un-interfered so long as they are not harming public interests.

35 The report did not make any distinction between standard form contracts that lie in consumer transaction domain or those that form part of commercial transactions. Though a consumer is more hapless and vulnerable when exposed to SFC and comparatively the parties in commercial transactions are presumed to be more or less on equal bargaining power. But the possibility of misuses of SFC can be done in purely commercial relations also. Hence the report is dealing with SFC and unfair terms in them (exemption/exclusion clauses) per se. 36 In dissenting opinion Shankaran Nair J , in the case of ShaikhMohd. Ravuther v. B.I.S.N. Co. (1909) II R. 32 Mad 95, observed that sec. 23 of the Contract Act provides for dealing with exemption clauses-unfair terms in contracts. 37 Cases sited in report

Under the present law, a court can set aside a contract if it does not fulfill conditions laid out under section 1038. By implication, validity of a contract can be challenged in India on ground of incompetency of contracting parties39, on lack of free consent40, on there being an unlawful object are unlawful consideration41, or where the contracts are otherwise declared unlawful by law42. Where the said agreement fulfills the said mentioned requirements, it becomes enforceable by law43 and matures into a contract. Nowhere there exists a section which empowers the courts to look into fairness or unconscionabilty of a term in contract. Whatever attempt has been made so far by courts to set aside unfair contracts or their terms have been on a reasoning which does not arise from any given section. Where section 23 does give a lot of scope to look into unfairness of terms but the judiciary so far has been adopted a very restraint attitude in reading the section very strictly. The other remaining provisions (sections) under which a desperate attempt at rescue can be made are section 2844, 7445 and 151. However all three are incapable of providing effective remedy against the procedural and substantive unfairness that may infiltrate a SFC via its exemption clauses. Hence the report categorically calls the Contract Act as incapable of treating the mischief as it does not provide any general provision46.

38All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. Nothing herein contained shall affect any law in force in [India] and not hereby expressly repealed by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents. 39 Competency to be determined as per sections 11 and 12. 40 Free consent is to be determined in accordance with sections 13 to 22. 41Lawfulness of “object” and of “consideration” to be established by reference to section 23. 42 Section 24 to 30 provide for agreements which are expressly declared by law to be void 43 Sec 2(h) 44 In light of 93rd report and the subsequent amendment in 1997, the anomalous position of unfairness created by original section has been done away with however the specific contracts that were undermining the protection to consumer said section have again been granted freedom from the clutches of said section by bringing them under specific legislations and providing exemptions in regard to the. Like the insurance and bank guarantee contracts. 45 46 There very much exists such inequalities of bargaining power and same is recognized by government is evident when we have statutes like rent control and labor legislation which are premised on the understanding that there exists unequal bargaining power between a landlord and his tenant, between a master and servant and hence there is a need to provide for statutory protection to the inferior power to bring artificial parity between the two so as to have effective freedom of contract.

The report highlights that the pre 1977 position in the UK, which more or less is the approach, applied by Indian courts today, was found inappropriate47 by the legislature which enacted thereby the Unfair Contract Terms Act 1977. The underlying principles48 in UK pertaining to reading of exclusion clauses in Standard Form Contracts and the established rules via case laws like the four corner rule, Gibaud rule, contra proferentem rule ,doctrine of fundamental breach prior to the 1977 legislation though were not bad in entirety but for the uncertainty they resulted in.

And no doubt any day a legislature made law is a better choice than a judge made law and the 197749 act was a timely action in UK. In India the consumer protection act of 1986 sought to achieve the same protection to the Indian consumers however the protection it has rendered till date is an open question and with reports of long pendency in consumer forums too is quite a dampener. Also where the UK has further developed upon its 1977 act50 , India has again gone in a limbo.51

Next the law commission report highlighted the position in US with regard to treatment of unfair terms in Standard Form contracts. One point that can be made with respect to studying conditions in developed countries like USA, UK on one hand and a developing country like India is that even without express protection in form of statutes the people are more aware of their rights and laws of the country and hence are better capable to look after their interests.

However in country like India there is greater need of urgency to be shown on part of government to protect not only consumers but other dealings in commercial transactions too, for there has been an intrusion of modern contractual principles in their life’s, without providing them the wherewithal to manage their interests in the changed

47 The approach had left a lot upon the discretion of the judges which resulted in net uncertainty and chaos. 48 Law Commission Report, p. 6. 49 It established that no exclusion clause can exempt one from liability of causing death by negligence, further all the exempting clauses will be judged on the threshold of reasonableness. This establishes hence that though freedom of parties to contract exists but the said freedom is not absolute but restricted by reasonableness. 50Unfair Terms in Consumer Contracts Regulations 1999 51 Though, there is a pending Consumer Protection (Amendment) Bill, 2015.

86 scenario. So in USA, which is a federal polity in the strict sense of the term52 though there is no federal statute like that of UK, section 575 of the Restatement of law of contracts and section 2.302 of the Uniform Commercial Code provides effective guidelines to treat with unfair terms in contracts. The latter greatly empowers the courts to look into any unreasonability or unconscionabilty in contractual terms, if any.53

The report rejected the suitability of the Israeli model in India which is to have an administrative control of industry experts over standard from contracts and exclusion clauses embedded in it. This however is not such a bad idea in the post liberalization era.

The ultimate recommendation of the commission in the report, to make use of the lived and successful experience of the UK and US legislations and introduce a new chapter IVA and section 67A54 that shall give express mandate to courts to refuse enforcing an unconscionable contract or terms contained in it and also making it explicitly clear that exemption sought with regard to liability arising from negligence and willful breach shall be void, would have been very helpful. However till date insertion of such a section is yet to happen.

5.5 Conclusion

In the over two hundred law commission reports released so far, only four have been devoted to the updating and reforming of two century old Contract Act of 1872. Being an advisory body only, the recommendations contained in reports don’t have a binding effect. As a result sometimes the report have no more affect than to act as mere information digest on existing issues surrounding the topic. The Law Commission taken

52 Unlike India’s quasi-federal polity where it is a union of states and not a confederation, which gives a greater stay and hold of center upon states. 53 However there are no guidelines as to determination of unreasonableness, as proposed in 199th law commission report. 54“67A. (1) Where the Court, on the terms of the contract or on the evidence adduced by the parties, comes to the conclusion that the contract or any part of it is unconscionable, it may refuse to enforce the contract or the part that it holds to be unconscionable. (2) Without prejudice to the generality of the provisions of this Section, a contract or part of it is deemed to be unconscionable if it exempts any party thereto from – (a) the liability of willful breach of contract, or (b) the consequences of negligence.”

