Standard form contract

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Standard-form contracts are ubiquitous in modern business transactions, ranging from consumer purchases to complex commercial deals. These contracts are pre-drafted and presented to parties on a “take-it-or-leave-it” basis, with little or no opportunity for negotiation or customisation. 

While standard-form contracts can offer convenience and efficiency, they can also pose significant risks to parties due to unequal bargaining power and the potential for unfair or unreasonable terms.

What is standard-form contract?

Standard form contract is a pre-written contract where the terms and conditions are non-negotiable and are usually drafted by one party and presented to the other party for signature. Standard form contracts are also known as adhesion contracts or boilerplate contracts

In India, standard form contracts are recognised under the Indian Contract Act, 1872.

The Indian Contract Act, 1872 does not provide a specific definition of standard form contracts, but it does recognise their existence. Section 23 of the Act states that any contract that involves a certain degree of unfairness or unconscionability, or which is against public policy, is void. This provision applies to standard form contracts as well, and any clause in such a contract that is found to be unconscionable or against public policy can be held to be void.

Use of standard form contracts

The purpose of standard form contracts is to streamline the contracting process by providing a pre-written set of terms and conditions that can be used for a large number of transactions. These contracts are often used in situations where one party has significantly more bargaining power than the other, such as in consumer contracts or employment contracts.

Standard form contracts can save time and resources by avoiding the need for negotiations and individualized drafting of contracts for each transaction. However, they can also be used to take advantage of consumers or other parties who may not fully understand the terms and conditions of the contract.

Standard form contracts are commonly used in various sectors such as insurance, banking, and telecommunications, among others. These contracts often contain a large amount of legal jargon, and the terms and conditions can be difficult for the average consumer to understand.

Why do people accept standard form contracts?

Here are some points on why people accept standard form contracts:

  1. Convenience: Standard form contracts offer pre-drafted terms that can be easily accepted or rejected without the need for time-consuming negotiations or customizations. This can save parties time and resources, particularly in cases where the transaction is routine or standardized.
  2. Familiarity: These contracts are widely used and accepted in a particular industry or market. Parties may feel more comfortable using a standard form contract that they are familiar with, rather than negotiating new terms or using an unfamiliar document.
  3. Perceived lack of bargaining power: In some cases, parties may believe that the other party is in a stronger position and that they have little leverage to negotiate more favourable terms. In these cases, accepting a standard form contract may be seen as the only viable option, even if the terms are not entirely satisfactory.
  4. Lack of legal expertise: Some parties may lack the legal expertise to effectively negotiate or draft a contract, and may prefer to use a standard form contract as a way to ensure that the basic terms and provisions are covered.
  5. Cost: Negotiating or drafting a custom contract can be expensive, particularly for small businesses or individuals. In these cases, using a standard form contract may be a more cost-effective option.

Legal status of standard form contracts

The standard form contracts are considered to be legally binding agreements, assuming that the parties have freely and voluntarily agreed to the terms in India.

Important rules related to standard form contracts

To address the unequal bargaining power between parties, several rules have been developed to protect the weaker party. Some of these rules include:

Doctrine of unconscionability 

Under this doctrine, a court may refuse to enforce a contract if it is found to be unconscionable or oppressive to the weaker party. This means that if the terms of a contract are overly harsh or one-sided, a court may declare the contract void or modify the terms to make them more equitable.

Statutory protections

Certain statutes have been enacted to provide protections to consumers, employees, and other weaker parties in standard form contracts. For example, the Consumer Protection Act, 2019 provides consumers with the right to file complaints against unfair trade practices and seeks to promote fair competition.

Implied terms

In some cases, courts may imply certain terms into a contract to protect the interests of the weaker party. For example, in a contract of employment, courts may imply a duty of good faith and fair dealing on the part of the employer towards the employee.

Duty to disclose

The party with greater bargaining power has a duty to disclose any relevant information that may affect the weaker party’s decision to enter into the contract. Failure to disclose such information may result in the contract being held void.

Right to rescind

The weaker party may have the right to rescind the contract if they were induced to enter into it by misrepresentation, fraud, or undue influence.

Landmark cases on standard form contracts

Road Transport Corporation v. Kirloskar Brothers

The court held that the contractual terms must be properly brought to the knowledge of the party who is sort to be bound thereby. If the consignment note is not signed at the time of delivery of goods for carriage the terms of the consignment note exclude the jurisdiction of certain courts and are not binding on the consignor or consignee. Hence, the court in this case held that there should be a reasonable notice of contractual terms.

Lily white v. Munuswami

In this case, the court held that if a dryer issues a receipt stating that the dry cleaner’s liability is limited to the extent of 50% of the value of the article the dryer is still liable to pay the full cost if he loses the new saree of the customer. Hence, the terms of the contract must be reasonable.

Conclusion

Reasonable and fair contractual terms are essential for the smooth operation of any business relationship. Various legal rules and protections have been developed to ensure that the terms of a contract are not unconscionable and that the weaker party is not exploited by the stronger party. The duty to disclose, the right to rescind, statutory protections, and implied terms are all crucial in ensuring that contracts are reasonable and fair. 

It is also important to have a written contractual document that accurately reflects the agreement between the parties and to perform obligations in good faith and without misrepresentation.


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