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.