87 up in the next chapter i.e. the 199th Law Commission Report is an instance of how the recommendations end up in vain.55

55 Report came up in 2006, and it will be full ten years in 2016, without the being acted upon.

CHAPTER 6 TREATING PROCEDURAL AND SUBSTANTIVE UNFAIRNESS IN CONTRACTUAL TERMS

th 6.1 Introduction: 199 Law Commission Report

Picking up from where the 103rd Law Commission Report left, Law Commission came up with its 199th Report.1 The report offers a voluminous treatment of the subject matter i.e. of unfairness in contracts. The report primarily concerns itself to treating terms that may be unfair either in procedural or substantive ways. The report is for comprehensive treatment of “unfairness” that may inform contracts generally. Hence the report not only provides for treating unfairness in Standard Form Contracts but in contracts generally.

6.2 Crux of the Report

There has been continuous erosion of interpersonal relationships amongst people with each passing century, onward movement from status to contract,2 and corresponding stress on the freedom of contract and trade. On the other extreme we have also had an increase of recourse to judiciary to settle disputes. The judiciary is to go by the rule book when deciding these disputes. The rule book pertaining to contracts is quite uniform across jurisdictions, inviting minimum interference in the private dealings of the people so long as they do not clash with express rule or matters of public policy. This has helped in introducing unfair terms in contracts in the name of hard bargain and freedom of contract.

The problem of judiciary in weeding out these unfair terms arises from two counts. One is the limitation of its powers which require it to stick to its jurisdiction and second are the entrenched principles of contract that forbade any uncalled for interference and the strong business lobby. What seems the best way out is to move away from traditional and

1Unfair (Procedural and Substantive) Terms in Contract.

2 Henry S. Maine, From Status to Contract, ANC. LAW (1861).

89 objective theory that governs contractual interpretation to a new theory that will permit to treat Standard Form Contracts as contracts fulfilling the offer-communication- acceptance-agreement-contract formality, howsoever flawed, but then permitting a greater judicial intervention to assess their reasonableness and unfairness. All laws require up gradation to serve their purpose continuously and stay relevant. The same must be true with contract laws and their treatment at the hands of judiciary.

An attempt to treat unfairness in contracts is a work in progress across jurisdictions.3 The treatment of unfair terms by the 199th law commission report seems to be hitting the bull’s eye. The word “Unfair terms” is both vague and wide at the same time. It has the potential of being an unruly horse much like the observation made with respect to the term “public policy”.

Hence classifying unfair terms under procedural and substantive is the right first step to begin with. Procedural unfairness relates to externalities pertaining to the relationship between the parties, their abilities to comprehend the terms of contract, and other indices that can come under procedure which will constitute unfairness. Substantive unfairness refers to the content and nature of the terms that comprise the contract. Existence of procedural unfairness might lead to substantive unfairness though not necessarily. Hence a case to case perusal would be required to be made to see if unfairness exists in the contract, when either their persists substantive or procedural unfairness. Also what needs to be provided for is the degree of unfairness that will be permissible, in name of freedom of contract. The important effect of such classification and acceptance of same in academic circles, business community and statutes would be that an automatic falling in line will happen inviting little interference from courts. Also the same will provide the presently restricted mandate4 of the courts a little bit more of leg space.

3 British and Scottish Law Commission Report, 2004, “Unfair Terms in Contracts” ; South African Law Commission Report in 1998 on “Unreasonable Stipulations in Contracts and the rectification of contracts” Discussion paper, 2004 , Victoria(Australia), Interim report, 2005 Canada (British Columbia); Reports of the new Zealand law commission, Ontario law commission 4 Sections under Contract Act of 1872 providing for void and voidable contracts, specific relief act etc.

6.3 Classical take on Unfairness and Contracts

Classical theory espoused a very touch-me-not stature for contracts. Law exists to only enforce the promise made in the contract and if any fairness-unfairness issue is raised then the most law must seek to redress is any procedural unfairness but not unfairness of outcome or unfairness pertaining to substance of the contract. Out of the three types of unfairness, the possibility of latter two is considered non-existent within the understanding that defines classical theory. This is because the classical theory runs on the presumption that contracts are freely entered into bargains. It is like a game, whose compliance to rules is assured by the law and hence a game based on rules and played by those rules is bound to be fair.5 Even though, one party may end up being better off than the other at the end of the game, but both will be better off than their pre contract stage. The next kind of unfairness that is completely discounted for by the classical theory is that of the substantive unfairness. The logic for this also is same. Probably another reason could be its confidence in the procedural safeguards it provides for that it led it into believing that there is impregnable shield protecting substantive unfairness from seeping in contracts, which is over and above what is already provided for. Moreover believing in its logic of party autonomy and near perfect bargaining power, it does not give much acknowledgment of procedural unfairness. Hence, there in the resultant exists a strong bias for non-interference in contracts leaving it entirely to the private domain of parties. In sum, classical theory provides little concern for “unfairness” arising in contracts. There exists, principles and safeguards within the theory for treating procedural unfairness like obtaining consent by fraud, misrepresentation, coercion. Treatment of possible substantive unfairness is considered like introducing a bull in the china shop, which may lead to unnecessary litigation, harming both commercial and consumer interests. This is so because, what may constitute a procedurally fair contract is still possible to establish but to obtain consensus with respect to substantive unfairness of a contract is highly elusive because fairness is a subjective term.

