Standard form of Contract
Author: VS Warrier
The law of contract has in recent time to face a problem, which is assuming new dimensions. The problem has arisen out of the modern large scale and widespread practice of concluding contracts in standardized form. People upon whom such exemption clauses or standard form contracts are imposed hardly have any choice or alternative but to adhere. This gives a unique opportunity to the giant company to exploit the weakness of the individual by imposing upon him terms, which may go to the extent of exempting the company from all liability under contract. It is necessary and proper that their interests should be protected. The courts have therefore devised some rules to protect the interest of such persons.
A valid contract requires offer and acceptance. It is in the essence of acceptance, that such acceptance must be a valid acceptance, that is to say, an acceptance made, fully conscious of and alive to the terms and conditions of the proposal. Of course, this is not to say that a man who signs an agreement blindfolded will be relieved from his obligations under that agreement, simply because he later chooses to discard the blindfold. However, what Section 2(b) [1] does require is that the acceptor must have a real opportunity to review the proposal and decide on whether to accept it or not.
A standard form contract is a contract between two parties that does not allow for negotiation, i.e. take it or leave it. Sometimes it is referred to an adhesion contract or boilerplate contract. It is often a contract that is entered into between unequal bargaining partners. It’s a type of contract, a legally binding agreement between two parties to do a certain thing, in which one side has all the bargaining power and uses it to write the contract primarily to his or her advantage.
OVER VIEW
It would be difficult for large-scale organizations to draw up a separate contract with every individual. They therefore keep a printed form of contract. Such standardized form of contracts contain large number of terms and conditions in “fine print” which restrict and often exclude the liability, and therefore his only function is to accept the offer whether he likes its terms or not.
NATURE
A standard form contract is a contract, which does not allow for negotiation, i.e. take it or leave it. It is often a contract that is entered into between unequal bargaining partners. It’s a type of contract, a legally binding agreement between two parties to do a certain thing, in which one side has all the bargaining power and uses it to write the contract primarily to his or her advantage. Sometimes it is referred to an adhesion contract or boilerplate contract.
An example of an adhesion contract is a standardized contract form that offers goods or services to consumers on essentially a “take it or leave it” basis without giving consumers realistic opportunities to negotiate terms that would benefit their interests. When this occurs, the consumer cannot obtain the desired product or service unless he or she acquiesces to the form contract.
Let’s take another example, that, when an individual is given a contract by the salesperson of a multinational corporation. The consumer is in no position to negotiate the standard terms of such contracts and the company’s representative often does not have the autonomy to do so. While adhesion contracts, in and of them, is not illegal per se, there exists a very real possibility for unconscionability.
MISCHIEF
The law of contract has in recent time to face a problem, which is assuming new dimensions. The problem has arisen out of the modern large scale and widespread practice of concluding contracts in standardized form. People upon whom such exemption clauses or standard form contracts are imposed hardly have any choice or alternative but to adhere. This gives a unique opportunity to the giant company to exploit the weakness of the individual by imposing upon him terms, which may go to the extent of exempting the company from all liability under contract. It is necessary and proper that their interests should be protected. The courts have therefore devised some rules to protect the interest of such persons.
A valid contract requires offer and acceptance. It is in the essence of acceptance, that such acceptance must be a valid acceptance, that is to say, an acceptance made, fully conscious of and alive to the terms and conditions of the proposal. Of course, this is not to say that a man who signs an agreement blindfolded will be relieved from his obligations under that agreement, simply because he later chooses to discard the blindfold. However, what Section 2(b) does require is that the acceptor must have a real opportunity to review the proposal and decide on whether to accept it or not.
DEVICES
In the Contract of Adhesion, the individual has no choice “but to accept”; he doesn’t negotiate, but merely adheres [2]. Therefore individual deserves to be protected against the possibility of exploitation inherent in such contracts. Some of the modes of protection which has been developed by the courts are as follows;
REASONABLE NOTICE
It is the duty of the person who is delivering a document to give adequate notice to the offeree of the printed terms and conditions. Where it is not done, the acceptor will not be bound by the terms.
