FAIRNESS IN CONTRACTS: A CONSUMER LAW PERSPECTIVE
FAIRNESS IN CONTRACTS: A CONSUMER LAW PERSPECTIVE
– Raghav Parthasarathy, Teaching Associate, CEERA, NLSIU
A recent consumer dispute filed against M/s. Pioneer Urban Land and Infrastructure Limited, highlighted the unequal bargaining powers in consumer contracts. Bench of Justices U.U. Lalit and Indu Malhotra of the Supreme Court, while upholding the Order passed by the National Consumer Disputes Redressal Commission noted that the “term of a contract will not be final and binding if it is shown that the flat purchasers had no option but to sign on the dotted line.”
Freedom of contract and formulation of terms in any contract is an integral part of the personal liberty. Party to a contract with higher bargaining power usually tend to draw up contractual terms favouring self. And when a dispute arises, the tendency is to rely on those terms which were primarily prejudicial to the interest of the party with lower bargaining power. There are, however, principles and doctrines which are invoked to rescue the parties who are at the receiving end of the stick. Any contractual term which is ex-facie one sided, unreasonable and unfair, if it has been included in the contract, amounts to unfair terms.
Unfairness in a contract has to be ascertained from the terms mentioned therein. Any explicit usage of unfair terms in a contract is hit by Section 23 of the Indian Contract Act, 1872 (hereinafter referred to as ‘Contract Act’). Such terms which are patently unfair and unreasonable are held to be void and classified as opposed to public policy. Further, a party suffering breach in a contractual transaction has remedy under Sections 73 and 74 of the Contract Act. The “Theory of Unjust Enrichment” would be an apt representation, explaining the essence of this article. The Theory of Unjust Enrichment is an aspect which elaborates about how one party of the contract fends off from the loss of another, in other terms, unfair practices and unfair means used for deriving benefit from the contract. This theory can be traced back to the 18th century, even when there were options available as a form of remedy for the parties when there is any disadvantage caused to the parties. The humanistic nature of man would step in and would eventually lead to them finding ways to derive an unfair advantage over the other party of the contract. Various definitions for this term have been explained in various reliable sources, but the conclusion of all of them is a simple statement ‘advantage over the other party’. This article has its aim deeply rooted into finding out some of the provisions and legislations which are deeply associated with the terms, unfair, unjust and bargaining power.
A party’s power to bargain in a contract is dependent on the subject matter of the contract. One who has higher bargaining power in the contract has to be wary of the possibility of the Courts intervention in striking down clauses which are unconscionable. Particularly, clauses which tend to exclude or limit the liability of the parties will have to be looked into carefully. Therefore, in this context, power of the parties to bargain has to be essentially considered as one of the factors which can lead to unfair terms in a contract. The discussion in this article is restricted to unfairness in the terms of consumer contracts and briefly alludes to unfair trade practices.
What’s Unfair in a Contract?
The fundamentals of every contract lies in its basic features. Free consent, competent parties, lawful consideration with a lawful object and are not declared as void, those would be the basic elements which would attest for a valid contract. All these elements when adhered to give the contract the sanctity and essence of it having the backing from a legislation. If any one of these elements are astray that would cause for the entire contract to fall apart. When discussing about the unfairness in a contract, the consideration and the object of the contract must be mainly taken into consideration. The consideration is what makes a promise an agreements, hence it is essential for the consideration and the object of the contract to be valid. The major flaw lies in the very aspect of ‘human’ being a part of the contract. The humanistic emotions are what would cause a lot of disturbances to the sanctity of the promise which lies at the core of the contract, when the promise itself would be violated, there would be no point for the participants of the same to adhere to it and therefore they would find ways to satisfy their needs even if that would mean causing or having and undue advantage over the other party. As these were certain issues which were very prevalent, the Indian legislature looked into the issue and got to light The Consumer Protection legislation, which was the gradual result of the ‘consumer rights movement’.