5 STEPHEN A. SMITH & PATRICK S. ATIYAH, ATIYAH’S INTRODUCTION TO THE LAW OF CONTRACT (OUP Oxford 2006).

However with changing realities and replacement of classical with modern theory, it becomes indispensable to accept the truth of ever increasing procedural and substantive unfairness in contracts and the need to treat the same, howsoever intractable it may appear or in reality even be. There are certain minimum standard of fairness to which a society must adhere to, so as to be worthy of being called a human society. The same is necessary to establish for wellbeing of a democratic state order.6

6.4 Need to classify unfairness into Procedural Unfairness and Substantive Unfairness The 199th law commission report has two pleas to make. One is that there should be outright and direct treatment of the issue of unfair contracts and unfair terms in contracts. The second plea is to have separate provisions for dealing with procedural unfairness and substantive unfairness.

The reasoning employed in the law commission report for having separate classification of procedural and substantive unfair terms is quite logical.7 With separate treatment of two, courts will be able to deal with both the aspects in depth and remedy the same. If there exists a mix-up between them, then one can camouflage the other and let the rot continue.

The classical theory is giving way to the modern theory which recognizes the unequal bargaining power between the parties, and lack of real freedom of contract. The fiction of negotiation in Standard Form Contracts and the myth of free consent is all acknowledged by jurists but justified in light of economic feasibility and practicality. Given this background assessing only procedural fairness will do no good and ensuring substantive fairness is a must, to have overall contractual fairness.

There is continued absence of statutes, across jurisdictions, which provide for separate treatment of procedural and substantive unfairness. But there is express agreement of the

6contract | law | Britannica.com, supra note 15. 7199th Law Commission Report

92 difference in two, the potential of two, both dependently and independent of each other, in resulting in unfairness, and to therefore have separate provisions to deal with two8.

Common law tradition treats and focuses primarily on procedural unfairness. The shortfall of such approach is that procedural unfairness is to be tested on a case to case basis, ascertaining the circumstances of that particular case. This takes away the possibility of treating “systematic use of unfair terms in Standard Form Contracts “.This lacuna is exploited well in present day Standard Form Contracts. Also to establish procedural unfairness is difficult as compared to substantive unfairness. This is so because former requires parole evidence (which is expensive and hard to prove) while the latter in contrast, itself is the evidence is easy to prove and lends indirect evidence for procedural unfairness even.

The poor performance of existing laws in dealing with unfairness is evidenced by the continuous use of unfair terns in Standard Form Contracts. This gives credence to demand for change.

6.5 Procedural unfairness and Substantive Unfairness in Contracts Given the subjective nature of “substantive” unfairness, it can be held as unfair and at the same time fair from a lot of competing angles. However, in the march towards establishing a regime of contract law that compulsorily ensures prevalence of nothing but fair contracts, an attempt can be made to start with establishing a minimum standard of substantive fairness. Minimum level of procedural fairness has been guaranteed since the origin of contract law but an element of ensuring substantive procedural fairness also needs to be looked into in the modern age.

A simple approach to establish substantive fairness is to consider an “unfair contract as one in which significantly more (or less) than a fair market price is paid. Provided that the contract price reflects the benefits and burdens of the contract’s terms, the contract as a whole may be said to be fair”.9 Even in the sectors, where there is a near monopoly, price cannot be arbitrarily fixed. Hence an objective analysis of fair price is always

8Supra 7. 9 STEPHEN A. SMITH & PATRICK S. ATIYAH, ATIYAH’S INTRODUCTION TO THE LAW OF CONTRACT (OUP Oxford 2006).

93 possible. This must not however lead to holding al hard bargains to be considered as unfair. The attempt is to not undermine party autonomy and freedom of contract. The attempt is also not to introduce the spectre of nanny state in the private dealings of man. The intention is not to overstretch the parens patriae role of the state. Individualism that defines the modern age is not intended to be taken for a ride. Also this approach is not attempting to regard ideals of capitalist model as unjust, but only to check it from becoming an unruly horse with no regard for ethics and justice.

The suggestion of the law commission the 199th report to deal with these two types of unfairness is quite novel on one hand and comprehensive on the other. Novel because though there is recognition of these two distinct types of unfairness, but nowhere yet such categorical separation has been made out as given in the draft bill. It is comprehensive because it provides for general principles to be followed in any category of contracts whether covered by any special legislation or not10. Hence the pernicious Standard Form Contracts will primarily be taken care of along with other types of specific contracts.

The approach to treating procedural unfairness as proposed by the law commission report is to add on to the already existing provision of the Contract Act dealing with procedural unfairness so as to make the redressal mechanism complete by providing for even with modern forms of introducing procedural unfairness. The objective is to introduce provisions that deal with “general procedural unfairness” i.e. “conduct of parties or the circumstances under which the terms of the contract are arrived at or the contract is entered into, may result in some unfair advantage or unfair disadvantage to one of the parties”11

This provides a solution to address the concern raised in previous law commission reports regarding lack of jurisdiction with the courts to effectively treat procedural unfairness in contracts. This change is also in line with the spirit of contract law whose preamble declares it to be an act to define and amend certain parts of contract law. The said proposed bill seeks to introduce a suggestive list of situations that will raise the

10Chapter-XI needs to define general procedural unfairness and general substantive unfairness under the Indian law. 11 199TH LAW COMMISSION REPORT, chap. XI, p. 178-86.

94 presumption of unfairness in eyes of law and at the same time give more elbow room to courts to do effective justice without having to evoke its inherent powers under section 151 of CPC, 1908 or to laterally address the issue under section 23 of Contract Act or article 14 of the constitution, which has been the practice up till now.

This will also most importantly enable courts to address unfair contracts made between private individuals, and not only those with state.

Though specific legislations exist in other common law countries and aid of same can be taken but the said references only have persuasive value in Indian courts. Having the said provisions dealing specifically with procedural and substantive unfairness not only will bring Indian law in connect with existential realities but will also give Indian laws a lead in comparison to other jurisdictions. In UK and other common law jurisdictions, provisions dealing with unfairness in contracts are still contained in specific legislations providing for specific types of contracts. The Indian approach is to avoid this incomprehensive treatment and duplicity of provisions. The approach is to have such provision incorporated in contract law which shall need to be complied with while framing any category of contracts and any exemption shall be allowed only by express mention in the specific legislation dealing with that particular type of contract. The greatest benefit of this approach will be that indirectly the civil law concept of good faith will be incorporated in common law India.