In Henderson v. Stevenson [3], the plaintiff bought a steamer ticket on the face of which was these words only: “Dublin to Whitehaven”; on the back were printed certain conditions one of which excluded the liability of the company for loss, injury or delay to the passenger or his luggage. The plaintiff did not see the back of the ticket, nor was there any indication on the face about the conditions on the back. The plaintiff’s luggage was lost in the shipwreck caused by the fault of the company’s servants. This was laid down by the House of Lords that the plaintiff is entitled to recover the loss which he suffered from the company in spite of the exemption clauses.
In Parker v. South Eastern Rail Co [4], the plaintiff deposited his bag at the cloakroom at a railway station and received a ticket. On the face of the ticket it was printed: “See back”; and on the back there was a notice “the company will not be responsible for any package exceeding the value of ₤ 10”. A notice to the same effect was also hung up in the cloakroom. The plaintiff’s bag was lost and he claimed the full value of his bag which was more than ₤ 10. The company relied upon the exemption clause. The plaintiff contended that although he knew there was some writing on the ticket, he did not see what it was as he thought that the ticket was a mere receipt of the money he paid.
In M/s Prakash Road Lines (P) Ltd v. HMT Bearing Ltd [5], it has been held that the carrier is bound to deliver the goods consigned at the appointed destination or else he will be liable to pay compensation for the same. Merely printing on the lorry receipt that the goods are transported at the owner’s risk will not absolve the transporter from his duty unless it is proved that such terms were brought to the notice of the plaintiff. Mere printing on the lorry receipt cannot be deemed to be the term of contract unless the plaintiff’s knowledge and the consent about the same.
NOTICE SHOULD BE CONTEMPORANEOUS WITH THE CONTRACT
If a party to the contract wants to have exemption from liability he must give notice about the exemption while the contract is being entered into and not thereafter. If the contract has been entered into without any exemption clause then subsequent notice regarding the exemption from liability will be in effective.
In Olley v. Marlborough Court Ltd. [6], plaintiff and her husband hired a room in the defendant’s hotel for one week’s boarding and lodging in advance. When they went to occupy the room they found a notice displayed there stating “proprietors will not hold themselves responsible for articles lost or stolen, unless handed to the management for safe custody.” Due to the negligence on the part of the hotel staff, plaintiff’s property was stolen from the room.
In an action against the defendant to recover the compensation for the loss, they sought exemption from liability on the basis of the notice displayed in the room. It was held that notice in the room was not forming the part of contract and therefore the defendants were liable to pay compensation.
FUNDAMENTAL BREACH OF CONTRACT
Another device which has been adopted to protect the interest of the weaker of the parties to the contract when they have an unequal bargaining position is to see that enforcing the terms of contract does not result in the fundamental breach of contract. In a standard form of contract it is likely that the party having a stronger bargaining power may insert such exemption clause in the contract that his duty to perform the main contractual obligation is thereby negative.
In Alexander v. Railway Executive [7], the plaintiff deposited his luggage in defendant’s cloak-room and in return received a ticket. A term printed on the ticket exempted the defendant from liability for loss or misdelivery of luggage. Plaintiff’s luggage was delivered to an unauthorized person without the production of the ticket. It was held that non-delivery of luggage to the plaintiff amounted to fundamental breach of contract for which the defendant was liable.
In Shivraj Vasant Bhagwat v. Shevanta D Indulkar [8], overloading an insured vehicle was a mere irregularity and not a fundamental breach so as to enable the insurer to get rid of his liability.
