Author Profile

Mandar R Rane

I am a qualified Company Secretary and Lawyer. I am multi-faceted professional with experience in varied fields including Capital markets, Taxation, Corporate Secretarial, Drafting, Due Diligence, Legal & Compliance, Labour Laws & Project Management Contact : 9769253082

Posted On by &filed under Legal Articles.


A Standard form of Contracts or Adhesion Contracts are contracts which are generally drafted unilaterally by any entities and these contracts is generally not bargained for, but is imposed on the recipient for a necessary service on a take or leave it basis.

However to take a stand that a contract is in a printed form and offered on a “take-it-or-leave-it” basis, those facts alone do not cause it to be a standard form of contract.It is necessary that the parties were greatly disparate in bargaining power, that there was no opportunity for negotiation, or that the services could not have been obtained elsewhere.

1.       Principle of “Consensus ad idem”

The principle of Consensus ad idem means meeting of minds. It can be articulated both the parties shall have the meeting of minds at the same thing and most importantly in the same sense

A criterion for a valid contract is Offer and Acceptance; Free consent of the parties;Competence of the parties to a contract;Lawful Object and lawful consideration and not expressly declared void by law

It is pertinent to note that the notification of acceptance to the person who makes the offer is considered essential only to ensure that the two minds may come together. The two minds, when remain apart, there is no expected consensus which is necessary to constitute a contract.

Considering supra of Judgement1, where in Para 10 High Court considered that: – “The first requisite of any valid contract is that there should be mutual agreement –consensus ad idem — between the parties. So to form any binding contract there must be a definite promise by one party and an acceptance by the other. Negotiations may carry on for a considerable time between them, but no valid contract can come into being until one accepts without qualification the final proposal of the other.”

Supra of another Judgement2 wherein it was held that: – “the absence of consensus ad idem on the material terms of the contract to be entered into between the parties, there emerged no concluded contract.”

2.       Enforceability of Standard Form of Contract

The Standard Form of Contract normally is a theory which is a basis for modifying or nullifying harsh terms which defeat the reasonable expectations of the parties.The Standard Form of Contract will not be enforced unless they are conscionable and within reasonable expectations of parties.

In United States, Service CorporationInternational, Et Al., V.Daniel Lopez and Consuelo Lopez, wherein defendant had put forth its contention that arbitration agreement in contract was not a negotiated term, but merely part of a standardized form contract, which was a contract of adhesion. It was further stated thatthe contracts of adhesion will not be enforced unless they are conscionable and within the reasonable expectations of the parties.

It was further cited that in Texas law in H.E. Butt Grocery Co., 17 S.W.3d 360, 370-71 (Tex. App. Houston [14th Dist.], adhesion contract is defined as a contract in which one party has absolutely no bargaining power or ability to change the contract terms. Hence it was held that contract of cannot be enforced

However additionallyIn re Oakwood Mobile Homes, Inc., 987 S.W.2d 571, 574 (Tex. 1999) (orig. proceeding) the Supreme Court stated that adhesion contracts are not automatically unconscionable or void. In other words, the party seeking to avoid the clauses must prove more than that the contract was offered on a take it or leave it basis.

Under Indian Judiciary, Superintendence Company of India Pvt. limited vs Krishan Murgai datedMay 9, 19803

The Apex Court in aforesaid judgement held that :- “……..employees covenants should be carefully scrutinised because there is inequality of bargaining power between the parties; indeed no bargaining power may occur because the employee is presented with a standard form of contract to accept or reject. At the time of the agreement, the employee may have given little thought to the restriction because of his eagerness for a job; such contracts “tempt improvident persons, for the sake of present gain, to deprive themselves of the power to make future acquisitions, and expose them to imposition and oppression.”

The Court herein disfavored restrictive standard covenant by an employee not to engage in a business similar to or competitive with that of the employer after the termination of his contract of employment.

3.       Doctrine of Blue Pencil4

This doctrine has been evolved to aid to severe the illegal and void provisions from the contract in order to enforce the rest of it.