Such a treatment of unfairness i.e. of classifying it into procedural and substantive unfairness will serve two purposes, one is to empower judges and second is to provide contract drafters with an indirect code to which their terms must fundamentally adhere to or at least not infringe or violate upon.

It can both expressly and impliedly be made out that neither Contract Act nor Specific Relief Act is exhaustive. Hence to make changes to suit the dynamism of present times is itself demanded by the Act.

Procedural unfairness can be defined as “without prejudice to the provisions of section 3 and 4, a contract or term thereof is procedurally unfair if it has resulted in an unjust advantage or unjust disadvantage to one party on account of the other party or the manner

95 in which or circumstances under which the contract has been entered into or the term thereof has been arrived at by the parties”12

The definition makes it clear that enough safeguards exists to ward off flimsy litigation but to uphold genuine cases. Twin test has to be satisfied to prove procedural unfairness which is existence of unfair procedure plus a consequent advantage or disadvantage arising out of that procedural unfairness. Though, the existing provisions in the Contract Act of 1872, dealing with procedural unfairness, which requires only procedural unfairness to be proved to make a contract voidable, are not to be substituted with this twin requirement. This interpretation is in line with respecting principles that accord sanctity to contracts and also with 2005 judgment of US Supreme Court dealing with the same question. Hence the standard is somewhat similar to that under section 19A which pertains to undue influence.

Black’s law of dictionary defines “substantive unconscionability as unconscionability resulting from actual contract terms that are unduly harsh, commercially unreasonable and grossly unfair given the existing circumstances.

The definition provided under the proposed bill under section 12 is “a contract or a term thereof is substantially unfair if such contract or the term thereof is in itself harsh, oppressive or unconscionable to one of the parties”.13

The definition is quite prima facie loosely worded. However the benefit is that it gives court the jurisdiction to deal with the substantive unfairness that is quite apparent but not covered limited provisions. The suggestive list provided under section 13 of proposed bill will help court ascertain the limits beyond which there exist substantive unfairness and within which there is no reason to interfere even if the bargain is a hard one. These provisions will help courts deal with inherent unfairness of exclusion terms. Though under proposed bill law compulsorily has made certain terms as unfair by itself and which shall have no effect as being void (Sections 9, 10, 11).

12 Section 5 of proposed bill, under the 199th Law Commission Report 13 Section 12 of the proposed bill

6.6 Filling the Gaps

The success of these provisions depends upon how creatively and judiciously these are employed by the judiciary. Purpose of these sections, to a great extent, appears to accord discretion and jurisdiction to judiciary to sit in judgment over these issues. To streamline discretion of judiciary, a suggestive guideline is also provided in proposed bill. Hence the scheme is quite full proof, attempting to serve both psychological and legal purpose.

A comprehensive treatment of unfair terms can only be had if post detection that a term is an unfair term, the next step to be undertaken is also provided for. To hold a term void or unenforceable my frustrate the contract and may again result in loss to the party who was at a disadvantage even without having the term declared unfair term. Hence if this would be the case then the entire exercise of providing for unfair terms dealing with procedural and substantive terms will be rendered useless. There can be three types of treatment that can be done to deal with a substantively unfair term. One is that the said term must be considered as null and void and be removed out from the contract leaving the remaining contract as executable. Other approach is to replace the said term unfair by a term that is least degree of unfair. Yet another approach can be to replace the said unfair term by a term that penalizes the drafter.

The proposed bill is not providing specifically as to what reliefs can be accorded, post declaration of a term as either procedurally or substantively unfair, and the same is being left to discretion of courts. This uncertainty must be done away with. A clear hierarchy of remedies must be established. First inclination of all such steps must be to come up harshly against the party that introduced such an unfair term so as to establish an effective deterrent against framing a contract with unfair terms.

6.7 Unfair Terms and Indian Courts Standard Form Contracts pervade not just the private sector but also public sector. Where there is some recourse against unfair terms contracts entered into with the sate such options are almost non-existent when it comes to private dealings. The apex court finds succor under article 14 of the Indian Constitution or under section 23 of Contract Act. This rarely solves the problem of invasive unfair contracts. This puts the governments at

97 a disadvantage for it loses its competitive edge while the private sector unhindered by any checks can continue to subject parties to unfair contracts. So the need is to have a law that clearly establishes as to what shall be regarded as procedural and substantive unfairness in contracts and such a bill must form the minimum standard of compliance and from which application no one can exempted.

Indian Judiciary with Unfairness

It is a very common observation that the present legal system in India is quite removed from the common man who feels more at home with the informal Panchayats than the present formal and foreign imported and imposed model of colonial rulers. The said observation on one hand shows the distance between the justice seeker and justice giver and on the other also represents the grim reality of having huge population that is uninformed of its rights. Coupled with this is the chronic poverty and lack of education of its populace.

In such backdrop we have the infiltration of Standard Form Contracts which are signed by hapless and unsuspecting individuals. The unfairness of these contracts go uncontested. But with increasing awareness and an ever active judiciary there have been instances where courts taking cognizance of the unequal bargaining power and the myth of freedom of contract and tried to provide recourse against injustice.

In the famous case of The Central Inland Water Transport Corporation Limited v. BrojoNathGanguly14 the supreme court dealt with apparent unfairness in the employment contract and defying the classical norms of interpretations gave substantive justice a priority. The employment contract had provided that an employee’s services could be terminated by giving three months prior notice. The said term was held to be unfair by the Supreme Court. The court stressed upon the requirement of reasonableness to run through the entire contract and discussed the three principles of “unconscionability”, “distributive justice” and “inequality of bargaining power”. The unconscionability is a doctrine originated in US, to treat the element of unfairness in contracts. In India the doctrine has a very limited scope as given under section 16 of the Contract Act of 1872.

14AIR 1986 SC 1571.

Supreme Court made recourse to section 20815 of the “restatement of the law (second)” as given and adopted by the American Law Institute (volume II) and the related commentary to section 2-302 of the UCC16 . The court further pointed out that Indian Constitution permits and directs the state to bring about distributive justice that seeks to remove economic inequality and have a more equitable distribution of wealth and resources in society. The said objective need not be limited to measures like taxation and land reforms. It also means that those “who have been deprived of their properties by unconscionable bargains should be restored their property” and control over transaction that take place between un-equals resulting in injustice. In the case court held that it is not possible to list out exhaustively all the situations where there exists inequality of bargaining power. The judges need to ascertain each case on its unique facts.

