Village & Post: Nighasan Kheri, 262903 City: Lakhimpur Kheri, 262701

STANDARD FORM OF CONTRACTS AND EXEMPTION CLAUSES

business contract

INTRODUCTION

Humankind’s subsistence used to be a barbaric one. This state of events was concluded and the genesis of civil society was facilitated by the inception of the social institution called the state. There are diverse perspectives related to this concept but the most crucial one of them is the theory of social contract.[1] It propounds that the very institution of the state owes its construction to a ‘contract’ as in the humans collectively elected from among them a leader who would provide them security and as consideration for this promise the people were to abandon some of their rights. Since then, across both public and, private spheres the significance of contracts has only grown substantially. Growth entails changes and the fundamental theory of contracts has also survived the same. Hence, it is imperative that a contemporary understanding of contracts shall be more diverse than that of the primary ones.

In English Common Law, the laws related to contracts originated around the 13th century from the concept of Debt and Covenants, the former being an action for recovering the sum of money owed and the latter being an action for the breach of contract under the state’s seal or instrument. But an intrinsic shortcoming in them was that these actions only dealt with the written form of contracts and not with the oral or informal form. Though the action of Assumpsit was eventually established to deal with the fore-mentioned form, yet the onus of producing facts and pieces of evidence related to the disputes arising out of informal form of contracts remained intact. Likewise, is the case in the contemporary scenario of contracts as well and to omit these particular uncertainties, the contracts are generally rendered formally in a written fashion. Standard Form of Contracts is a manifestation of this practice.

WHAT IS STANDARD FORM OF CONTRACTS?

In a basic language, the Standard Form of Contracts can be referred to as ‘take it or leave it contracts. These types of contracts are formal contractual documents wherein one of the contracting parties brandishes the authority over the other party since the latter does not have any position to negotiate. The weaker party in the contract has two options, either to accept the terms and conditions provided by the stronger party or to forget about the contract. Insurance contracts, terms, and conditions that we agree upon (mostly without reading properly) while signing up of social media sites, terms while accepting cookies on a website, bus, and railway tickets, etc., are all types of standard forms of contracts. The fundamental right to negotiate is negatively affected by the widespread usage of such forms of contract in modern times. That is exactly the reason why the 103rd Report by the Law Commission of India acknowledged that “The standardized contracts are pretended contracts that have only the name of contract”.[2]

Now, the issues arising as a result of these contracts are innumerable. For instance, for any insurance company, it would be a herculean task to frame different contracts for different customers and explain the intricacies of every condition mentioned in that contract. That is why such companies bear with themselves many pre-printed forms that they can readily provide to their customers for them to read and denote their acceptance of those terms by the means of a signature. Such companies generally keep the font in fine print, or rather highlight the fundamental terms in large fonts but keep certain clauses in small fonts which at times might favor them in the situation of disputes arising out of these contracts. One of these types of clauses that the companies generally prefer writing in small fonts for their benefit is the exemption clause (also known as the exclusion clause). And as we all know that human beings are, on a general basis, lackadaisical in nature and their approach, which is why the majority of such clauses remain unread by the acceptor of the terms who signs the document without properly providing it a thorough evaluation and analysis. To put it directly, this approach forms the root of the majority of the evils arising out of these standardized contracts.

To surmise it, this trend offers a unique incentive for large corporations to take advantage of an individual’s vulnerability by placing provisions against him that resemble private law and could also exclude the company from all liabilities under the contract.[3] Also, it results in a herculean task for the courts to decide the disputes that arise by the virtue of unawareness of the terms and conditions mentioned in the contracts. As a result, in such cases, the courts follow the traditional practice of strictly interpreting the clauses of the contract except only in cases where the terms contain any fraudulent, misrepresenting, or unreasonable clauses. It was held in the 1934 English King’s Bench case of L’Estrange v. F. Graucob Ltd.[4]