The Consumer Rights movement slowly picked pace in India and as a result of this, a legislation for the protection of Consumers was enacted in the year 1986 (hereafter ‘Act of 1986). Even though this was the first legislation that focused exclusively on protection of consumers, the Monopolies and the Restrictive Trade Practices Act, 1969, (hereafter ‘MRTP Act’) had recognised and prohibited some of the unfair practices which were prejudicial to interest of the consumers at large. The definition of Unfair trade practice was incorporated in the MRTP Act, which was mostly from the perspective of regulating the competition in the market. Once the Act of 1986 was passed, most of the consumer disputes was decided by the consumer fora. The two legislations (i.e., MRTP Act, and Consumer Protection Act) running simultaneously, led to confusions regarding its operation and jurisdiction. This led to the overhauling of the MRTP Act and introduction of the Competition Act, 2002.
Most consumer contracts, due to large scale operations, resort to standardised forms. These forms are standard terms and conditions which are prepared by one party (the business enterprise) to be offered to the other party (the consumers). The participation of the other party is merely adherence, often unknowingly, to a document which is drafted unilaterally, without any negotiations. The Law Commission of India has taken note of the fact that the characteristics, usually and traditionally associated with a contract, such as freedom to contract and consensus, are absent from these so-called contracts.
Inadequacy in the law to address the situation was highlighted by making specific references to cases where, the High Courts and the Supreme Court intervened to protect the interest of the weaker party, without there being any legal basis. One example of such unfair term was found in an agreement of the Railway Administration. The contractual clause empowered the administration to cancel the contract at any stage. This clause was held to be void and unconscionable. In another case, the petitioner could not collect the prize money, which he won as a prize in raffle, within a period of three months due to the fault of bankers. Accordingly, the money lapsed to the State under a rule which was a part of the contract. The Court held in this case that the terms of the contracts are so unconscionable and if one of the terms is in terrorem and without any consideration known to law, it would be against public policy.
Several such unfair and unreasonable clauses have been taken note of by the Courts time and again, but due to reluctance of the Courts, no tests were laid down. In order to remedy the situation, the Law Commission recommended insertion of a new chapter IV-A and section –
“67A: (1) Where the Court, on the terms of the Contract or on the evidence adduced by the parties, comes to the conclusion that the contract or any part of it is unconscionable, it may refuse to enforce the contract or the part that it holds to be unconscionable.
(2) Without prejudice to the generality of the provisions of this section, a contract or part of it is deemed to be unconscionable if it exempts any party thereto from – (a) the liability for wilful breach of the contract, or (b) the consequences of negligence.”
However, no changes were made to the Act and the recommendations of the Law Commission remained without seeing the daylight. But as a follow-up measure, the Consumer Protection Act of 1986 was enacted which exclusively protected the welfare of the consumers. But, the provision with regard to unfair terms was still elusive. During this time, the Supreme Court of India came out with a landmark ruling in the case of Central Inland Water Transport Corporation Limited and Others v. Brojo Nath Ganguly and Others. The question addressed by the Court was relating to the interpretation of clauses in employment contracts. But the court laid down general principles which are applicable to other contractual matters. It held as follows –
“Article 14 of the Constitution guarantees to all persons equality before the law and equal protection of the laws. This principle is that the courts will not enforce and will, when called upon to do so, strike down an unfair and unreasonable contract, or an unfair and unreasonable clause in a contract, entered into between parties who are not equal in bargaining power. It is difficult to give an exhaustive list of all bargains of this type. No court can visualize the different situations which can arise in the affairs of men. One can only attempt to give some illustrations. For instance, the above principle will apply where the inequality of bargaining power is the result of the great disparity in the economic strength of the contracting parties. It will apply where the inequality is the result of circumstances, whether of the creation of the parties or not. It will apply to situations in which the weaker party is in a position in which he can obtain goods or services or means of livelihood only upon the terms imposed by the stronger party or go without them. It will also apply where a man has no choice, or rather no meaningful choice, but to give his assent to a contract or to sign on the dotted line in a prescribed or standard form or to accept a set of rules as part of the contract, however unfair, unreasonable and unconscionable a clause in that contract or form or rules may be. This principle, however, will not apply where the bargaining power of the contracting parties is equal or almost equal. This principle may not apply where both parties are businessmen and the contract is a commercial transaction.”
