(The author of this post is Paridhi Poddar, a 1st year student of the West Bengal National University of Juridical Sciences, Kolkata. She can be contacted at paridhipari04@gmail.com)
Introduction: Adhesion Contracts
Contracts of adhesion, simply put, are
contracts containing a set of standard terms and conditions presented on a
take-or-leave basis thereby eliminating the scope and need for negotiations
between the contracting parties. In the day-to-day sense, one comes across such
contracts during the purchase of insurance policies, license agreements, online
software etc. Adhesion contracts incorporate terms which are derived from
common business experience and do not allow for any customisation as per the
needs of the other party. Sometimes, such contracts are formed through shrink
wrap or click wrap agreements.[1]
As a result, such contracts are sometimes also termed as “boilerplate
contracts” or “private legislation.”[2]
In its 103rd report of 1984, the Law Commission of India has even
gone to the extent of calling these as “pretended contracts.” This is true
because such contracts become problematic to the basic tenets of contract law
when they evince unconscionable manipulation of the bargaining powers of the
contracting parties. On the other hand, since adhesion contracts evolve through
business usage and practice, they import efficacy in commercial bargains by
reducing costs in transactions to a large extent. Even after having some of these advantages, the probable presence of unconscionability in adhesive contracts has urged the judges to critically think
about the notions of freedom of contract and “pact sunt servanda”. This article would introduce you to the
position of Indian law on the enforceability and the binding nature of such
contracts.
Unconscionability of bargain: The test
A contract comes into existence on the grounds of consensus-ad-idem when the consumer “accepts” or “agrees” to the terms. Hence, when firms in the market intend to do
business on the basis of standard contracts, the presumption of the court is
that there is nothing unconscionable about such a transaction per se.[3]
Thus, the courts have never held
that all forms of standard contracts would be struck down as unenforceable. For
instance, in Ferro Alloys Corpn. Ltd. v.
A.P. State Electricity Board,[4] where
the terms of the contract provided that no interest would be provided on the
security deposit made by the consumers with the board, the court held that such
a term was not arbitrary but reasonable on the grounds of statutory validation.
As a result, since such a term did not shock the conscience of the Court, it
was not declared to be void.
But, the practical problem associated
with such contracts is that they are drafted so lengthily and in such a
complicated manner that they are rarely read. It is thus an admitted fact that
when standard terms are presented before any party, they are most often neither
read nor negotiated by him. The courts of equity have
recognised that such contracts often give giant multi-nationals and other
companies opportunities to exploit the vulnerable classes by subjecting them to
harsh, arbitrary and inequitable terms. Hence, in the growing sociological
dimension of the contract law, where it becomes clear that the terms would not
have been agreed to by a reasonable minded person, the courts often resort to
reviewing the contracts. For this, courts have employed the test of “unconscionability”
to protect the interest of this group. The doctrine of unconscionability is an
off-shoot of the Roman maxim “laesio enormous” which means that a contract which is so
onerous that one of the parties would be overreached by the other need not be
performed. Thus, if it is proved that the free consent within the
meaning of section 14 of the Indian Contract Act was absent or when the terms were
so unfair and unreasonable that they could “shock the conscience of the court",[5] the court would strike down such term. In order to evaluate the
unconscionability, the courts investigate whether the terms of the contract had
the effect of grossly manipulating the inferior bargaining powers of the
parties to obtain an “unreasonably favourable” advantage for the other party.[6]
Such contracts are not only vitiated on grounds of lack of true consent but they
also impugn the sacrosanct notion of “freedom to contract.” This is especially true
when they are entered into by a party under economic duress (as in the case of
employment contracts) or due to lack of any meaningful choice( for example, in
consumer contracts). For instance, in the case of employment contracts, the courts have had a general tendency to
assume inequality of bargaining power primarily because an employee may not
have any meaningful choice at the time of accepting the conditions of the
employment. Hence, he may consent to contract due to the exigencies of economic
duress.[7] For example, in LIC of India v. Consumer
Education Research Centre,[8] the
court held a standard insurance policy, which contained a term by which the
benefit of the insurance would accrue
only to salaried class in government and firms, as being unconscionable.
But, this does not imply that a court would
render a contract inoperative merely on the ground of inequality of bargaining
powers. For example, in case of commercial transactions where contracts are
formed by two business firms, even though parties may be of varied economic
status, there is no presumption of unconscionability. Another test that is employed
by the courts to determine if an adhesive contract is unconscionable is to find
whether the “consideration is so grossly inadequate” that a reasonable person
would not have gotten into it.[9]
Once any
term in a standard contract is found to be unconscionable, the courts have been
of the opinion that such contracts are void as being opposed to public policy under
section 23 of the Indian Contract Act. In Central Inland Water Transportation v.
Brojo Nath Ganguly[10], the standard terms of employment contained
a term empowering the employer to sack the employee without conducting any inquiry.
The term was held to be a bad bargain and was declared to be void and
unenforceable. This was because such a
clause in the contract had the effect of threatening the right to employment of
a large number of governmental employees, and would have amounted to an injury
to public interest. Thus, the courts prefer to declare unconscionable contracts
void also to avoid a multiplicity
of litigation which would crop if the contract is only declared as voidable under section 16 of the Act.
Recommendations of the Law Comission in its 103rd
Report[11]
The Law Commission report admits that barring
judicial attempts, the Indian Contract Act does not provide any time for nullifying
such contracts. Thus, it has recommended a new chapter on adhesion contracts to
be included in the act itself. It has been recommended by the Commission that
besides investigating into the reasonableness of standard terms, if any term
exempts the parties from (i) liability for wilful breach of the contract or,
(ii) the consequences of negligence, that would prima facie be held to be
“unconscionable” and should be made inoperative.
Thus, in its jurisprudential sense, the entire doctrine with regard to adhesion contract hinges on the ground that “pacta sunt servanda” does not imply that even unreasonable contracts should be enforced. Secondly, it also suggests that the freedom to contract should not mean that it can be abused. As a result, when one falls prey to the standard terms in a business contract, unconscionability serves as a good defence provided one can prove the contract to be prejudicial for “shocking the conscience” of the court.
[1]
Shrink wrap agreements are those where the terms of purchase of a license of a
software are read by the customer only when the package is open, whereas the
opening of the package signifies an acceptance of these terms. Similarly, click
wrap agreements are those where the sale is completed by click on the button
which states “I agree” to the terms stated thereof.
[2]
Thornton v. Shoe Lane Parking Ltd., 1971
2 QB 163, per Lord Denning.
[3]
Lekh Raj v. State of Rajasthan, 1987 1 WLN 774.
[4]
AIR 1993 SC 2005.
[5]
Id.
[6]
Central Inland Water Transportation v. Brojo Nath Ganguly, AIR 1986 SC 1517, ¶ 81. V.
Raghunadha Rao v. State of A.P., 1 A.L.T. 461
[7]
See generally Superintendence Company of India Pvt. Ltd. v. Sh. Krishan Murgai, AIR 1980 SC 1717.
[8]
AIR 1995 SC 1811.
[9]
But see Indian Contract Act, 1872, §25 (adequacy of consideration is not a primary
factor, however,if it so inadequate that it becomes unreasonable for a person
to be bound by it).
[10]
1986 AIR 1571.
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