Report No. 199
Standard form Contracts and Their Nature
The device of a new type of contract i.e. standard form contract, is common in today's complex structure of giant corporations with vast infrastructural organization. The use of standard terms and conditions is confined not only to contracts in commercial transactions, but contracts with public authorities, multinational corporations, or in banking and insurance business etc. Standard form contracts have become common place in the trade practices of the 20th and 21st century. They are found in almost every branch of industry and commerce, consumer contracts, employment, hirepurchase, insurance, administration, any form of travel, or the courier services, or while downloading software contracts from the internet, etc.
But there are also dangers inherent in standard form contracts. First, the bargain before parties contract, is not on equal terms and one party invariably has to sign on the dotted line, with no opportunity for that party to negotiate over the terms at all. Secondly, one party may be completely or relatively unfamiliar with the terms or language employed by the other. This may be compounded by the use of fine print and exclusionary clauses. Thus the characteristics, usually and traditionally associated with a contract, such as freedom of contract and consensus ad idem are significantly absent in these so-called standard form contracts.
The standard form contracts have varied names, the French call them "Contracts d'adhesion", and the Americans call them "adhesion contracts" or "contracts of adhesion". In Black's Law Dictionary (7 th Ed. p.38), 'Adhesion contracts' are defined as follows:
"A standard-form contract prepared by one party, to be signed by the party in a weaker position, usually a consumer, who has little choice about the terms. Also termed Contract of adhesion; adhesory contract; adhesionary contract; take it or leave it contract; leonire contract.
Some sets of trade and professional forms are extremely one-sided, grossly favouring one interest group against others, and are commonly referred to as contracts of adhesion. From weakness in bargaining position, ignorance or indifference, unfavoured parties are willing to enter transactions controlled by these lopsided legal documents" Quinlin Johnstone and Dan Hopson, Ir, Lawyers and Their Work, 329-30 (196).
Standard form contracts are usually pre-printed contracts that are only "contracts" in name. The standard terms and conditions unilaterally prepared by one party are offered to the other on a take it or leave it basis, rather, the terms are forced on the other party. The individual participation consists of a mere adherence to the document drafted unilaterally and insisted upon by the powerful enterprises who could abuse their position under the garb of free will. The conditions imposed by one party on the other are never put into discussion. One has to just fill the blanks and sign on the dotted line. Clever suppliers of goods and services-providers seek to exclude or limit their possible legal liability by the insertion of exclusionary clauses in the standard form contract offered by them.
In the case of a person who takes a mediclaim policy, if one looks at its standard form, there is, for example, a restricting clause in the contract which says that any pre-existing illness that the policy holder suffers from will not be covered. It is uncommon to find an individual aged above 65 years who does not suffer from some medical problem or other. The policy contains another clause in fine print that in case of any life threatening situations that require immediate treatment the company "could" pay insurance cover, which means that they may or may not pay.
Then, there are contracts where one party is authorized unilaterally either to enforce or not to enforce the contract or to alter its terms wholly or within certain limits at its free will. Employment contracts contain certain clauses enabling the employer to terminate the contract without assigning any reason whatsoever. Some contracts permit one party to nominate its own employee, consultant or lawyer to act as arbitrator. Such terms could never be part of a contract, if parties were to negotiate the terms on an equal footing.
The standard form contract can be beneficial to both the parties if the terms constitute a fair balance between them. For example, use of such standard terms can enable the parties to make complex contracts with minimum expense of time and trouble in negotiating the terms to standardize the risks they face. Further, it takes advantage of lessons of experience and enables a uniform interpretation of all similar contracts. It is believed that simplified planning and administration, makes the skill of the draftsman available to all personnel and it makes risks calculable and increases real security which is the necessary basis of initiative and the assumption of foreseeable risks.
In Chitty on Contracts 'General Principles' (27 th Ed) (vol. I, 1994), the following passage in connection with the standard form contracts (paragraph No. 12.097) is referred to:
"Contracts in standard form. -- A different problem may arise in proving the terms of the agreement where it is sought to show that they are contained in a contract in standard form, i.e. in some ticket, receipt, or standard form document. The other party may have signed the document, in which case he is bound by its terms. More often, however, it is simply handed to him at the time of making the contract, and the question will then arise whether the printed conditions which it contains have become terms of the contract.
The party receiving the document will probably not trouble to read it, and may even be ignorant that it contains any conditions at all. Yet standard form contracts very frequently embody clauses which purport to impose obligations on him or to exclude or restrict the liability of the person supplying the document. Thus it becomes important to determine whether these clauses should be given contractual effect."1
1. Quoted in Pawan Alloys and Casting Pvt. Ltd Meerut etc. v. U.P. State Electricity Board, AIR 1997 SC 3910 at 3930 with approval.