The argument of ‘being bound by a term of contract’, which has been signed by the party, without leaving any scope for negotiation, will not survive. Post this judgment, the focus on invoking Section 23 of the Contract Act, was followed in several other judgments to strike down those contractual clauses on the grounds of violation of public policy. It becomes imperative that a party with lesser bargaining power has to be protected from unfair terms in day to day contracts. In the case of Classic Kudumbam Retirement Community v. S.P. Sundaram it was noted that the freedom of contract is of little value when one party has no alternate option between, accepting set of terms, proposed by the other or doing without the goods or services offered. Gross inequality in bargaining power coupled with unreasonable terms favouring stronger party may indicate that the transaction involved compulsion or deception without there being any real alternative or choice. In fact, it clearly establishes the assent to unfair terms.
The most major distinction between the new and the old act, is to make sure that, the new one would encapsulate all the remaining discrepancies which the old 1986 act missed to over. The new act, by involving in the base aspect of the contract itself, ensure that the consumer rights have to be of utmost importance and have to of vital necessity to be looked into and taken care of. Unfair trade practices, as defined means to talk about the fraud/deception which is involved in the process of commission of trade and the main aim of these is to hurt the rights of the consumer. But not specifically mentioned that unfairness exists right from the stage of the contract itself.
Now due to rapid advancement in technology and increase in business through electronic medium, the discussion about unfairness in standard form contracts assume more relevance than ever. Despite having Contract Act of 1872 and the Specific Relief Act of 1963, there are no specific provisions to protect consumers, particularly from the extensive usage of standard terms. These standard form contracts have varied names as French call them “Contracts d’adhesion”, Americans call it ‘Adhesion contracts’.
To address this issue, the Law Commission of India in its 199th Report deliberated about having additional provisions for redressal against unfair terms of contracts. The report moots for a separate law to deal with two types of unfairness – ‘Procedural unfairness’ and ‘Substantive unfairness’. To understand what the term ‘fairness’ means in a contractual transaction, it is important to understand some of the fundamental concepts enumerated under the Contract Law. Insofar as the Procedural unfairness is concerned coercion, undue influence, fraud, misrepresentation and agreements without free consent have been classified. The Law Commission has also addressed the issue about the category under which ‘unconscionable bargain’ would fall. If it is placed under the head of undue influence, then the contract would be voidable. This may lead to a situation where the party entering into contract with another party of higher bargaining power would seek to adjudge the contract voidable solely on this ground. It is also highly undesirable, as this will lead to multiplicity of proceedings. Therefore, such clauses have to be necessarily adjudged as void due to it being opposed to public policy. The Contract Act further classifies certain agreements as void in specific scenarios where agreements are in restraint of marriage, trade and legal proceedings. These are, however, facets directly related to the public policy.
The aspect of fairness in a contract plays a vital role and to have a better understanding, the English Law reference on this subject is indispensable. The English law on Unfair Contract Terms Act, 1977, is a general law to govern unfair terms in the contract. But this piece of legislation is not applicable to consumer contracts and a special law called the Consumer Rights Act, 2015 has been in effect.
The old act took to perspective, all the practices which usually are conducted post the signing of the contract by the parties, but it hugely fails to look into the aspects where, the terms which exist in the contract, the terms which give it its legal presence and are being neglected. The new act seeks to do just that, it seeks to look into what goes on behind the formation of a contract and the events leading up to the signing of the contract by the parties. It looks at the aspects which might arise suspicion in the minds of the courts, even slightly hinting towards there being a possibility of unfairness which would cause a great risk to the consumers rights and to the fundamental rights that they are entitled to. The slightest sign of unrest or compulsion towards the attestation of the contract by the consumer, the new act gives an array of importance and protection to the consumers rights. This prevents the seller from making terms which would be unilateral and hugely benefit the sellers and not take into consideration the situation/state of the consumers.
