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Analysing Adhesion Contracts And The Discrimination They Cause

With the increase of globalization and world economies , the importance of contracts cannot be overstated . Contracts ensure smooth and secure running of businesses across borders, playing a crucial role. Contracts provide legal protection, risk management , clarity , compliance with laws and regulations, dispute resolution, intellectual property protection etc.

Contracts can be classified into many categories due to its nature , one such type which is discussed in this blog is Adhesion Contracts derived from the French word " contract d'adhesion" simply meaning Standard Contracts having an unconciousable term.

Standard Contracts are generally those contracts which are common for a set of people , in these contracts generally there is single will of the superior party exclusively present and dominant. As a result of which there is bargaining power present for the other party, making it discriminatory in nature.

Clause Of Un Conciousability In Standard Form Of Contracts
The term Unconscionable has not been defined under any Indian statute but has been defined in various cases. The clause of Unconscionability or Unconscionable contracts are drafted in such a manner which seem to impose unfair and unjust conditions on one party this is an unreasonable practice which has been followed by businesses since a long time . One of the key standards of unconscionable contracts is that one of the parties signed the deal under duress, with incomplete knowledge, or after being mislead.

Unconscionability can be divided or characterized into two types depending upon its nature:
  1. Procedural Unconscionability [1]:
    The circumstances underlying the establishment of a contract, such as the negotiation process and the parties' relative positions, are referred to as Procedural Unconscionability. It can happen when there is a considerable disparity in bargaining power, restricted options for one party, or unexpectedly unfavourable conditions.

    The Court in the case of Weaver v. Am. Oil Co. [2]reviewed elements such as the parties' understanding and agreement, their age, education, intelligence, and negotiating power, as well as who drafted the contract and whether the weaker party was informed about its provisions or was been misled by its terms and conditions.
  2. Substantial Unconscionability[3]:
    Refers to specific unjust contract stipulations that make the contract onerous, one-sided, or impractical. Unfair pricing, remedy restrictions, and warranty disclaimers are examples of such provisions.

However, the courts in India are vested with the power to decide on these clauses. When a lawsuit is filed and the court determines that a contract is unconscionable, the contract is usually deemed void. If a contract is deemed void, no damages or particular performance are given, but the parties are liberated from their original contract obligations.

There are numerous case laws on the subject of contract unconscionability. The most notable of them is Employment Agreement terms, where the contract is frequently improperly worded, benefitting the employer. Employers use arbitrary clauses in employment contracts and subject employees to extremely unjust working conditions.

The Supreme Court held in Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly [4]that a clause providing for the dismissal of a permanent employee's services by serving three months' notice on him is arbitrary, unreasonable, contrary to public policy, and thus unconscionable.

In a similar instance, the Supreme Court ruled that a clause was unconstitutional because it gave the authority unrestrained and arbitrary power to terminate the services of a permanent staff member without recording any reasons for such dismissal.

The Issues Raised By Such Contracts, As Well As The Inadequacies Of Current Indian Statute Laws
Standard forms of contracts allow large corporations to establish law for themselves, giving them the authority to construct conditions in their benefit, while neglecting the abstract legal notion of contracts, which gives both parties similar negotiating power. Companies draught these contracts with the assistance of legal experts, and the clauses are written in such a way that the firm benefits the most.

Two of the primary clauses that benefit firms in these types of contracts are the Exemption and Exclusion clauses, which are added to solve various issues that arise in the event of a breach, and they create such loopholes that they can easily escape the hands of the law.

Additionally, they also include a clause relating to liquidated damages, so that they can estimate the potential damages done in case of breach . Furthermore, businesses may seek to avoid court procedures or incorporate such provisions just because other businesses do. These favourable terms are frequently in small type, which people rarely read and cannot negotiate.

Because of the market dominance of large corporations, individuals have no choice but to accept the terms offered, with no capacity to explore alternatives. As a result, organisations might take advantage of people's helplessness by including phrases that may absolve them from liability under the contract.

There have been a few situations where the Courts have bravely attempted to reach a decision in which relief was granted to the weaker party. Reviewing what the Indian Courts have expressed in this regard we observe that:
  • In a case the Madras High Court [5]held that a stipulation in a contract between the appellant and the respondent's Railway Administration that permitted the administration to cancel the contract at any time was unconstitutional and unfair. The Supreme Court later upheld the High Court's verdict but did not comment on the clause's constitutionality.
  • In a separate instance, the Madras High Court [6]found in favour of a consumer who had misplaced a saree at a wash. According to the laundry receipt, the customer was only entitled to 50% of the market price or worth of the article if it was lost or damaged. The court decided that this condition would encourage dishonesty by allowing the cleaner to purchase new items at a lower cost, which would be contrary to the public interest.
  • In a Karnataka case, [7]a provision requiring payment of merely 8 times the cost of cleaning a garment in the event of loss was considered unfair. In another case, a kerosene supply contract permitted the defendant to cancel the plaintiff's dealership without cause, which the court ruled was an unjust contract term. In a Madras case, a petitioner won a lottery prize but was unable to collect it due to the neglect of their lenders. The respondent argued that the money lapsed to the state due to a contractual clause, but the court ruled that such a term was unconscionable and against public policy.

Suggestions And Conclusion
Finally, an examination of standard form contracts demonstrates the discrimination they cause, as well as the necessity for stronger legal safeguards to address this issue. Standard form contracts, often known as adhesion contracts, frequently contain unconscionable stipulations that place one party under unfair and unreasonable restrictions. These contracts are usually written with the goal of benefiting the superior party while putting the inferior party at a substantial disadvantage.

The two categories of unconscionability, procedural and substantive, show the unfairness of these contracts even more. Procedural unconscionability occurs when one party has a large power imbalance or has restricted options throughout the negotiating process. Specific contract requirements that are onerous, one-sided, or unworkable are referred to as substantive unconscionability.

In rare circumstances involving unconscionable contracts, Indian courts have taken measures to safeguard the weaker party. However, the present parts of the Indian Contract Act are insufficient to properly solve the situation. The burden of proof and the definition of illegal contracts need to be clarified and expanded.

The Law Commission [8]recognised the need for changes and provided recommendations in its 103rd report on "unfair terms in contract." These ideas include adding a new chapter and section to the Indian Contract Act that would allow courts to refuse enforcement of unconscionable contracts or particular elements of contracts deemed unconscionable.

Finally, it is critical to address the discrimination produced by standard form contracts as well as the shortcomings of current Indian statute legislation. Implementing stronger legal rules and changes will contribute to a more equitable and balanced contractual environment, protecting the weaker party and fostering equality in economic transactions.

  1. Nivedita Arora," Contract Unconscionability in India"(ipleaders, 30 October 2017) - accessed on 7 July 2023
  2. Weaver v American Oil Co [1971] 257 Ind 458, 276 NE2d 144
  3. Nivedita Arora," Contract Unconscionability in India"(ipleaders, 30 October 2017) - accessed on 7 July 2023
  4. Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly & Anr, [1986] 2 SCR 278, [1986] AIR 1571
  5. H. Thathaih v Union of India, AIR 1957 Mad 82.
  6. Lily White v. R. Manuswamy, AIR 1966 Mad 13.
  7. Ramalt v Director, Tamil Nadu Raffles [1972] 2 MLJ 237.
  8. Law commission , Unfair Terms in Contract(Law Commission no.103,1984)paras 6.1-6.2

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