Standard Form Agreements

A standard form contract passes every one of those tests on its face. The customer was not coerced; he was not deceived; he agreed to the very document put before him. And yet, in any real sense, he consented to the transaction and not to the terms. He wanted a bank account, and the eleven pages of conditions came with it.

The law therefore cannot solve the problem through the doctrine of free consent, which is designed for defects in a particular bargain, not for the structure of a market. It has had to reach for other tools.

The four protections

(a) Reasonable notice of the terms

A term is part of the contract only if the party affected had reasonable notice of it before or at the time of contracting. Three rules follow, and they are the ones most often applied:

• Notice must come before or at the time of contracting. A condition displayed inside a hotel room, or printed on a receipt handed over after payment, comes too late.
• A document must be of a kind a reasonable person would expect to contain terms. A ticket or a receipt may be treated differently from a signed agreement.
• The more unusual or onerous the term, the more it must be brought home. A clause excluding all liability for negligence requires more prominence than a clause fixing a delivery window.

(b) Strict construction, and the contra proferentem rule

Where a clause is ambiguous, it is construed against the party who drafted it. That party chose the words and could have made them clear. The rule bites hardest on exemption clauses, which are read narrowly: a clause excluding liability for breach of contract will not readily be read as excluding liability for negligence.

(c) Section 23 and unconscionability

This is the most powerful of the four and the one MU's syllabus is really reaching for. Section 23 makes the consideration or object of an agreement unlawful, and the agreement void, where the court regards it as opposed to public policy.

Indian courts have used that head to strike down a term in a contract between parties of grossly unequal bargaining power where the term is unconscionable, that is, so one sided that it could only have been obtained by the imposition of superior strength. The doctrine is usually stated with two conditions: gross inequality of bargaining power, and a term that no reasonable person would have accepted with a real choice. It has been applied with particular force to employment contracts of instrumentalities of the State and to service conditions imposed on employees.

The authorities on this are identified in authorities/cases.json and are not named here until they have been read in full, which is the rule this book follows for every case.

(d) Statute

• The Consumer Protection Act 2019 defines an unfair contract and empowers consumer commissions to declare such terms void. Its list includes demanding excessive security deposits, imposing a disproportionate penalty for breach, refusing early repayment, and unilateral termination without reasonable cause. It also created a Central Consumer Protection Authority with power to act against unfair trade practices generally.
• Sector regulators prescribe the terms of standard documents in insurance, telecommunications, banking and real estate, which converts the problem from one of contract into one of regulation.

A worked example

Nikhil parks his car in a paid car park. The attendant hands him a token. On the reverse of the token, in small print, is: "The management shall not be liable for any loss or damage to the vehicle howsoever caused, including by the negligence of its employees." An attendant reverses another car into Nikhil's.

Work it in the order the four protections come:

1. Was there reasonable notice? The token was handed over after Nikhil had driven in and paid. If the contract was concluded at the barrier, a term on a token given afterwards came too late and is not part of the contract at all. That answer alone may decide the case.
2. If it was in time, how is it construed? As an exemption clause it is read strictly and against the car park. Here, though, the clause names negligence expressly, so the construction argument is weaker than it usually is.
3. Is it unconscionable? Consider the inequality: a customer with no ability to negotiate, a clause excluding all liability including for the operator's own negligence, and no alternative if he wants to park. This is the strongest ground, and it proceeds under section 23 as a term opposed to public policy.
4. Is Nikhil a consumer? He paid for a service, so the Consumer Protection Act 2019 is available, with the unfair contract provisions and a cheaper forum.

Note the order. Notice first, construction second, unconscionability third, statute fourth. A student who begins with unconscionability has skipped the two arguments most likely to win.

What it does NOT mean

"A standard form contract is not a real contract." It is. There is a proposal, an acceptance and consideration, and it is enforceable. What may fail is a particular term, not the contract.

"Any harsh term is void." It is not. Commercial parties are entitled to strike hard bargains. The doctrine requires gross inequality of bargaining power as well as a term no reasonable person with a choice would accept.

"Signing means you are bound by everything." Signature is powerful evidence of assent, and the notice arguments are much harder after a signature. But it is not an absolute answer, because unconscionability under section 23 goes to the enforceability of the term and not to whether it was agreed.

"The Consumer Protection Act has solved the problem." It reaches consumers. Two businesses of very unequal size are left with section 23 and the common law rules.

Limits and criticism

The Indian position is judge made and therefore uneven. There is no general statutory control of unfair terms in contracts between businesses, of the kind some other systems have. Section 23's public policy head is elastic, which is a strength when a court wants to intervene and a weakness when a party wants to predict whether it will. And the notice rules were developed for tickets and receipts, and sit awkwardly on a page of terms behind a hyperlink, which is the subject of [Clickwrap and Shrink Wrap Contracts].

Quick revision

• Standard form agreement, also contract of adhesion: terms drafted in advance, offered take it or leave it, no negotiation.
• The Act's machinery is satisfied; its assumption of equal bargaining power is not.
• Four protections: reasonable notice, strict construction against the drafter, unconscionability under section 23 as opposed to public policy, and statute.
• Notice must be given before or at the time of contracting; the more onerous the term, the greater the notice required.
• Unconscionability needs gross inequality of bargaining power and a term no reasonable person with a choice would accept.
• Consumer Protection Act 2019: unfair contract, consumer commissions, Central Consumer Protection Authority.
• Argue in order: notice, construction, unconscionability, statute.

Test yourself

1. What is a standard form agreement? One whose terms are settled in advance by one party and offered to the other without any opportunity to negotiate, typical of mass transactions such as insurance, banking and transport.

2. Why can the doctrine of free consent not solve the problem? Because consent under sections 13 and 14 is present on the face of it: the customer agreed to the very document offered. The difficulty is structural inequality, which those sections were not designed to address.

3. State the rule about notice of an onerous term. It must be brought to the other party's attention before or at the time of contracting, and the more unusual or onerous the term the greater the notice required.

4. On what statutory basis may an unconscionable term be struck down? Section 23, as an agreement whose object or consideration the court regards as opposed to public policy, and which is therefore void.

5. Name two statutory responses to standard form contracts. The Consumer Protection Act 2019, which defines an unfair contract and allows consumer commissions to declare such terms void; and sector regulation prescribing the terms of standard documents in insurance, telecom, banking and real estate.