The `doctrine of blue pencil’ was evolved by the English and American Courts. In Halsbury’s Laws of England (4th Edn. Vol.9), p.297, para 430, it is stated:

“430. Severance of illegal and void provisions – A contract will rarely be totally illegal or void and certain parts of it may be entirely lawful in themselves. The question therefore arises whether the illegal or void parts may be separated or “severed” from the contract and the rest of the contract enforced without them. Nearly all the cases arise in the context of restraint of trade, but the following principles are applicable to contracts in general”

In P. Ramanatha Aiyar’s Advanced Law Lexicon, 3rd Edn. 2005, Vol. l,p.553-554, it is stated:

“Blue pencil doctrine (test). A judicial standard for deciding whether to invalidate the whole contract or only the offending words. Under this standard, only the offending words are invalidated if it would be possible to delete them simply by running a blue pencil through them, as opposed to changing, adding, or rearranging words. (Black, 7th Edn., 1999) This doctrine holds that if Courts can render an unreasonable restraint reasonable by scratching out the offensive portions of the covenant, they should do so and then enforce the remainder. Traditionally, the doctrine is applicable only if the covenant in question is applicable, so that the unreasonable portions may be separated. E.P.I, of Cleveland, Inc. v. Basler, 12 Ohio App2d 16:230 NE2d 552, 556”

4.       Doctrine of Contra Proferentem

The Doctrine of Contra Proferentem clearly stipulates that when a provision of the contract can be interpreted in more than one way, the Court will prefer that interpretation which is more favourable to the party who has not drafted the agreement. To put it differently, Court will prefer the interpretation which goes against the party who has inserted/ insisted on inclusion of the alleged ambiguous clause in the agreement.

Hence in common parlance the doctrine of contra proferentem is based on the commonsense notion that ambiguous language should be interpreted against the drafter because that party was in the best position to prevent the ambiguity; that is, “the provision should be construed less favorably to that party which selected the contractual language.

In United India Insurance Co. Ltd vs M/S. Orient Treasures Pvt. Ltd.5 It was adjudged by the Court that:-

“It was held that there is no ambiguity in the insurance policy and so the rule of contra proferentem was not applicable. A standard policy of insurance is different from other Contracts and in a claim under a standard policy the rule of contra proferentem is to be applied. The Policy in this case is in a standard form. If there is any ambiguity or doubt the clause in the Policy should be interpreted in favour of the insured. But we see no ambiguity in the relevant clause of the policy and the rule of contra proferentem is not applicable.”

In National Highways Authority of India vs  M/S. Lanco Infratech Ltd.6.It was argued by the learned counsel that:-

“No circumstance warranting the application of the contra proferentem rule, as the respondent was – or was atleast deemed to be – fully aware of all the terms of the contract and had sufficient opportunities to seek clarification before it even bid for the tender.Rule of contra proferentem ought to not have been applied in this matter as it was a commercial contract signed by the parties after all terms have been understood fully. Thus, it is contended that there is no mandate to construe the terms of the contract against the appellant. Indeed, it is a well-established principle of construction of contract that if the terms employed by one party are unclear, an interpretation against that party will be preferred”

Judicial Pronouncement

·         D.C.M. Ltd. And Anr. vs Assistant Engineer dated April 22,19877

In this case a Division Bench had to consider the question whether the Rajasthan State Electricity Board functioning under the Electricity Act of 1910 and the Electricity (Supply) Act, 1948 could in exercise of its powers under Section 49 of the Supply Act require the consumer- appellant before them to pay by way of minimum charges at nearly three times the normal rate charged from other consumers being heavy industries consuming heavy demand of 25 MW. Even though the appellant before them, D.C.M. Ltd., had entered into such an agreement with the Board it was held that the said term in the agreement was unreasonable and consequently the demand of such excessive minimum consumption charges was not justified and could not be tolerated on the touchstone of Article 14 of the Constitution of India as the Electricity Board was an instrumentality of the State. The Court in this connection had to consider the nature of the written agreements entered into by the consumers of the electricity with the Board which was a monopolist and the further question whether an apparently inconceivable and unjust term in the written contract could be enforced by the Board against the consumer