EXEMPTION CLAUSES

The human treatment of law has been from time immemorial to twist it to maximize his profit even if it undermines law itself; the same thing has happened with the standard form of contracts with the addition of the exemption clauses.[5] The exemption clauses, or as already mentioned which are also known as an exclusion clause, apparently look harmless but are added by parties to limit the scope of performance of their respective parts in a contract. An exemption clause, to be very precise, serves to limit the responsibility of a party to the contract (the stronger party in case of a standard form of contract) either completely or partially in the event any dispute arises out of the subject matter or the terms of the contract. But it is highly imperative that a condition might so occur, or it might so happen in a standard form of contract that the party in power of the contract inserts certain exemption clause in the contract such that his duty to perform the primary and the main part of the contractual document becomes absent. The weaker party to the contract might suffer heavy losses. For instance, if a person signs in any social media platform, let us assume X, and ticks on the box of ‘I agree’ without reading the terms and conditions one of which let us suppose was that the company X would not be liable for any breach of privacy in case of leak of a user’s personal information particularly uploaded on the app. Now if the user’s information that he/she uploaded on the platform gets misused then upon realization of the terms of the contract, he would technically not be in a position to sue the company in court because of the presence of the exclusion clause. Upon scrutiny, does this situation not sound highly inequitable in nature? The answer is yes; and that is why the justice delivery systems provide certain protections in similar cases.

THE PRINCIPLE OF CONTRA PROFERENTUM

The phrase contra proferentum, which is a Latin maxim, directly translates to ‘against the offereor’. This basically implies that any ambiguity that arises in such contracts shall be resolved against the party who has inserted it that is the stronger party or equivalently in favour of the weaker party.[6] We shall understand it in certain cases. In Lee & Sons (Grantham) Ltd v. Railway Executive[7], some goods of a tenant that were stored in the warehouse of the railway department caught fire and subsequently he filed a suit. But the defendants pleaded on the ground that they had put an exemption clause in their tenancy agreement which excluded them from any damage to the goods howsoever which “but for the tenancy hereby created would not have arisen”. But nevertheless, the court held that the company was liable because it opined that the phrase “but for the tenancy hereby created” was limited to only the relationship of the landlord and tenant, whereas in this case the fire was caused due to the negligent act of one of the servants of the landlord. Thus, this is how the principle of contra proferentum is utilized.

DESTRUCTION OF THE BASIC ESSENCE OF THE CONTRACT

In cases where the exemption clause renders the stronger party to the contract, free of the contractual liability which forms the fundamental essence of the contract, the court provides a remedy to the weaker party to the contract. In the case of Karsales (Harrow) Ltd. v. Wallis[8], the defendant agreed to buy a used car from the vendor, the claimant, on a hire-purchase agreement. Upon inspecti6ng the car after entering into the agreement, it was found that several parts of the car were missing, and it could not start ignition. Naturally, the claimant claimed compensation, but the defendant refused on the ground of the exclusion clause that read “no condition or warranty that the vehicle is roadworthy is guaranteed herein”. The court held the company liable for compensating on the principle of the destruction of the very subject matter or the essence of the contract as the essence of purchasing the car, in this case, was its roadworthiness.

To conjecture it, even though the humongous counts of issues arise in relation to the standard form of contracts with particularly the intricacies of the exemption clause, the courts have devised mechanisms for the safeguard of the weaker parties in such contracts. If we are to consider the case of India, then several provisions in the Specific Relief Act of 1963, Sale of Goods Act of 1930, etc. specifically provide remedies so as to deter the unjust utilization of the exemption clauses in the highly prevalent, standard form of contracts.

Author(s) Name: Anushmita Dutta (Dharmashastra National Law University, Jabalpur)

Image

[1] JEAN-JACQUES ROUSSEAU, THE SOCIAL CONTRACT: & DISCOURSES (JM Dent & Sons 1920).

[2] Justice K.K. Mathew, Law Commission of India, 103rd Report (May 1984).

[3] AVTAR SINGH, CONTRACT & SPECIFIC RELIEF, EBC Explorer (1st ed 1973).

[4] L’Estrange v Graucob, [1934] 2 KB 394.

[5] Aishwarya Singh, Exemption Clauses in Standard Form of Contracts, NLU Delhi (2016).

[6] CHESHIRE AND FITFOOT, THE LAW OF CONTRACT 129 (8th ed, 1972).

[7] Lee (John) & Sons (Grantham) Ltd v. Railway Executive, [1949] 2 All ER 581 (CA).

[8] Karsales (Harrow) Ltd. v. Wallis, [1956] EWCA Civ 4

Related Posts