This article is written by Deepika Prashar. She is currently pursuing BA-LLB from IIMT &School of Law, GGSIPU, Delhi. In this article, she has discussed term Contract, with respecting to this term she has also tried to explain the concept of ‘Standard forms of contract.’
In the modern global world, millions of contract are drafted every day. It has become an integral part of our life. In order to discuss the main topic ‘the Standard Forms of Contract’. We must first know, what exactly a contract is?
So, in simple words, ‘A contract is an agreement which is enforceable by law.’ But, this isn’t it, the journey of forming a Contract starts with an offer, which is made by one person to another person, and only upon acceptance of such offer by another party, an agreement is formed. An agreement comprises of reciprocal promises between the two parties. For the agreements to turn into a valid contract, the conditions given in section-10 of Indian contract Act are needed to be satisfied. It is only upon all conditions being satisfied, a Contract is said to be made.
A contract creates an obligation on the parties to perform their part in the contract. Contract is a powerful tool, as it protects the legal rights of either party against breach made by another party.
A contract to perform a promise may rise in the following way:
- By agreement and contract
- By standard form contract
- By promissory Estoppel
In this article, we will take a look into ‘Standard forms of contract’.
Standard forms of Contract
A ‘standard form of contract’ is a contract between two parties in which the terms of a contract are prepared beforehand by one of the parties and the other party does not have much say in the matter. There is no place for negotiation, it is a kind of ‘take it or leave it ‘ contract. Due to a great rise in the volume of trade and business, a business concern may have to enter into a large number of contracts with its customers or clients. So from a practical point of view and for the sake of convenience to save time and money a standard form for the numerous contracts is used. The contract with standard terms may be drafted by one party and on the same terms contracts may be made with several persons.
For example, an insurance company may prepare a draft of insurance policy on which it can enter into contracts with a large number of persons. It is often a contract entered into unequal bargaining partners in which one side has all the bargaining power and uses it to write a contract mainly for his or her advantage.
Standard form contracts have prefixed terms and condition. The terms are drafted and included in the contract by the party having more bargaining power and the weaker party has only one function i.e. is to sign on the dotted line and the contract is made. Whether the other party, who does not have any bargaining power, knows that there is any term in the contract, whether there is limiting or exclusion clauses or not, that is immaterial. The consent is inferred from the fact that the party has put his signature on the contract.
Indian contract system does not have any specific differentiation between Standard form contract and general contract, as the standard form contract is a kind of contract which is governed by the same laws through which general contracts in Indian contract Act 1872 are governed. Due to an enormous increase in business trends, these kinds of contract have become very common and are entered into large numbers nowadays. This had led to the demand of formulation of fledge rules on the standard form of contract to protect the rights of the weaker party in a standard form of contract who have less bargaining power and can be exploited easily.
Why people accept Standard Form of Contract?
- Usually, people don’t read the contract clauses thoroughly as they are lengthy and are in legal language so even if they read they are unable to understand it.
- In some contracts, there are clauses like if you accept the given terms and condition then they will tell the full terms and condition of the contract.
- In Standard form contract is a kind of contract the party generally focus on the price mentioned in the contract; he doesn’t really care about other different clauses of less probability of occurrence which might be exploitative in nature.
- Social pressure on the party is created by another party to sign standard form contract, in the beginning, all the negotiation and the terms had been discussed orally and explained to them. So it creates a pressure on the party to sign the contract. The pressure can be from some other sources as well.
- The major point in the standard form contract is that they are taking it or leave basis, so they don’t have any choice but to accept the contract.
Exclusion or limitation of liability by one person
In standard form contract generally, the terms of the contract are pre-drafted by one of the parties and the other party is supposed to just sign on the dotted lines, without having any opportunity to get the terms altered. The party who is in the greater bargaining position drafts the terms according to his advantage and at times tries to exclude or limit his liability without caring for the interest of the other party who is in a weaker bargaining position. So keeping in mind the unequal bargaining power of the two parties, the court and the legislature have evolved certain rules to protect the interest of the weaker party.
Ways to limit exploitation from Standard Forms of Contract
These devices are effective to protect the interests of the party who is in a weaker bargaining position in the contract:
- There should be a Contractual Document
The parties are bound if the terms are contained in a contractual document. For making the terms binding it needs to be shown that the document containing those terms were contractual. In Chapelton v. Barry Urban District Council it has been held that if a document is a mere receipt and doesn’t create a contract, the terms contained in such a document are not binding. In this, it was held by the court that the exemption from liability clause which was printed on the ticket was no more than a receipt so the defendant couldn’t claim exemption from liability on the basis of anything printed on it.
- There should be No Misrepresentation
Even if a person signs a document containing certain terms but there is found to be a different oral misrepresentation about the contents of the document, the document would not be binding. In Curtis v. Chemical cleaning and drying co., The plaintiff was asked to sign a receipt where the misrepresentation was made by the shop assailant regarding the contractual terms. It was held by the court of appeal that as there was misrepresentation as to contractual terms which mislead the plaintiff as to the extent of defendants’ exemption of liability, so the defendants were bound to pay damages.
