Report No. 199

LIC v. Consumer Education & Research Center: 1995 (5) SCC 482

We next come to a case not involving service conditions. A case of unequal bargaining power arose in the context of a life insurance policy in LIC India v. Consumer Education & Research Center. The Supreme Court interpreted an insurance policy issued by Life Insurance Corporation of India by bringing in certain elements of public purpose. The court declared a term in the policy, pertaining to restricting the benefit of the policy only to those people employed in the Government, quasiGovernment or reputed commercial firms as void under article 14 of the Constitution.

It was stated that it is settled law that if a contract or a clause in a contract is found unreasonable or unfair or irrational, one must look to the relative bargaining power of the contracting parties. In dotted line contracts there would be no occasion for a weaker party to bargain as to assume to have equal bargaining power. He has either to accept or leave the service or goods in terms of the dotted line contract. His option would be either to accept the unreasonable or unfair terms or forgo the service for ever.

With a view to have the services of the goods, the party enters into a contract with unreasonable or unfair terms contained therein and he would be left with no option but to sign the contract. An unfair and untenable or irrational contract executed by a public authority is unjust and amenable to judicial review. LIC being a State within the meaning of article 12 of the Constitution, the court invoked article 14 of the Constitution and, in para 27, it further stated:

"In the sphere of contractual relations the state its instrumentality, public authorities or those whose acts bear insignia of public element, action to public duty or obligation are enjoined to act in a manner i.e. fair, just and equitable, after taking objectively all the relevant options into consideration and in a manner that is reasonable, relevant and germane to effectuate the purpose for public good and in general public interest and it must not take any irrelevant or irrational factors into consideration or be arbitrary in its decision. Duty to act fairly is part of fair procedure envisages under Articles 14 and 21. Every activity of public authority or those under public duty or obligation must be informed by reason and guided by the public interest."