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This Article What is the Standard form of Contract? Its adaption throughout the world and implications on International transactions is written by Sanjay Rawat. He is a 5th year BA.LLB student at Lovely Professional University.


1. INTRODUCTION

In a general sense, no law is without contractual obligation. All laws create some obligation either on the part of the state or citizens to which they must abide. Any breach on anyone’s part is backed by punitive actions or compensation. Contracts are therefore a legal medium to regulate human promises against each other. English philosopher, Thomas Hobbes’s ‘Social Contract Theory’ to an extent explicates the same reasoning that humans surrender some of their rights to the state or king for individual protection, peace, and equality.

Legally, a contract is a promise enforceable by law. The promise may be to act to do something or to abstain from doing something. According to the Indian Contract Act, 1872, ‘Contracts are agreements enforceable by law’[1]. An agreement must be legally enforceable to become a contract which means no agreement in contravention of law sees the light of the day.

1.1 Section 10 of the Indian Contract Act

The process of a contract starts with a promise (offer and acceptance). It completes when all other essential elements of a contract are met.

For example, there should be an agreement between the parties. And that agreement should be made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not expressly declared to be void by other provisions of the contract act.

To simplify, in accordance with Section 10 of the Indian Contract Act, an agreement becomes a valid contract if it contains the following essentials along with the enforceability of law.

  • At least two parties
  • Proper offer and acceptance between the parties
  • Parties must be competent to contract
  • Free consent
  • Certainty and possibility of performance
  • Agreement not declared as void or illegal
  • Lawful object and agreement
  • Lawful considerations
  • Legal obligations and intentions to create legal relationships
  • Legal formalities

In today’s e-world, Contracts are of innumerable types and forms. Whereas, this paper elucidates on only one particular kind of contract, i.e. Standard Form of Contract. Further tries to highlight its adaption throughout the world and its implications on International transactions.  

2. WHAT IS A STANDARD FORM OF CONTRACT? NATURE, AND OBJECTIVE.

To draft a contract from the very inception is a cumbersome, time-consuming and expensive job. Not only do we need to have some efficient lawyers also making the client, customer or management understand the contractual jargon is perplexing. Similarly, it is not feasible for big businesses, companies and industries or governmental agencies like railways to draft different contracts for every other individual. To refrain from complexity and smoothen the process, the Standard Form of Contract comes into the picture.

2.1 Meaning

To put simply, the ‘Standard form of Contract’ is in general a contract which is pre-fixed, non-negotiated, and based on uniformly set conditions by a party to a contract against anyone who wishes to enter a contract with him.

For instance, whenever we download any ‘Application’ from the google play store or online, it comes with a kind of ‘Standard Form of Contract’ displayed as ‘Terms and Conditions’. These ‘Terms and Conditions’ are in standardised form for everyone who wishes to use that App. Only if we agree with it, we can use the application and not otherwise. These “Terms and Conditions’ are pre-printed, equal for all customers and non-negotiable.

2.2 Nature of SFCs

The natural course of these forms of contracts is economically efficient for business transactions and less perplexing. Innumerable positive objectives like its economic efficiency, cost-cutting and almost zero negotiation quality associated with SFCs make it prevalent and preferred in the contemporary world.

However, these forms of contracts have become very deceptive with the advent of the digital world. People click on the “I Agree” button on various digitalized standard forms of contracts daily on the internet. They don’t even realise that they have entered into a contract. If you ask them whether they have ever in their life entered into any contract with anyone. The plain answer of most of them remains negative. Therefore, these forms of contracts always put one party at the higher end, this party has usually greater bargaining power.

 2.3  BATTLE OF THE FORMS AND STANDARD FORM CONTRACTS

The use of standard form contracts can lead to a battle over whose form it is that is the contract. Consider the following situation:

The manager of an organisation (Buyer) emails a Supplier (Seller) requesting a quote to be supplied with paper bags with the Buyer’s standard form contract attached.

Seller replies. Providing a quotation with its standard form contract attached.

Usually, all will run smoothly, and the question of whose standard form contract applies will not become an issue.

However, when something goes wrong (Defective product. Failure to pay or anything. The battle of the forms makes the issue all the more difficult, time-consuming, and expensive to resolve.

So, It is important to ensure that when there are different standard forms being passed around, that the parties agree on whose standard form is to be the contract for the transaction.

