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Unconscionability and Standard Form Contracts

The Research question that this paper aims to address is whether genuine consent is given by the parties assenting to the terms in cases involving the use of Standard Form Contracts and whether such contracts should be enforceable as a rule without exception.

Ø   Synopsis: The article focuses on standard form contracts through the lens of unconscionability and how more often than not consumers end up with an unfair deal due to the inherently unfair nature of such contracts.  Scholars agree that cases wherein Standard form contracts are used generally involve a predominant party that ends up dictating terms and conditions in transactions with an array of parties who are put in a comparatively more vulnerable position. Standard form contracts have been depicted in bad light as having terms that are extremely harsh due to opacity in the bargaining process and absence of negotiation of such agreements along with illegibility and incomprehensibility of numerous clauses the authors suggests that such contacts are unconscionable.  

Ø Response: The first argument I make is that Standard form contracts have a certain amount of pros as well.
Secondly, due to the disparity in bargaining power there is always a possibility to exploit the weaker party.
Thirdly, assenting to terms under circumstances with absolutely no room for negotiation mustn’t be misunderstood as ‘free consent’. I then will support these claims along with relevant case law.
Fourthly, there need to be limits on the principle of ‘freedom of contract’.
Lastly, I would suggest for more clear guidelines to be inserted and for the courts to step in and take action more often than they do.

Standard form contracts, most definitely have the potential to be unconscionable. However, one mustn’t ignore the pros of standard form contracts, which many like to omit.  Standard forms reduce administrative costs, save time and trouble of bargaining and more importantly are essential in areas where there is one party that deals with numerous (sometimes even millions) of other parties as it would be too time consuming and tedious a process to sit with each and every party individually to negotiate terms and conditions. It’s a very practical and convenient option in a lot of cases. [1] Proponents of the economic theory would contend that everyone has the right to strive towards their own betterment and contracts that parties “freely” enter into, regardless of how favorable or unfavorable, isn’t a matter that should come within the purview of courts.[2]

As per the principle of freedom of contract, terms of a contract must be upheld when the parties had capacity to contract, manifested assent and there was valid consideration. [3] Initially it’s puzzling when one thinks about how, keeping aside gifts and self-sacrifice, why exactly would parties sign contracts that are way more advantageous to the other party. Using points mentioned below I would like to respond to why people enter into such agreements and would like to contest that there need to be limits on this ‘freedom of contract’.  In numerous cases it has been seen that the natural self-interest of the dominant party soon leads to inclusion of clauses such as “exclusion of liability” that are blatantly unfair. [4]

Another drawback of SFC’s is that even when certain terms are extremely incomprehensible these agreements have a lulling effect that happens to be induced by the knowledge that what one is signing right now is also “what everyone else has signed” and so the terms and conditions are not worth going through very carefully. [5] An example of this is the clause inserted in fine print on the online booking portal of certain airline companies. This clause reads, “Customers are solely responsible for carriage of their handbags/ personal belongings and the airline will not be liable for any loss/damage of their hand or check-in baggage/personal belongings. In case of loss of check-in baggage, compensation will be awarded as per company policy.”

To decipher their “company policy” one has to open three separate links that are conspicuously hidden from areas where a customer would ordinarily search.  Additionally, due to the monopolist or semi-monopolist positions that businesses sometimes occupy, assenting individuals are left with little choice but to agree. These contracts are looked upon as take it or leave it contracts with no room for negotiation.[6]

In the case of Henningsen v. Bloomfield Motors, wherein the defendants refused to repair a car that was under warranty because there was a clause in their contract that exempted them from it, the New Jersey Supreme Court ruled in favor of the plaintiff and in their reasoning for the judgment mentioned “freedom of contract is most at home when a contract is a result of free bargaining of parties who meet each other on a footing of approximate economic equality rather than the standard mass contract that is used primarily by enterprises with strong bargaining power and position and is presented to consumers on a take it or leave it basis.” [7]SFC’s have been shown to comprise of terms that are particularly harsh for the weaker party and the gains happen to be disproportionally greater for the dominant party. This shouldn’t be hard to accept considering the fact that these contracts are drawn out by professionals for the dominant party keeping in mind only the interest of the dominant party. [8] Consumers, even if they recognize that they are in an unfavorable position, many times end up signing on the dotted line because of the fact that the terms being offered are standard across the industry or the products that they wish for are supplied only by the particular party. [9]In the case of D.C.M Ltd. v. Assistant Engineer (HMT Sub-Division), Rajasthan State Electricity Board, the Rajasthan State Electricity Board charged the consumer-appellant almost three times the normal rate charged from other consumers. Even though in the present case the appellant had signed an agreement with the Board, the court held that the terms and conditions of the agreement were highly unreasonable and unfair. [10]

