A New Regime "Contracts of Adhesion": Unconscionability of Bargain?

(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 103^rd 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.

'Doctrine of fairness' is not applicable to Statutory Contracts

Holding that doctrine of reasonableness or fairness is not applicable to statutory contracts, Supreme Court of India (“Supreme Court”) has rejected an appeal wherein the appellant had sought the refund of security amount which was deposited to open an arrack shop.  In Mary v. State of Kerala and Ors [Judgment dated October, 22, 2013], the court had to consider the following issue:

“.....in  case  of  a  statutory  contract,  will  it necessarily  destroy  all  the  incidents  of  an ordinary  contract  that  are  otherwise  governed  by the Contract Act?”

Facts: The appellant, Mary, having succeeded in an auction for sale of privilege to open an arrack shop, had deposited 30% of the bid amount as security. However, near to the area, where the arrack shop had to be started, was the birth place of Adi Sankaracharya and also a Christian pilgrim centre. Because of this, physical resistance was offered by the local people so that the arrack shop could not be opened in the area. This situation led the appellant to believe that it was not possible for her to open arrack shop in the area. Accordingly, she requested the concerned authorities to consider the ‘proposed contract’ as rescinded.

(Image Source: virginiabusinesslitigationlawyer.com)

Declining the request of the appellant, the Excise Inspector sent a notice to the appellant thereby awarding the contract to open arrack shop in her favour. In addition to this, security deposit, as requested by the appellant, was not returned. Further communications took place between the appellant and the authorities but the request of the appellant was not accepted. Against this, the appellant filed a writ petition before the High Court of Kerala (“High Court”). Applying the doctrine of frustration and impossibility, the single judge bench of the High Court held that the contract had become void from its inception. On appeal to division bench, the single judge bench judgment was reversed and it was held by the High Court that the state was justified in forfeiting the deposit made as a security.

Section 26 of the Specific Relief Act, 1963: Rectification of an Instrument and Undue Influence

Section 26 of the Specific Relief Act, 1963 (“Act”) provides the means to rectify a contract or any other instrument which, by mutual mistake or fraud, does not express the real intention of the parties. However, when an agreement provides for the entire subject matter and does not show any sort of ambiguity, applicability of this section will not arise.[1]

On 12^th March, 2013, Supreme Court (“Court”), in Joseph John Peter Sandym (“Appellant”) v. Veronica Thomas Rajkumar & Anr (“Respondent”), had to decide a question concerning the applicability of Section 26 of the Act. In this case, deceased father executed two registered settlement deeds thereby transferring two houses in favour of the appellant and the respondent (“they are siblings”). On an allegation by the appellant that wrong houses have been provided to them, contesting parties executed an “unregistered deed” for exchanging the houses. Since respondent did not give effect to this unregistered deed, appellant filed a suit before the trial court. During the pendency of the suit, father of the contesting parties executed a rectification deed by which allotment of houses to the parties was changed. Following this, decision of the trial court, which was decreed in favour of the appellant, was overruled by the High Court. Against this, appellant filed an appeal before the Supreme Court.

Supreme Court, while determining the scope of Section 26 of the Act, held that it does not have a “general application”, and can be attracted only in a limited number of cases.

“The relief of rectification can be claimed where it   is   through   fraud   or   a   mutual   mistake   of   the  parties   that   real   intention   of   the   parties   is   not   expressed   in  relation to an instrument”[2]

Admissibility of an “unregistered instrument”

While deciding the outcome of the case, court also dealt with the question of admissibility of an unregistered instrument. In doing so, court referred to the case of State of Bihar & Ors. v. Radha Krishna Singh & Ors., AIR 1983 SC 684, wherein it was held that:

“Admissibility of a document is one thing and its probative value quite another - these two aspects cannot be combined. A document may be admissible and yet may not carry any  conviction and weight of its probative value may be nil.”[3]

Onus of “Proof”

In this case, Court was also of the view that onus of proving the validity of an instrument is on the one (“plaintiff”) who produces it, and not on the other party (“defendant”).[4] As far as fiduciary relationship is concerned, the   burden   of   proving   the   absence   of   fraud, misrepresentation   or   undue   influence   is   upon   the   person   in   the dominating position.[5]

Undue Influence

Court also dealt with the issue of undue influence in this case. While doing so, court referred to Afsar Shaikh & Anr v. Soleman Bibi & Ors, AIR 1976 SC 163 wherein the it had laid down the conditions before which one can allege the presence of undue influence.

“..if   a   person   seeking   to   avoid   a  transaction on the ground of undue influence  proves-

(a)   that   the   party   who   had   obtained   the  benefit was, at the material time, in a position to dominate the will of the other conferring  the benefit, and

(b) that the transaction is unconscionable,

the burden shifts on the party benefiting by  the   transaction   to   show   that   it   was   not induced by undue influence. If either of these two conditions is not established the burden will not shift

With regard to undue influence, court, in case of Afsar Shaikh, referred to a judgment of Privy Council wherein it was held that if the transaction appears to be unconscionable, then the burden is on the person exercising dominating will to disprove the existence of undue influence.[6] Burden, in this situation, can be understood as the burden to provide the absence of undue influence. However, the first thing to be considered is the relation of the parties and not the unconscionable transaction.

Outcome of the case

After considering the above positions in relation to Section 26 of the Specific Relief Act, undue influence and onus of proof, Court, in Joseph John Peter Sandym v. Veronica Thomas Rajkumar & Anr, held that there was a presence of undue influence, In support of this, court confirmed the findings of the high court that at the time when exchange deed between the parties was executed, respondent was not married and was dependent on the appellant for sustenance. 

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[1] Subhadra & Ors. v. Thankam,  AIR 2010 SC 3031

[2] Also see State of Karnataka & Anr. v. K. K. Mohandas & etc, AIR 2007 SC 2917

[3] Also see  Madan Mohan Singh &  Ors v. Rajni Kant & Anr, AIR 2010 SC 2933, H.Siddiqui (dead) by Lrs. v. A.Ramalingam AIR 2011 SC 1492; Laxmibai (dead) thr. Lrs. & Anr v. Bhagwantbuva (dead) thr Lrs. & Ors, JT 2013(2) SC 362

[4] See Thiruvengada   Pillai   v.   Navaneethammal   &   Anr,  AIR  2008   SC   1541; K. Laxmanan v. Thekkayil Padmini & Ors., AIR 2009 SC 951

[5] Krishna   Mohan   Kul  v. Pratima Maity & Ors.  AIR 2003 SC 4351

[6] Raghunath Prasad v. Sarju  Prasad,  (AIR 1924 PC 60)