Consumer Protection Act of 2019
The Consumer Protection Act, 2019 introduced the concept of ‘unfair contracts’ as a ground for filing complaint, in addition to already existing unfair or restrictive trade practices. This places the manufacturer, trader or service provider on the one side and the consumer on the other. The unfairness can be ascertained by such terms which cause significant change in the rights of the consumer and this includes –
- Seeking excessive deposit as security for performance of contractual obligations;
- Disproportionate imposition of penalty on consumers to that of actual loss;
- Refusing to accept early repayment of debts on payment of applicable penalty;
- Unilateral termination of contract without reasonable cause;
- Assignment of contract to the detriment of consumer, without consent;
- Putting the consumer to disadvantage by imposition of any charges, obligations or conditions which are unreasonable.
The provision was introduced keeping in mind the standard terms which are usually imposed on the consumers in e-commerce platforms, banking and other finance related contracts. It is essential to distinguish between ‘unfair terms’ and ‘unfair trade practices’. Upon reading Section 2(46) and 2(47) of the Act of 2019, major differences are clearly forthcoming. The term ‘unfair’ has been used in relation to the contract as well as the trade practice. As has been mentioned earlier, ‘unfair trade practice’ has been part of the legislative framework since MRTP Act of 1969. Whereas, the inclusion of ‘unfair terms’ in the legislation has been a longstanding demand and the Consumer Protection Act of 2019 fulfils it.
In the erstwhile Act of 1986, neither the State Commission nor the Central Commission had the power to declare any terms of contract as unfair. Whereas, the Act of 2019, has created the provision specifically empowering the Commissions to declare and any terms of contract, which is unfair to any consumer, to be null and void. This is a significant development in the area of consumer protection, which has clearly granted the power to challenge any clause which is unfair to consumers. Under the present framework, the establishment of Consumer Commissions are made at three levels – District Commission, State Commission and National Commission. The pecuniary jurisdiction of the District, State and National Commission has been set at value of less than rupees one crore, between one crore to ten crores and above ten crores respectively. This helps to ensure that, the number of products which could be covered under these very broad spectrums can be looked into, hence directly affecting and directly protecting the rights of the consumers. Not only that, but also would ensure that, the commissions would have a wider array of cases to look into rather than the earlier existing demarcations.
The power to declare any term as unfair has been granted to the State Commission and the National Commission. Sections 49 and 59 of the 2019 Act clearly provides for this power as follows –
“49(2) Without prejudice to the provisions of sub-section (1), the State Commission may also declare any terms of contract, which is unfair to any consumer, to be null and void.”
“59(2) Without prejudice to the provisions of sub-section (1), the National Commission may also declare any terms of contract, which is unfair to any consumer, to be null and void.”
The implication of having this provision in the Act will mean that the consumers can now directly challenge any particular clause in the contract as unfair before the State or National Commission. Through this provision, the power to review a contractual clause has been granted to the State and National Commission. Based on the relief sought, the Commission may grant relief in relation to such contracts if it is of the opinion that the contract has been unjust at the time when it was made.
These provisions which allow the consumers to directly take up an action to protect their rights in their territorial jurisdiction itself. This is one of the provision which would help for the ease of approaching the commissions by the consumer. The perspective of making not just the seller, but also the manufacturer also liable is one of the most stringent perspectives, which would ensure that, the manufacturers also fall into the mix of being questioned and being liable for their products and their quality which would likely have effect on the rights of the consumer. The cause and effect dimension has been most certainly been given a lot more emphasis to ensure the encapsulation of a lot more different aspects to fall under the category of liability for effects caused to the consumer.
The Act of 2019 has reflections of substantive unfairness where the contractual term can be unconscionable, oppressive or harsh in itself. It remains to be seen how effective the provision will be used by the Commissions in the coming days. The objective of the Bill is to ensure and empower the concerned authorities to take requisite measures to protect the consumers. By giving such wider provisions which would ensure that, the legislations would have to ensure that the rights of the consumers take the higher podium, which in itself is one of the most boldest steps the legislations have taken till date.