In another case involving yet another employment contract court held that services of a permanent employee cannot be terminated in arbitrary manner by giving him notice. The decision of the court had the effect of nullifying any clause/term that seeks to have such effect. In similar other cases court has held such terms in employment contracts which have the effect of “Hire and Fire” as null and void. Sometimes however this was done on ground of public policy under section 23 of Contract Act of 1872 or sometime under violation of article 14 of the constitution. Thereby showcasing the absence of direct provisions to treat unfairness.

6.8 Present situation in India

It is not that there exists no provision in Indian laws which can assist courts in setting aside unfair terms or contracts. But the issue is that:

15 Section 208: unconscionable contracts term : “if a contract or term thereof is unconscionable at the time the contract is made, a court may refuse to enforce the contract, or may enforce the remainder of the contact without the unconscionable term, or may so limit the application of any unconscionable term, as to avoid any unconscionable result” 16 “A bargain is not unconscionable merely because the parties to it are neither unequal in bargaining position, nor even because the inequality results in the allocation of risks to the weaker party. But gross inequality of bargaining power, together with terms unreasonably favorable to the stronger party, may confirm indications that the transaction involved elements of deception or compulsion, or ay show that the weaker party had no meaningful; choice, no real alternate, or did not in fact assent or appear to assent to the unfair terms”

1. There is no clear unambiguous comprehensive legislation that empowers courts to cancel out unfairness. 2. Second there is no statute empowering courts to directly attack unfair terms. It’s is the backdoor approach that is employed. It is to say that already being in the private domain, suo-moto action is restricted but on top of that unfair contracts/clauses if set aside are usually on lateral grounds like against public policy or against an express law rather than declaring out rightly that it is an unfair contract and hence void. 3. Courts have no jurisdiction to look into the fairness quotient of a contract. 4. The existing provisions under Indian laws do not distinguish between procedural and substantive unfairness and present a mix up of two.17

6.7 Conclusion

There is no consensus with respect to the issues of unfairness in contracts generally and Standard Form Contracts in particular. Though there have been informal techniques adopted by legislature and courts to ascertain the fairness of a contract and permit recognition only if it passes the unspoken threshold. The attempts of judiciary so far can be appreciated, given the limitations it is bound in. but on contrary some have called such treatments of unfairness in contracts as “babel of tongues that the judges are speaking”.18 It is stated that owing to direct appreciation of the problem and adequate mechanisms to remedy the situation with, there has percolated a lot of uncertainty, since the decisions are adjudged not against a common established standard but as per arguments put forth in a particular case and satisfaction of individual courts. The inadequacy of Contract Act and absence of a determinate Supreme Court ruling on the aspect has resulted in the net result of “conflicting decision and doubtful distinctions”.19 “More is lost by indecision than wrong decision. Indecision is the thief of opportunity. It will steal you blind”, the government of the day needs to take cue from the wisdom in these words of Marcus Tulius Cicero, and get its act straight and provide for a legislation that deals with unfairness of contracts.

17 Section 19A for instance 18 nd V KESAVARAO, CONTRACT I, CASES AND MATERIALS, (2 Edn. Lexis Nexis Publications) 19Id.

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CHAPTER 7 CONCLUSION

“Even a dog discriminates between one who stumbles over him and one who kicks him”1

Man takes pride in being the most evolved creation of God. The evolvement according to him is in one sense signaled by having established a just and fair society, marked by rule of law. However the rigidity observed in re-writing the established contractual principles2 with regard to Standard Form Contracts and associated exemption clauses, so as to suit this specific category within contracts per se, depict man3 lacking in judgment which seems to be exercised even by a Dog. Also, at a different level, this also shows that despite there being a state and law society, following the actualization of social contract theory; the state has failed in controlling the selfish tendencies of man. Since man continues to be inward looking and pity social interest at the anvil of his individual interest, by continuing to employ unfairness in his contractual dealings.4 The animal instinct, if to give regard to the above mentioned quote, seems quite alive. This is not to hold that Standard Form Contracts and exemption clauses are per se unfair. But it is a remark on the unfair ones, which do exist5 and in an increasing trend.

Duty of legislature6 is to constantly upgrade law so as to suit needs of contemporary society at the least. Recognition and affording sustenance to Standard Form Contracts and exemption clauses was in congruence to this function. However the other concurrent job is to undertake continuous pruning of the same. It is in this latter task in which the Indian legislature, in particular, has lacked, in not being able to provide

1 MORRIS RAPHAEL COHEN, LAW AND THE SOCIAL ORDER: ESSAYS IN LEGAL PHILOSOPHY, P 95. 2Belonging to Classical Theory of Law. 3Represented by legislature. 4Reference hear is more to B2C contracts than B2B contracts. 5http://staffunion.unov.org/docs/FOCUS201101.pdf,http://www.societyofauthors.org/soa- news/international-calls-action-creator-contracts,http://www.theguardian.com/money/work- blog/2013/aug/16/debunking-myths-employment- contract,http://www.findlaw.com.au/articles/594/unfair-dismissal--unfair-employment-contracts-is- m.aspx (May 14,2016, 1:30 PM) 6 http://www.economist.com/node/10849115 (May 14, 2016, 2:23 PM)

101 effective checks upon the unfairness of Standard Form Contracts and exemption clauses that inform the Indian commercial-consumer sector.

The safest route to continue and benefit from the advantages to be had from Standard Form Contracts and exemption clauses while at the same time keeping their possible ill effects at bay is, by one, providing legislative safeguards, against any sort of contractual unfairness. The solution is not hard to fetch, for the provisions laid out in the 199th Law Commission Report, provide comprehensive treatment of unfairness, both procedural and substantive, of not just Standard Form Contracts but contracts in general. Hence, the legislature by adopting same would go in performing more than the minimum, i.e. take care of not just present but future fault lines as well. The second solution to curb unfairness in Standard Form Contracts, amongst the other already discussed, is to evoke in man the very spirit which he prides himself in as distinguishing from lesser animals. The distinguishing spirit is that of being, honest and fair in one’s dealings with others. Even commerce must be informed by minimum level of fairness, whether such an understanding comes voluntarily or is state imposed, the same will be justified, by the logic that led to a civilized society which makes possible commerce.