- There should be reasonable notice of contractual terms
For making the terms of the contract binding a reasonable notice containing all the information should be given to the other party to draw the attention of the other party to those terms. It can be by the way of printing on a ticket “for conditions see back” or any other method. If reasonably sufficient notice about the terms of the contract has not been given then there is no binding contract on such terms.
In Parker south Eastern Railway Co., the plaintiff deposited a bag in a cloakroom managed by defendants at a railway station. In return, he got a ticket on the front side of which it was stated ‘see back’. One of the conditions printed at the back stayed that the liability of defendants for any package was limited to 10 euro. The plaintiffs bag valued at 24 euro and 10 shillings was lost. The plaintiff in his action to recover the whole of the loss contended that the term limiting the defendant’s liability to 10 euro should not be binding on him because he hadn’t read the terms. It was held that the defendants had made reasonably sufficient efforts to draw the attention of the plaintiff to the terms and so the terms were binding and the liability of the defendants were to pay 10 euro only.
- Notice should be contemporaneous with the contract
Any notice regarding exemption from liability should be given at the time of entering into the contract and not thereafter. If the contract has already been entered into without the exemption clause, any subsequent notice about exemption from liability will be ineffective. If subsequent notice will be allowed, it will be a great tool for exploiting the weaker party.
In Marlborough Ltd. case, the plaintiff and her husband hired a room in the defendants’ hotel and paid for one weeks boarding and lodging in advance. When to went to occupy the room they found a notice which stated ‘ the proprietors will not hold themselves responsible for articles lost or stolen, unless handed to manageress for safe custody’. Due to the negligence of the hotel staff their property was stolen from the room. It was held that the notice in the room did not form part of the contract and the defendants were therefore liable for the loss.
- The terms of the contract should be reasonable
It is not just enough that terms of the contract should have been brought to the knowledge of the other party by a sufficient notice before the contract is entered into, it is also necessary that the terms of the contract should be reasonable and not arbitrary. If the terms of the contract will be unreasonable and opposed to public policy they will not be enforced even if agreed between the parties.
In Central Inland Water Corporation Ltd. v/s Brojo Nath, one of the clauses of the contract employment provided that the employer could terminate the service of the permanent employee by giving him a 3 month’s notice or 3 month’s salary. In accordance with the clause, the service of the respondent and another were terminated instantly by giving notice and a cheque fie 3 month’s. It was held by the Supreme court that such a clause was wholly unreasonable and against public policy and therefore void under section 23 of the Contract Act.
- Fundamental breach of the contract
This device is used to see that enforcing the terms of the contract does not result in the fundamental breach of contract. The main obligation under the contract is not allowed to be negatived by any term of the contract. No exemption clause is allowed to permit the non- compliance of the basic contractual obligation. In Alexander v. Railway Executive, the plaintiff deposited his luggage in defendant’s cloak-room and on return received a ticket. A term printed on the ticket exempted the defendant from liability for loss or misdelivery of the luggage. The plaintiff’s luggage was delivered to an unauthorised person without the production of the ticket. It was held that non-delivery of the luggage to the plaintiff amounted to fundamental breach of contract for which defendant was liable.
- Non-contractual liability
Exclusion of contractual liability may not negative any other kind of liability like liability in tort. In White v. John Warrick and Co.Ltd the plaintiff hired a cycle from the defendants under an agreement stipulating that “nothing in this agreement shall render the owners liable for any personal injury “. While the plaintiff was riding the cycle, its saddle tilted forward as a consequence of which he was thrown and injured. It was held that the exemption clause excluded only contractual liability of the defendant whereas they still remained liable for negligence under the law of torts.
- Liability towards third parties
If A and B enter into a contract under which B tries to exclude his liability by an exemption clause such a clause wouldn’t exempt any other person, say C, from liability because of the rule that C is a stranger to the contract and he can’t take advantage of a contract between A and B. In Morris v. C.W. Martin and Sons Ltd., the plaintiff gave her fur garment to a furrier for cleaning. Since the furrier himself couldn’t do the job, he has this garment to the defendant for cleaning with the consent of the plaintiff. The defendant’s servant stole the garment for which the plaintiff brought an action against them. The defendants sought exemption from liability on the basis of an agreement between the plaintiff and the furrier. The defendants were not allowed exemption and were held liable.
Standard form contract is a contract which is drafted by one party beforehand in which the party is a weaker bargaining position has no say. It is like ‘take it or leave it ‘ for them. It is true that it is not practically possible for a big firm, banks etc to enter into a separate contract with each individual so this method is devised but this form of contract can be a very big tool to exploit the weaker party in a contract. Usually, the party in higher bargaining position tries to limit or exclude their liability without caring for the interest of the other side. so the court has evolved certain devices e.g. giving reasonable notice to protect the interest of the weaker party.
- DR. R. K. Bangia, 7th Edition
- Avtar Singh, 12th Edition