Some points on ‘Standard form contracts’

A Standard form contract (sometimes referred to as a contract of adhesion, a leonine contract, or a take-it-or-leave-it contract) is a contract between two parties, where the terms and conditions of the contract are set by one of the parties, and the other party has little or no ability to negotiate more favourable terms and is thus placed in a “take it or leave it” position.

These are standardised contracts employed to counter the impracticability of drawing personalised contracts with respect to each customer, where there are a large number of customers with whom contracts are entered into on a regular basis and with little variation. These contracts are also known as Contracts of Adhesion for the obvious reason that a customer merely adheres & is not in a position to negotiate.

The fact that a customer rarely reads the fine print, provides an opportunity to giant firms to exploit this weakness of an individual & exclude themselves from liability. Anyone who has ever downloaded an app, created an online account, brought a parking ticket, got clothes dry cleaned or entered an insurance contract would know this.

Most of these standard form contracts include liability exclusion clauses which are so widely worded so as to deprive the individual from any protection/recourse under the contract.

If seen from the perspective of freedom of contract and literal conception of free consent, there is nothing wrong with these contracts, however, the notion of ‘freedom of contract’ is sometimes illusory and cannot be literally stretched to such an extent so as to let a party with lesser bargaining power be abused.

In such cases, the law enters into the arena and protects the party by way of certain doctrines. Certain protective devices have been evolved by courts to guard customers against the possibility of exploitation inherent in such contracts. Some of these devices are :

  1. Doctrine of Reasonable Notice – This doctrine mandates the company to give adequate notice of terms of the contract to the customer.

Case Law : Thornton v. Shoe Lane Parking Ltd. (1940) KB, where it was held that exempting conditions which are so widely couched so as to be totally destructive of rights of a customer and totally exclude liability should not be binding on a person unless his attention is drawn to the same in most explicit terms.

  1. Notice should be contemporaneous with contract : This doctrine mandates that notice of such exclusionary clauses should be contemporaneous or prior to the making of the contract and not subsequent, so as to give the party an opportunity not to enter in the contract or renegotiate terms. One may visualise a situation where a person parks his car in a parking lot and the conditions (excluding liability of the parking lot owner) are not written on the parking slip issued to him at the barricade but in the basement on a pillar after he has parked his car. A notice like this which is not contemporaneous will not withstand judicial scrutiny and not protect the parking lot owner.
  1. Theory of Fundamental Breach – By way of this doctrine, where a term in the standard form contract itself constitutes breach, even the widest of exemption clauses won’t save the erring party from liability.
  1. Strict constructionCourts have evolved this tool of interpretation wherein exemption clauses in a standard form contract are to be strictly and narrowly construed in favour of the individual who has to perforce adhere to the contract and not in favour of the company. (A variation of this is the rule of Contra proferentem. (Latin: “against [the] offeror”), which is also known as “interpretation against the draftsman” : Contra Proferentem is a doctrine of contractual interpretation providing that, where a promise, agreement or term is ambiguous, the preferred meaning should be the one that works against the interests of the party who provided the wording).
  1. Liability in tortCourts have also consistently held that even where liability in a contract stands excluded by way of a standard form contract, tort liability may still be fastened for negligence etc.

Further Reading :

The following two cases make for interesting reading on standard form contracts :

A. Lily White v. Munnuswami (AIR 1966 Mad 13)– A case on liability of a launderer/dry cleaner for damages despite purported exclusion of liability by a standard form contract printed on the reverse of the bill handed over to the customer.

 Relevant excerpts :

“(5) It appears to me to be very clear that a term which is prima facie opposed both to public policy and to the fundamental principles of the law of contract, cannot be enforced by a court, merely, because it is printed on the reverse of a bill and there is a tacit acceptance of the term when the bill was received by the customer. Certainly, the conditions printed on the reverse of a bill may well govern or modify any simple contract, such as the contract in the present case, which was to entrust an article for dry cleaning, and to pay due charges for that service, subject to the obligation on the part of the businessman to perform the process properly, and to return the articles safe and intact. But, if a condition is imposed, which is in flagrant infringement of the law relating to negligence, and a bill containing this printed condition is served on the customer, the court will not enforce such a term, which is not in the interests of the public, and which is not in accordance with public policy. Actually, it is a matter of some surprise to me that the revision petitioner-firm has thought it fit to press this matter in revision, and there is certainly justification for the observation, both of the trial Judge and the New Trial Bench, that this may well be putting a premium upon the abstraction of clothes, which may be committed by the employee of a firm, intent on private gain, though the firm itself may be blameless with regard to the actual loss. The revision has no merits whatever, and it is dismissed”

B. Central Inland Water Corp v. Brojo Nath Ganguly & Anr – 1986 SC – wherein broadly worded ‘removal from service’ clauses were held to be bad. This manifests that in cases of unconscionable terms in a standard contract, court can construe the same as evidence of inequality of bargaining power and hold the contract vitiated on account of undue influence/ or being against public policy. This decision is also a preposition on the point that even the State has a duty to act fairly and cannot enter into unconscionable bargains.

The judgment in an excellent piece of legal writing and is a must read for all students!


2 thoughts on “Some points on ‘Standard form contracts’

  1. Good morning sir,
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    Chirag Arora

    Liked by 1 person

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