Hence the initial hypothesis that Standard Form Contracts, found in consumer transactions particularly, are a particular type of contract which requires treatment suited to their peculiarities stands reasoned to a great extent. Given the absence of negotiation in such contracts, they are not much different from the instance of someone accidently stumbling upon a contract. To treat them at par with bargained for exchange will be like turning a blind eye to realities of modern commercial market economy and the placement of an individual consumer in it or generally of the inequities that exist in various market players and the possibilities of unfairness pervading contractual transactions.

The next hypothesis i.e. Standard Form Contracts stand for efficiency in commercial transactions rather than as tools of exploitation stands affirmed as far as theoretical reasoning goes. However whether theoretical logic put forth is not merely a camouflage underneath which insidious oppressive and one way beneficial contract is sought cannot be proved. The incessant criticism, pertaining to the use of Standard Form Contracts, especially in consumer transaction, show that the fear is very much

102 real. However the fact of continuance of use of Standard Form Contracts and increasing spread across sectors go on to prove their economic logic as well. Also, in light of the fact that uncompetitive and lopsided business models and practices, usually are replaced, by markets own logic, continuance of Standard Form Contracts itself proves its economic utility. Hence replacement of Standard Form Contracts is not an option to be delved into. Possible misuse of any existing practice and model is also an equally plausible occurrence. This hold true in case of Standard Form Contracts also but it does not render Standard Form Contracts as obsolete but requires effective solution to the loopholes that exist in use of Standard Form Contracts which make possible mockery of established contractual principles and introduction of unfairness by exploiting procedural and substantive conditions.

The next hypothesis stands proved in the fourth chapter of the dissertation. Judiciary indeed has employed its discretion and judicial mind, so far legitimately possible in absence of clear legislative guidance and backing, in interpreting Standard Form Contracts and exemption clauses, rather than simply following the classical contractual principles, that do not quite suit to the realities associated with Standard Form Contracts. In fact, this also give further credence to the first hypothesis that Standard Form Contracts form a particular type within contracts simpliciter thereby requiring certain tailor-made principles.

Standard form contracts are here to stay. It is not possible to make vast multitude of consumers legally smart in one go while keeping use of Standard Form Contracts in abeyance for that period. Hence the way out can be in imposing obligation on drafting party to not include any unreasonable term using reasonable man standard and not the rational man standard. The last hypothesis which pitches for having statutory requirements, which establish standards of fairness, both procedural and substantive, stands proved to the extent that its need is felt. It shall empower the judiciary plus inform the drafting party of the scope of its freedom of contract. However, since so far the suggestions of the 199th law commission report have not been acted upon by the Indian legislature and there is no existing statute that provides comprehensive scheme of guidelines that help cull out procedural and substantive unfairness in contracts, such a schemes success is still contestable.

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Howsoever one might want; human society is not going back to its primitive days. The commercial society we have become will continue to be so7. Sir Henry Maine’s8 prediction of movement of Human Society from Status to Contract and again to Status has proved itself to be true.9 However, it appears that contract has not lost its relevance or existence. Also, the return to status shows that the status being spoken of second times around is itself premised on contract. Hence, contracts are here to stay and it would be wise to recognize the various types of contracts that come up overtime and bring up appropriate laws to deal with the same.

7http://www.britannica.com/topic/contract-law#toc21766, (accessed on 15th may 2016) 8http://www.encyclopedia.com/doc/1G2-3045000754.html (accessed on 15th may 2016) 9 RH Graveson, The Movement from Status to Contract’(1941), 4 MOD. LAW REV. 261.

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JEAN-JACQUES ROUSSEAU, THE SOCIAL CONTRACT: & DISCOURSES (JM Dent & Sons 1920).

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OREN BAR-GILL, SEDUCTION BY CONTRACT: LAW, ECONOMICS, AND PSYCHOLOGY IN CONSUMER MARKETS (Oxford University Press 2012).

PATRICK BOLTON & MATHIAS DEWATRIPONT, CONTRACT THEORY (MIT press 2005).

PATRICK RILEY, WILL AND POLITICAL LEGITIMACY: A CRITICAL EXPOSITION OF SOCIAL CONTRACT THEORY IN HOBBES, LOCKE, ROUSSEAU, KANT, AND HEGEL (iUniverse 1999).

PAUL LYNDON DAVIES, INTRODUCTION TO COMPANY LAW (Oxford University Press 2010).

RANDY E. BARNETT, PERSPECTIVES ON CONTRACT LAW (Aspen Publishers 2001).

RICHARD G. LAWSON, EXCLUSION CLAUSES AND UNFAIR CONTRACT TERMS (Sweet & Maxwell 2011).

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WILLIAM REYNELL ANSON ET AL., ANSON’S LAW OF CONTRACT (Oxford University Press 2010).

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Donal Nolan, The Classical Legacy and Modern English Contract Law, 59 MOD. LAW REV. 603 (1996).

Donald B. King, Standard Form Contracts: A Call for Reality, 44 LOUIS ULJ 909 (2000).

Gaddy Wells, Doctrine of Unconscionability: A Sword as Well as a Shield, 29 BAYL. REV 309 (1977).

George Gluck, Standard Form Contracts: The Contract Theory Reconsidered, 1789 REVOLUTION (1962).

GHL Fridman, Effect of Exclusion Clauses, The, 7 ALTA REV 281 (1969).

HB Sales, Standard Form Contracts, 16 MOD. LAW REV. 318 (1953).

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Russell Korobkin, Bounded Rationality, Standard Form Contracts, and Unconscionability, UNIV. CHIC. LAW REV. 1203 (2003).

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Stanley D. Henderson, Promises Grounded in the Past: The Idea of Unjust Enrichment and the Law of Contracts, VA. LAW REV. 1115 (1971).