LIABILITY IN TORT
Even where an exemption clause is exhaustive enough to exclude all kinds of liability under the contract, it may not exclude the liability of tort. In White v. John Warwick & Co Ltd [9], plaintiff hired a cycle from the defendant. The defendant agreed to maintain the cycle in working condition and a clause in the agreement provided: “nothing in this agreement shall render the owners liable for any personal injuries…” while plaintiff was riding the cycle saddle titled forward and he was thrown and injured.
It was held that although the clause exempted the defendants from their liability of contract, it did not exempt from liability in negligence.
UNREASONABLE TERMS
Another mode of protection is to exclude unreasonable terms from the contract. A term is unreasonable if it would defeat the very purpose of the contract or if it is repugnant to the public policy. In M Siddalingappa v. T Nataraj [10], where a condition that only eight per cent of the cost of garment would be payable in case of loss was held to be unreasonable. In RS Deebo v. MV Hindlekar [11], laundry receipt contained printed condition restricting liability for loss or damage to 20 times laundry charges or half the value of the garment, whichever was less. The condition was held to be unreasonable.
LIABILITY TOWARDS THIRD PARTY
On the basis of the principles of law of contract, a contract is a contract only between the parties to it and no third party can either enjoy any rights or suffer any liability under it [12]. In Morris v. CW Martin & Sons, the plaintiff gave her fur garment to a furrier for cleaning. Since the furrier himself could not do the job, he gave this garment to the defendant for cleaning, with the consent of the plaintiff. The defendant’s servant stole the garment, for which the plaintiff bought an action against them. The defendant sought exemption from the liability on the basis of agreement between the plaintiff and furrier. The defendants were not allowed exemption and they were held liable.
ENGLISH & INDIAN VIEW
In England, Unfair Contract Terms Act, 1977 severely limits the rights of the contracting parties to exclude or limit their liability through exemption clauses in their agreements. Liability for death or personal injury cannot be excluded or restricted through a term in the contract or notice. Moreover the manufacturer or the distributer cannot exclude their liability arising out of defective goods or for their negligence, as regards goods supplied for private use or consumption.
Unlike England, there is no specific legislation in India concerning the question of exclusion of contractual liability. There is a possibility of striking down unconscionable bargains either under section 16 of the Indian Contract Act on the ground of undue influence or under section 23 of that Act, as being opposed to public policy.
In Central Inland Water Transport Corp. Ltd v. Brojo Nath [13], the Supreme Court struck down a clause in service agreement whereby the service of a permanent employee could be terminated by giving him a 3 months’ notice or 3 months’ salary. It was held that such clause was unreasonable and against public policy and void under section 23 of Indian Contract Act.
The Law Commission of India in its 103rd report (May, 1984), on Unfair Terms in Contract, has recommended the insertion of a new chapter IV- A consisting of section 67-A of Indian Contract Act. According to this recommendation where the court on the terms of contract or evidence adduced by the parties, comes to the conclusion that contract or any part that it holds to be unconscionable. A contract according to this provision is considered to be unconscionable if it exempts any party there to from either the liability for willful breach of contract, or consequence of negligence.
CONCLUSION
The Standard Form Contracts are standardized contracts that contain a large number of terms and conditions in fine print, which restrict and often exclude liability under the contract. This gives a unique opportunity to the giant company to exploit the weakness of the individual by imposing upon him terms which often look like a kind of private legislation and which may go to the extent of exempting the company from all liability under the contract. The battle against abuse has fallen to the courts. The courts have found it very difficult to come to the rescue of the weaker party.
The courts have evolved and applied certain rules to protect the interest of the consumer, customer or passenger, as the case may be upon whom standard form contracts or exemption clauses are imposed, like reasonable notice should be given, notice should be given, notice should be contemporaneous with contract, theory of fundamental breach, contra proferentem interpretation of the contract, liability in tort, exemption clauses and third parties etc. These modes, along with other Acts help the courts in dealing with the problem of Standard Form Contract.
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[1] When a person to whom the proposal is made, signifies his assent thereto, the proposal is said to be accepted. A proposal, when a accepted, becomes a promise;