Standard form Contracts | Law Optional Notes for UPSC PDF Download

Introduction to Standard Form Contracts

In simple terms, a standard form contract is a 'take it or leave it' type of agreement. In such contracts, one party establishes all the terms and conditions, simplifying the process and reducing the need to create individual agreements every time. The other party typically doesn't have the opportunity to negotiate and must either accept the contract as is or decline it. With the increasing volume of business activities and global trade, the use of contracts has become more prevalent than ever. Common examples of standard form contracts include those used by insurance companies, contracts for purchasing appliances like washing machines, and agreements for services such as email or website usage.

Nature of Standard Form Contracts

Standard form contracts do not allow for negotiations and are typically agreed upon by parties with unequal bargaining power. Essentially, these are legally binding agreements in which one party, holding the stronger bargaining position, drafts the contract to primarily benefit themselves. As a result, this type of arrangement diminishes the fundamental right to negotiate for the other party.

Issues Concerning Standard Form Contracts

Failure to Read Clauses

Courts have consistently maintained that standard form contracts, even when used, are intended to be upheld and can only be invalidated if they are proven to have been entered into through fraud, misrepresentation, mistake, or coercion. Therefore, under normal circumstances, standard form contracts are considered valid. In cases where a party has neglected to read and understand the terms and conditions of the contract while signing it, they are typically not provided with any legal remedy.

Unequal Bargaining Power

Courts have taken a strict stance against standard form contracts that exploit the stronger position of employers over employees. In employment agreements, it is common to include terms and conditions that favor the employer, leaving employees with little choice but to accept them. The court, in the case of Superintendence Company of India (P) Ltd v. Sh. Krishan Murgai, emphasized the need for careful scrutiny of employee agreements due to the advantage held by employers. This situation leaves employees with very little bargaining power as they are presented with a standard form contract that they can either accept or reject.

Irrational or Unconscionable Terms

Courts have refrained from interfering in cases where the bargaining power of the parties is deemed equal. However, they have been more receptive when confronted with irrational or unconscionable terms in standard form contracts. For instance, in the case of M Siddalingappa v. T Nataraj, the issue concerned the applicability of clauses printed on the back of a laundry receipt, stating that the company was not responsible for any loss of clothes entrusted to them for cleaning. The court held that the laundry company, acting as a bailee, had a basic responsibility not to lose the temporarily entrusted goods.

Reasons for Welcoming Standard Form Contracts

• Lack of Reading: Many individuals do not thoroughly review standard form contracts, often assuming that the terms will be reasonable and standardized for everyone. Some may not consider it worthwhile to spend time reading through the entire document.
• Priority of Purpose: People sometimes prioritize their immediate need or purpose for entering into a contract over potential negative consequences. They may overlook unfavorable terms in favor of the benefits they seek.
• Oral Explanations: In some cases, the party drafting the contract may orally explain the major terms and policies to the other party, leading to the perception that reading the final draft of the contract is not necessary.
• Lack of Alternatives: Even when encountering unfavorable terms, individuals may feel they have no other option but to accept the contract to benefit from the deal or service.

Tools and Mechanisms for Protecting Parties in Standard Form Contracts

• Due Notification: The party drafting the contract has a duty to provide due notification of the terms and conditions. If the terms are not adequately communicated, the acceptor is not bound by them. Notification should be provided before or during the contract's formation.
• Fundamental Breach of Contract: When a party fails to perform its contractual obligations or delivers something other than what was agreed upon, it constitutes a fundamental breach that can put an end to the contract. This principle is used to control unfair exemption clauses.
• Tortious Liability: Exemption clauses in contracts may absolve parties of their contractual liabilities but not their liabilities under tort law. Parties can still be held liable for torts such as negligence.
• Unreasonable Terms: Terms are considered unreasonable if they violate public policy or are so irrational that they defeat the purpose of the law. Unreasonable terms can be challenged and deemed unenforceable.
• Liability Towards Third Parties: Parties in standard form contracts cannot escape liability towards third parties who may be affected by their services or products, even if the contract contains exemption clauses.
• Clarity of Clauses: Exemption clauses in contracts should be clear and free from confusing terms. Any ambiguities are typically resolved in favor of the weaker party. Confusing clauses may render the contract unenforceable.

These tools and mechanisms aim to protect the interests of the parties entering into standard form contracts and ensure fairness and clarity in contractual relationships.

Legal Status of Standard form of Contract in India

In India, the legal status of standard form contracts is governed by the Indian Contract Act of 1872, which does not make a specific distinction between standard form contracts and general contracts. These contracts fall under the general framework of contract law.

The 199th Law Commission Report of 2006 addressed the issue of unfair (procedural and substantive) terms in contracts, acknowledging the prevalence of standard form contracts, especially in the digital age. While there isn't specific legislation governing standard form contracts, courts have developed a body of case law that parties can refer to in case of disputes.

Advantages of Standard Form Contracts

• Cost Reduction: Standard form contracts significantly reduce the cost of contracting since there's no need to draft a new contract from scratch each time.
• Speed: As there's no room for negotiation, the contracting process is expedited.
• Consistency: The consistency of terms and conditions in standard form contracts makes them easier for parties to understand and become familiar with.
• Case Law Precedents: Over time, courts have set precedents through case law that can guide parties when disagreements arise.

Disadvantages of Standard Form Contracts

• Missed Terms: Parties may overlook specific terms and conditions, putting them at a disadvantage even if their position is just.
• Limited Negotiation: The inability to negotiate terms can disadvantage one party. Fixed prices and terms may be imposed.
• Language Complexity: The language used in these contracts may be complex and hard to understand, discouraging parties from reading or fully comprehending them.
• Favoring One Party: Standard form contracts are often drafted to favor one party, leaving the other party in a disadvantaged position.

Conclusions

In conclusion, a standard form contract is a type of contract governed by the Indian Contract Act, where one party unilaterally drafts the terms and conditions, leaving no room for negotiation by the other party. These contracts are widely used due to their simplicity and efficiency.
While standard form contracts are prevalent and unlikely to be replaced by other contract types, it is crucial to promote awareness among individuals entering into such contracts. Parties should be encouraged to carefully read and understand the terms and seek clarification for any ambiguous clauses they encounter.
Despite the absence of specific legislation governing standard form contracts, the legal system has evolved to introduce various mechanisms and tools to protect the rights of weaker parties, providing a level of safeguard against potential abuses in these contracts.