A promise, as defined is a declaration or assurance to do an act by someone. The breach of the same being the basis of the emergence of contract laws, consumer protection laws and other such laws which deal with such issues. Laws have been dealing with such problems from time immemorial and it has been one of the most weakest sections which have to be given a lot more importance. All the actions of various legislations have tried to decrease the issues which discuss about unfairness, but those actions are not enough for curbing these problems. The reason for that is because of the fact that, it is not a mutual actions which is being done to ensure these problems would be reduced, only governmental actions would never reduce the discords that people have. It is also the responsibility of the people to ensure that they would contribute to the reduction of the unfair treatment and misuse of the inherent goodness of people.
Due to increase in economic activities, there has been an exponential growth in the business activities, which has had an impact on consumers. Unfair terms in contractual transactions has become a significant issue in the recent times, especially in consumer contracts. Protection of consumers therefore, becomes paramount, and the responsibility of the State to bring in requisite laws to protect the interests of consumer. In this article, an attempt has been made to highlight the recent changes that are made to the Consumer Laws in India and more specifically the introduction of the Unfair terms in a consumer transaction. However, this has marked the beginning of changes in the legislation to protect the weaker party from exploitation under the garb of terms which are unconscionable, unreasonable and arbitrary. The remedies provided for in the Contract law has proved to be insufficient to address the issue of unfair terms in consumer contracts. Even though the transition has been a little slow, but is essential and significant to chart the part for future consumer contracts.
The major advantage of the new Consumer Law is that, it favours and it caters more to the needs of the consumers, which is an advantage. Looking at the way everything happens, it would ensure that, it instils a duty on the manufacturer, now that he would also be liable for actions and the seller as well making them be more stringent, informed about every working aspect and would ensure that they would take care of the work which is being done by them to resist any suits which would be issued to them, which would just increase the burden and the cost on their shoulders. Hence, it would be of benefit for them to pool in a lot more resources to make sure that they would prevent suits being lodged to their establishment which would just act as an added cost to their ongoing work load.
Featured Image from – https://www.laulegal.consulting/articles/2017/7/31/how-unfair-contract-terms-can-affect-your-business
 Pioneer Urban Land & Infrastructure Ltd. V. Govindan Raghavan, Civil Appeal No.12238 of 2018, Supreme Court of India, dated 02.04.2019.
 Order dated 23.10.2018 in Consumer Case No.238 & 239 of 2017.
 Indian Contract Act, 1872. Section 23 – What considerations and objects are lawful, and what not – The consideration or object of an agreement is lawful, unless –
it is forbidden by law;
is of such nature that, if permitted, it would defeat the provisions of any law; or
is fraudulent; or
involves or implies, injury to the person or property of another; or
the Court regards it is as immoral, or opposed to public policy.
In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void.
 Indian Contract Act, 1872. Section 73 – Compensation for loss or damage caused by breach of contract. Compensation for failure to discharge obligation resembling those created by contract.
Section 74 – Compensation for breach of contract where penalty stipulated for.
 Saransh Kothari, Theory of unjust Enrichment, Legal Service India.com, (31 Dec 2020) http://www.legalservicesindia.com/article/1351/Theory-of-Unjust-Enrichment.html
 Section 10 of Indian Contracts Act, 1872
 Monopolies and Restrictive Trade Practices Act, 1969, was introduced with an objective to curb the concentration of economic power to the common detriment by controlling monopolies and for prohibition of monopolistic and restrictive trade practices. The Act was repealed and replaced by the Competition Act, 2002.
 Section 36A of Monopolies and Restrictive Trade Practices Act, 1969
 Section 66(4) of the Competition Act, 2002, provided for exclusive jurisdiction of issues under the MRTP Act, 1969, to be adjudicated by the National Commission or State Commissions established under the Consumer Protection, Act, 1986.