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Article 2.1.19 (Contracting under standard terms) - Unidroit - International Institute for the Unification of Private Law - Institut International pour l’Unification du droitprivè, http://www.unidroit.org/instruments/commercial-contracts/unidroit- principles-2010/415-chapter-2-formation-and-authority-of-agents-section-1- formation/897-article-2-1-19-contracting-under-standard-terms. contract | law | Britannica.com, http://www.britannica.com/topic/contract-law.

Some Solutions | fair contracts.org, http://www.faircontracts.org/some-solutions. http://www.prsindia.org/uploads/media/Consumer/SCR%20Summary- Consumer%20Protection%20%28A%29%20Bill,%202011.pdf (accessed on May 28, 2016)

Annexure 1

Unfair (Procedural and Substantive) Terms in Contract Bill, 2006

A Bill to declare certain provisions of the laws relating to contracts and specific performance, as procedural and substantive, to further define unfairness in contracts, as procedural and substantive, to determine impact of unfairness on contracts, to provide guidelines for such determination and to enable Courts to grant certain reliefs to relieve parties from the effect of unfairness in contracts.

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Be it enacted by Parliament in the Fifty Seventh Year of the Republic of India as follows:-

Chapter I

Preliminary

Short title, extent and commencement

1. (1) This Act may be called the Unfair (Procedural and Substantive) Terms of Contracts Act, 2006. (2) It extends to the whole of India except the State of Jammu and Kashmir. (3) It shall come into force on such date as the Central Government may [by notification in the Official Gazette] appoint.

Definitions

2. In this Act, unless the context otherwise requires.- (a) ‘contract’ means a contract as defined in clause (h) of section 2 of the Indian Contract Act, 1872 (9 of 1872) and includes an agreement as defined in clause (e) of section 2 of that Act. (b) ‘Court’ means a Civil Court of competent jurisdiction and includes every Consumer Dispute Redressal Agency referred to in section 9 of the Consumer Protection Act, 1986 (68 of 1986) and an Arbitral Tribunal referred to in clause (d) of sub-section (1) of section 2 of the Arbitration and Conciliation Act, 1996 (26 of 1996). (c) words and expressions not defined in this Act and defined in the Indian Contract Act, 1872 (9 of 1872) shall have the meanings assigned to them respectively in that Act.

Chapter II

Procedural Provisions and Procedural Unfairness Procedural provisions of the Indian Contract Act, 1872 (9 of 1872)

3. The following provisions of the Indian Contract Act, 1872 (9 of 1872) are procedural, namely:-

(a) Section 15 which deals with coercion,

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(b) Sections 16 and 19A which deal with undue influence,

(d) Section 18 which deals with misrepresentation,

(e) Section 19 which deals with agreements without free consent.

Procedural provisions of the Specific Relief Act, 1963 (47 of 1963)

4. The following provisions of the Specific Relief Act, 1963 (47 of 1963) are procedural, namely:-

(a) clause (a) of sub-section (2) of section 20 in so far as it deals with the conduct of the parties at the time of entering into the contract or the other circumstances under which the contract was entered into are such that the contract, though not voidable, gives the plaintiff an unfair advantage over the defendant.

(b) clause (c) of sub-section (2) of section 20 which deals with a defendant who entered into the contract under circumstances which though not rendering the contract voidable, makes it inequitable to enforce specific performance.

(c) clause (a) of sub-section (1) of section 27 which deals with a contract voidable or terminable by the plaintiff and where any person interested in the contract sues to have it rescinded and such rescission is adjudged.

General procedural unfairness

5. Without prejudice to the provisions of sections 3 and 4, a contract or a term thereof is procedurally unfair if it has resulted in an unjust advantage or unjust disadvantage to one party on account of the conduct of the other party or the manner in which or circumstances under which the contract has been entered into or the term thereof has been arrived at by the parties.

Guidelines for purposes of determining general procedural unfairness under section 5

6. For the purposes of section 5, the Court may take into account the following circumstances, namely:-

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(l) the knowledge and understanding of the promisee in relation to the meaning of the terms thereof or their effect;

(m) the bargaining strength of the parties to the contract relative to each other;

(n) reasonable standards of fair dealing or commonly accepted standards of dealing;

(o) whether, or not, prior to or at the time of entering into the contract, the terms were subject to negotiation or were part of a standard terms contract;

(p) whether or not it was reasonably practicable for the party seeking relief to negotiate for the alteration of the contract or a term thereof or to reject the contract or a term thereof;

(q) whether expressions contained in the contract are in fine print or are difficult to read or understand;

(r) whether or not, even if he or she had the competency to enter into the contract based on his or her capacity and soundness of mind, he or she

(i) was not reasonably able to protect his or her own interests or of those whom he or she represented at the time the contract was entered;

(ii) suffered serious disadvantages in relation to other parties because he or she was unable to appreciate adequately the contract or a term thereof or their implications by reason of age, sickness, physical, mental, educational or linguistic disability, emotional distress or ignorance of business affairs.

(s) whether or not independent legal or other expert advice was obtained by the party seeking relief under this Act; (t) the extent (if any) to which the provisions of the contract or a term thereof or their legal or practical effect were accurately explained by any person, to the party seeking relief under this Act; (u) the conduct of the parties to the contract in relation to similar contracts or courses of dealing to which any of them had been party; or

(v) whether a party relied on the skill, care or advice of the other party or a person connected with the other party in entering into the contract.

Chapter III

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Substantive provisions and substantive unfairness

Substantive provisions of the Indian Contract Act, 1872 (9 of 1872)

7. The following provisions of the Indian Contract Act, 1872 (9 of 1872) are substantive, namely:-

(a) Section 10 which deals with agreements which are contracts if made by free consent of parties competent to contract, for a lawful consideration and with a lawful object, not otherwise expressly declared to be void,

(b) Section 20 which deals with both the parties to an agreement who are under a mistake,

(d) Section 25 which deals with an agreement without consideration,

(e) Section 26 which deals with an agreement in restraint of marriage of any person, other than a minor,

(f) Section 27 which deals with an agreement in restraint of trade,

(g) Section 28 which deals with an agreement in restraint of legal proceedings,

(h) Section 29 which deals with an agreement which is uncertain,

(i) Section 30 which deals with an agreement by way of wager, and

(j) Section 56 which deals with an agreement to do an act impossible in itself.

