The law must define unfair contract as a principle and draw up a comprehensive list of such terms
Towards the close of the monsoon session of Parliament, the government introduced the Consumer Protection Bill, 2015, in the Lok Sabha. The Bill is aimed to replace the pre-liberalisation era Consumer Protection Act, 1986. In these 30 years, there has been an expansion of the list of goods and services available to the consumer, the coming of e-commerce, vigorous sales promotion and aggressive advertising. The Bill addresses the new economy and the new consumer but, as a work in progress, its content and expression need sharpening. Protection against unfair contracts is one of the several features of the Bill.
A courier company disclaims any responsibility for delivering a consignment; an airline appropriates the entire ticket value as penalty on a passenger cancelling a ticket; a builder demands a large forfeit-able security deposit. These contracts have asymmetrical rights and obligations and are unfair. In India, however, unfair contracts are binding!
Indian contract law is drawn from the British common law. British courts emphasised that as contracts, by their very nature, were voluntarily formed, the courts must not interfere with the terms. From the middle of the 20th century, as businesses developed, corporations printed standard-form contracts to deal with their customers. In standard-forms, corporations exempted themselves from liabilities and limited the rights of the customers. This left the courts in a bind. The courts could neither interfere with the terms nor be silent witnesses to a strong party imposing itself on the counter-party.
Lord Diplock, in a judgement in 1974 describing standard-form contracts to be “of comparative modern origin”, expressed dismay that the corporations, being stronger, effectively offered the customer “take it or leave it” choices. Lord Denning, who attempted to reform this, corrected that the customer in many cases did not even have this freedom. Instead, she was simply given a form and told: “Sign here.” And if things went wrong, the corporation would say: “You have no claim. Look at the conditions on the form. You signed it and are bound by those conditions.”
British courts attempted to fashion remedies for the customers, but their hands were tied. The initiatives were spirited but did not go far. As Lord Denning conceded, they had “contorted” the principles of contract law to fashion remedies for the customers. The legislature stepped in to address the problem. British Parliament enacted the Unfair Contract Terms Act, 1977, to address unfair terms in standard form contracts and consumer contracts. This has been followed by the Unfair Terms in Consumer Contracts Regulations, 1999. In addition, other Acts, though not exclusively on unfair terms, have addressed the problem.
We have not had a reform in our laws and continue to follow the older version of the British law. The new Bill addresses this need. A consumer can approach a consumer forum if he suffers “a loss due to an unfair contract entered into by him”. The Bill lists five kinds of terms which can make a contract unfair. These include, one, the requirement of an excessive security deposit. This seems to be drawn from the housing contracts. Two, a lender refusing to accept early repayment even on paying the penalty. Three, right of the seller or the service provider to terminate the contract at will. Four, hefty damages on the consumer compared to the losses suffered by the other party. The last entry in the list is “any unreasonable charge, obligation or conditions which puts the consumer at disadvantages”. This is the general principle of an unfair contract. The EU directive sees it as a term significantly tilting the rights and obligations against the consumer.
In the arrangement followed in the Bill, several unfair terms will not get covered by the specific listing—for example, the courier service contract cited earlier in this column, where the service provider exempts itself from the very performance of the contract. These will have to be contested under the last listing of the general principle of unfair contract. In each contract, the consumer will have to establish that the terms are unreasonable. This is an unnecessary burden on the consumer. The intention is to give remedy against unfair contract terms. An effective way of doing this is to express an unfair contract as a principle and follow it up by expanding the existing listing of five into a comprehensive illustrative listing. The UK law, based on the EU directive, illustrates unfair contract terms with 16 kinds of terms.
Coming to the remedy against an unfair contract term, a contract is binding but not the unfair terms in it. Thus, a contract should be enforced without unfair terms. If the contract cannot survive without unfair terms, the contract would fall. If the parties have part performed the contract, the benefits should be restored to the parties. Alternately, the contract should be taken to be part performed and the rest abandoned. The Bill does not contemplate the different trajectories an unfair contract can take and specify remedies. A clear statement on remedies is central to a meaningful protection against unfair contract terms. In fact, as consumer councils are quasi-judicial bodies, a clear and specific direction is imperative.
The author is professor,