 One Hundred and Third Report (103rd Report) on Unfair Terms in Contract, May 1984. http://lawcommissionofindia.nic.in/101-169/Report103.pdf
 H. Thathaih v. Union of India, AIR, 1957 Mad 82.
 Ramulu v. Director, Tamil Nadu Raffles. (1972) 2 MLJ 237.
 The Supreme Court of India relied on the definition as given by the American Law Institute in the case of Central Inland Water Transport v. Brojo Nath Ganguly (1986) 3 SCC 156. The term ‘Unconscionability’ has been defined by the American Law Institute (Vol.II)(Dealing with the Law of Contracts, in Section 208 at page 107). Section 208 – Unconscionable Contracts Term – “If a contract or term thereof is unconscionable at the time the contract is made, a Court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or may so limit the application of any unconscionable term, as to avoid any unconscionable result.”
 (1986) 3 SCC 156.
 Revision Petition No.4695 of 2013, National Consumer Disputes Redressal Commission, New Delhi.
 Winston and Strawn LLP, What is Unfair Trade Practices?, Winston and Strawn LLP, (1 Jan 2020) https://www.winston.com/en/legal-glossary/unfair-trade-practices.html
 Darren Punnen, Rahul Rishi, Payel Chatterjee & Gowree Gokhale, New Consumer Protection Law in India: Broadening The Horizon, Nishith Desai Associates, (27 Aug 2019) https://www.nishithdesai.com/information/research-and-articles/nda-hotline/nda-hotline-single-view/article/new-consumer-protection-law-in-india-broadening-the-horizon.html?no_cache=1&cHash=761270d01627de9ff2d1e43c52c5c21b
 Black’s Law Dictionary (7th Edition, p.38) defined Adhesion Contracts as – “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”
 One Hundred and Ninety Ninth Report (199th Report) on Unfair (Procedural and Substantive) Terms in Contract, August, 2006. http://lawcommissionofindia.nic.in/reports/rep199.pdf
 A contract or a term thereof is procedurally unfair if it has resulted in an unjust advantage or unjust disadvantage to one party on account of the conduct of the other party or the manner in which or the circumstances under which the contract has been entered into or the term thereof has been arrived at by the parties.
 A contract or a term thereof shall be treated as unfair if the contract or terms thereof are by themselves harsh, oppressive or unconscionable.
 See, Sections 13 to 19 of Indian Contract Act, 1872.
 See, Sections 26, 27 and 28 of Indian Contract Act, 1872.
 The Act is applicable to parties where there is an agreement between a trader and a consumer for the trade to supply goods, digital content or services, if the agreement is a contract.
 Colins Dictionary of Law, “Unfair”, The Free Dictionary, (1 Jan 2021) https://legal-dictionary.thefreedictionary.com/unfair
 Act No.35 of 2019 received the Presidential assent and was notified and published in the official gazette on 09th August, 2019. It came into force on 20th, July, 2020. The Act of 2019 replaced the Consumer Protection Act, 1986.
 Section 2(46) of the Consumer Protection Act, 2019.
 Section 28 provides for the Establishment of the District Consumer Disputes Redressal Commission.
 Section 42 provides for the Establishment of the State Consumer Disputes Redressal Commission.
 Section 53 provides for the Establishment of the National Consumer Disputes Redressal Commission.
 Muskan Narang, Consumer Protection Act, 1986 v. Consumer Protection Act, 2019, Law Circa, (13 June 2020) https://lawcirca.com/consumer-protection-act-1986-v-consumer-protection-act-2019/
 Smita Paliwal & Rajeev Rambhatla, India: An Overview Of The Changes To Be Introduced By The Consumer Protection Act, 2019, Mondaq, (24 July 2020) https://www.mondaq.com/india/dodd-frank-consumer-protection-act/969026/an-overview-of-the-changes-to-be-introduced-by-the-consumer-protection-act-2019
 Cambridge University Press, Promise, Cambridge Dictionary, (31 Dec 2020) https://dictionary.cambridge.org/dictionary/english/promise