Para 24 of the Judgement the Court Observed that:- “… We may further add that for the reasons already given it is obvious that the giving of such an undertaking by execution of the agreement was no doubt a conscious act of the petitioner, but in the circumstances it cannot be held to indicate the petitioner’s willingness to be bound by such an onerous condition, if it had the option. It is obvious that there was no option to the petitioner and therefore, it cannot be said that the petitioner voluntarily and willingly chose and accepted the more onerous condition of a higher rate instead of the normal rate for payment of minimum charges. The willingness to accept such an onerous term with free consent can be assumed only where a consumer has an option or in other words he can get the supply of electricity he wants even without agreeing to any such term specified by the Board for being incorporated in the written contract without execution of which the consumer cannot insist on supply of electricity to him. It is not the Board’s case that it was willing to honour the petitioner’s requisition and make the supply even without the petitioner undertaking in writing to pay minimum charges according to Cl. 16(c). How can it then be said that the petitioner willingly accepted this term when the fact is that it had no option in the matter…..”

·         Kedar Nath Motani and Ors. vs Prahlad Rai and Ors. dated September 25, 19598

In this case, the Apex Court in Para 22 held that :- “The correct position in law, in our opinion, is that what one has to see is whether the illegality goes so much to the root of the matter that the plaintiff cannot bring his action without relying upon the illegal transaction into which he had entered. If the illegality be trivial or venial, as stated by Williston and the plaintiff is not required to rest his case upon that illegality, then public policy demands that the defendant should not be allowed to take advantage of the position. A strict view, of course, must be taken of the plaintiff’s conduct, and he should not be allowed to circumvent the illegality by resorting to some subterfuge or by mis-stating the facts. If, however, the matters is clear and the illegality is not required to be pleaded or proved as part of the cause of action and the plaintiff recanted before the illegal purpose was achieved, then, unless it be of such a gross nature as to outrage the conscience of the Court, the plea of the defendant should not prevail.”

Conclusion

Hence there are legislative rules and judicial judgements against unfair terms in standard terms of contract. The Party advancing standard for of contract shall ensure that rights and liability of other party should not fall within the ambit of unfair terms under a contract.

.                                                                                                               .

1 – The Life Insurance Corporation of India vs Mrs. Prasanna Devaraj dated August 18, 1994 AIR 1995 Ker 88, 1995 82 CompCas 611 Ker

2. – U.P. Rajkiya Nirman Nigam Ltd. Vs. Indure Pvt. Ltd. & Ors [1996] dated February 9,1996 1996 AIR 1373 1996 SCC (2) 667 JT 1996 (2) 322 1996 SCALE (2)247

3.- Superintendence Company of India Pvt. limited vs Krishan Murgai datedMay 9, 19801980 AIR 1717, 1980 SCR (3)1278

4.-Beed District Central Co-Operative Bank Ltd. vs State Of Maharashtra And Ors dated September 29, 2006, (Supreme Court of India – Bench: S.B. Sinha, Dalveer Bhandari)

5.- United India Insurance Co. Ltd. v. Orient Treasures (P) Ltd

6.-National Highways Authority of Indiavs M/S. Lanco Infratech Ltd dated  March 7, 2014(Delhi High Court – Coram : Hon’ble Mr. Justice S. Ravindra Bhat Hon’ble Mr. Justice Najmi Waziri)

7.- D.C.M. Ltd. And Anr. vs Assistant Engineer(Hmt Sub-division), Rajasthan State Electricity Board, Kota and anr dated April 22,1987 AIR 1988 Raj 64, 1987 (2) WLN 538

8.-  Kedar Nath Motani And Ors. vs Prahlad Rai And Ors. dated  September 25, 1959AIR 1960 SC 213, 1960 1 SCR 861


Leave a Reply

Your email address will not be published. Required fields are marked *

* Copy This Password *

* Type Or Paste Password Here *