Substantive provisions of the Specific Relief Act, 1963 (47 of 1963)

8. The following provisions of the Specific Relief Act, 1963 (47 of 1963) are substantive, namely:-

(a) Clause (a) of section 18 where on account of fraud, mistake of fact or misrepresentation, the written contract of which performance is sought, is in terms or effect different from what the parties agreed to, or does not contain all the terms

111 agreed to between the parties on the basis of which the defendant entered into the contract,

(b) Clause (a) of subsection (2) of section 20 in so far as it deals with the terms of a contract which gives the plaintiff an unfair advantage over the defendant,

(c) Clause (b) of subsection (2) of section 20 which deals with the performance of a contract which would involve some hardship on the defendant which he had not foreseen, where its non-performance would involve no such hardship on the plaintiff.

Exclusion or restriction of certain liabilities to be substantively unfair

9. A contract or a term thereof shall be deemed to be substantively unfair if it (a) excludes or restricts liability for negligence; (b) excludes or restricts liability for breach of express or implied terms of a contract without adequate justification therefor.

Exclusion or restriction of rights, duties or liabilities referred to in section 62 of the Sale of Goods Act, 1930 (3 of 1930) to be substantively unfair unless there is adequate justification

10. In contracts to which this Act applies as stated in sub-section (1) of section 18, any exclusion or restriction of the rights, duties or liabilities referred to in section 62 of the Sale of Goods Act, 1930 (3 of 1930) shall be deemed to be substantively unfair unless there is adequate justification therefor.

Choice of law clauses

11. Where a contract contains terms applying or purporting to apply the law of a foreign country despite the contract being in every respect wholly unconnected with the foreign country, such terms shall be deemed to be substantively unfair.

General substantive unfairness

12. Without prejudice to the provisions of sections 7 and 8, a contract or a term thereof is substantively unfair if such contract or the term thereof is in itself harsh, oppressive or unconscionable to one of the parties

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Guidelines for purposes of determining general substantive unfairness under sections 9 to 12

13. For the purposes of sections 9 to 12, the court may take into account the following circumstances, namely:-

(i) whether or not the contract or a term thereof imposed conditions which are,–

(i) unreasonably difficult to comply with, or

(ii) are not reasonably necessary for the protection of the legitimate interests of any party to the contract;

(j) whether the contract is oral or wholly or partly in writing;

(k) whether the contract is in standard form;

(l) whether the contract or a term thereof is contrary to reasonable standards of fair dealing or commonly accepted standards of dealing;

(m) whether the contract, agreement or a term thereof has resulted in a substantially unequal exchange of monetary values or in a substantive imbalance between the parties;

(n) whether the benefits to be received by the disadvantaged party are manifestly disproportionate or inappropriate to his or her circumstances;

(o) whether the disadvantaged party was in a fiduciary relationship with the other party; or

(p) whether the contract or a term thereof

(i) requires manifestly excessive security for the performance of contractual obligations; or

(ii) imposes penalties which are disproportionate to the consequences of a breach of contract; or

(iii) denies or penalises the early repayment of debts; or

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(iv) entitles a party to terminate the contract unilaterally without good reason or without paying reasonable compensation; or

(v) entitles a party to modify the terms of a contract unilaterally.

Burden of proof

14. If a contract or a term thereof excludes or restricts liability as stated in clause (b) of section 9 or excludes rights, duties and liabilities referred to in section 62 of the Sale of Goods Act, 1930 (3 of 1930) as stated in section 10, it is for the person relying on such exclusion or restriction to prove that it is not without adequate justification.

Provisions of the Act to apply for executed contracts

15. The Court may grant relief on the basis of sections 5, 6, 9 to 14 of this Act in relation to a contract notwithstanding that the contract has been wholly or partly executed and for that purpose it may consider whether and to what extent restitution is possible in the facts and circumstances of the case and where such restitution is not, either wholly or partly possible, whether any compensation is payable.

Court’s power to raise an issue of unfairness of contract or a term thereof

16. A Court may, in proceedings before it, raise an issue as to whether a contract or its terms are unfair under sections 5, 9 to 12, even if none of the parties has raised the issue in its pleadings.

Relief that may be granted by Court

17(1) Without prejudice to the provisions in the Indian Contract Act, 1872 (9 of 1872), Specific Relief Act, 1963 (47 of 1963), Sale of Goods Act (3 of 1930) or to the provisions of any other law for the time being in force, where the Court comes to the conclusion having regard to sections 5, 6, 9 to 14 that a contract or a term thereof is either procedurally or substantively unfair or both, the Court may grant any one or more of the following reliefs:-

(b)refusing to enforce the contract or the term thereof;

(b) declaring the contract or the term is unenforceable or void;

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(d) refund of the consideration or price paid;

(e) compensation or damages;

(f) permanent injunction;

(g) mandatory injunction; or

(h) any other relief which the interests of justice require as a consequence of the non- enforcement of the contract or the term thereof which is unfair provided that where the contract or its term is procedurally unfair as stated in section 5, the person who suffers the disadvantage may, at his option, insist that the contract or term shall be performed, and that he shall be put in the position in which he would have been if the conduct, manner or circumstances referred to in that section did not permit the disadvantageous term to form part of the contract.

(2) For the purpose of granting the reliefs under subsection (1), the Court may determine if any of the terms of the contract which are unfair are severable and thereafter whether and to what extent and in what manner, the remaining terms of the contract can be enforced or given effect to.

Applicability of the Act and exemptions

18. The provisions of this Act (other than sections 3, 4, 7 and 8)

(1) shall apply to all contracts entered into after the commencement of this Act; and

(2) shall not apply to

(f) contracts and relations between employers and workmen under the labour laws in force;

(g) public employment under the Central Government or a State Government or their instrumentalities or under local authorities;

(h) employment under public sector undertakings of the Central Government or a State Government;

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(i) employment under corporations or bodies established by or under statutes made by Parliament or State Legislatures;

(j) contractual terms in respect of which measures are provided in international treaties or agreements with foreign countries to which the Central Government is a signatory.

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