The court held in favor of the appellant and reasoned that even though having given an undertaking was a conscious act of the petitioner, the situation wasn’t indicative of the petitioner’s willingness to be bound by such onerous conditions. It was not like the petitioner had the option to negotiate these terms and hence it cannot be said that the petitioner voluntarily and willingly accepted the condition of paying higher charges. “Willingness to accept terms as onerous as in this agreement should be said to comprise of free consent only when a consumer has an option to get this electricity supply from elsewhere without having to agree to terms that the Board had specified.”[11]In recognition of this unequal bargaining power between the two parties courts have stepped in occasionally to set things right. Due to the information asymmetry and unequal bargaining power going in favor of the dominant party in such contracts the balance clearly slants towards the suppliers. [12]An example of a case where the court had to intervene was that of Air Deccan Vs. Dinesh B.V & Anr. wherein the complainant took a flight from Bangalore to Chennai and upon arrival was informed that his baggage had been misplaced by the airlines. The compensation offered was based upon the weight of the suitcase as mentioned in their policies that were stated on the website which was in the form of a Standard form contract. This “compensation” was far from the value of the articles that the suitcase had. The court ruled in favor of the plaintiff and the compensation to be offered was increased to INR 15,804 along with INR 1000 as litigation costs. [13]

The entire notion of capitalist ideals of free economy and the laissez-faire argument falls flat on it’s face when one analyzes the tremendous amount of scope that these standard form contracts have to exploit parties that are economically not as stable or substantially inferior to the dominant party drafting the terms. Keeping in mind the drastic manner in which such forms could be used it is essential for the courts to develop a better doctrine regulating such agreements while liberally refusing to enforce terms that are unconscionable and in some contracts, the entire agreement. This will hopefully act as a deterrent, ensuring drafting of efficient and fair contractual terms and conditions. I personally feel that principles of equity must be utilized more often as they could play a significant role in coming to the rescue where strict law would be powerless to prevent injustice that would arise from enforcing contracts such as these which are nothing but mere tools of the oppressive and are demonstrably unfair.

[1] Nicholas S. Wilson, 'Freedom of contract and adhesion contracts' (1965) 14 International and comparative law quarterly.
[2] Alan Wertheimer, 'Unconscionability And Contracts' (1992) 2 Business Ethics Quarterly.
[3] Nicola Giocoli, 'Classical Competition And Freedom Of Contract In American Laissez Faire Constitutionalism' [2014] SSRN Electronic Journal.
[4] Friedrich Kessler, 'Contracts Of Adhesion--Some Thoughts About Freedom Of Contract' (1943) 43 Columbia Law Review.   [5] Leon Trakman, 'Adhesion Contracts And The Twenty First Century Consumer' [2007] SSRN Electronic Journal. [6] Russell B. Korobkin, 'Bounded Rationality, Standard Form Contracts, And Unconscionability' [2003] SSRN Electronic Journal.
[7] Henningsen v. Bloomfield Motors [1960] N.J. 213
[8] Alan Wertheimer, 'Unconscionability And Contracts' (1992) 2 Business Ethics Quarterly.
[9] M. J Trebilcock, The Limits Of Freedom Of Contract (Harvard University Press 1993).
[10] D.C.M Ltd. v. Assistant Engineer (HMT Sub-Division), Rajasthan State Electricity Board, Kota, [1987] Raj. HC   [11] ibid.
[12] Russell B. Korobkin, 'Bounded Rationality, Standard Form Contracts, And Unconscionability' [2003] SSRN Electronic Journal.
[13] Air Deccan (Deccan aviation Ltd.) vs Dinesh B.,V. & Anr. [2013] N.C.DR

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