3. STANDARD FORMS OF CONTRACT: INDIAN CONTEXT

In India, any kind of contract can be executed provided it fulfils the essentials under Indian Contract Act. Therefore, the Standard forms of Contracts in general keep an equal position in the Indian scenario. Very similar to any other contracts. However, the decisiveness and dominating nature of these contracts sometimes touch to contradict the provisions of the above-stated Act. In such scenarios, Judicial Interpretation comes to the rescue.

3.1 TWO STYLES OF STANDARD FORMS OF CONTRACT IN INDIA

It would also be not wrong to state that the entire jurisprudence of Indian law on this subject has evolved through the judgments. The courts have found two styles of standard form contracts prevailing in practice. It is based on the allocation of bargaining powers among the parties.

  • One is a  result of continuing discussions among equal players in the industry. Such contracts have received approximately legitimate acceptance because they facilitate the conduct of trade and raise a presumption that their terms are fair and reasonable.
  • In the second style the parties don’t have equal negotiating power. One party is always at the lower end. It is of a modern origin and these businesses are generally transacting with consumers who have comparatively lesser bargaining power or no negotiating power. And also have no option but to sign across the dotted line, howsoever, unreasonable the terms of the contract may be[2]. These contracts are normally referred to as ‘adhesion contracts’.

Black’s Law Dictionary defines them as a standard form contract prepared by one party, to be signed by another, usually a consumer, who, being in a weaker position, adheres to the contract with little choice about the terms. These contracts are loosely interpreted by courts in favour of weaker parties.

3.2 Supreme Court’s Views

In the words of the Supreme Court of India, ‘the ‘standard form’ of the contract is the rule. One must either accept the terms of the contract or go without. Since it is not feasible to deprive oneself of such necessary services, the individual consumer is compelled to accept those terms. In view of this fact, it is quite clear that freedom of contract is now largely an illusion[3]

In India, courts have ascribed higher value and enforceability to negotiated terms over standard terms. Therefore, while ruling on the nature, meaning and extent of operation of standard terms, the courts have opted for interpretations that seem to be in consonance with the main object or intent of the parties involved. If the intentions of the parties are not clearly captured, then a strict construction of the contract is adopted. Mostly, the standard terms are interpreted in favour of the weaker party.

For instance, when an insurer contracts through a standard insurance contract to the insured, then ‘in case of real doubt, the policy ought to be construed most strongly against the insurers; because they frame the policy and insert the exceptions.’ This rule is significant in a standard form contract as one of the parties is generally forced to accept the terms without any discussion or negotiation.

 In this regard, the following observation of the Supreme Court of India in January 2020 is relevant:

There is no gainsaying that in a contract, the bargaining power is usually at equal footing. In this regard, the joint intention of the parties is taken into consideration for interpretation of a contract. However, in most standard form contracts, that is not so. In this regard, the Court in such circumstances would consider the application of the rule of contra proferentem, when ambiguity exists and an interpretation of the contract is preferred which favours the party with lesser bargaining power”[4]

The Courts of India work on the Doctrine of unconscionability. Therefore, strikes out any contracts which are understood as unconscionable by the court

4. ADAPTATION OF STANDARD FORMS OF CONTRACT IN GLOBAL CONTEXT AND INTERNATIONAL USAGE

Unlike India, many countries across Europe and parts of the world have made specific legislation to adopt and regulate SFCs.

4.1 The United States

The United States have specific provisions for SFCs under its Uniform Commercial Code. SFCs are made subject to special scrutiny by the company to decide if the SFCs are enforceable or not. It is done in two ways.

They see that if it contains such terms and conditions which a reasonable man would not even expect of and if the parties are contracting on an unequal basis then it is not enforceable. Also, the purpose, prominence and circumstances of terms are taken into consideration.  Also, the doctrine of unconscionability is used in order to decide which we have already talked about.

4.2 Israel

In Israel the government has tried to use both judicial and administrative approaches to cope with the problems of standard form of contracts.

Israel then enacted a statute to deal with “restrictive terms” and “standard contracts” taking and covering large number of contracts or agreements who try to offer a service or product and where the terms are already decided by the other party. With this the novelty of Israel lies with the formation of administrative board helping and assisting the Israeli courts in the matters of standard contracts. Board has power to approve the restrictive terms and represent both company/supplier and consumer. And is directed to see in the light if these contracts or terms are not prejudicial to anyone.

This system of administrative board is efficient and useful and is very positive step in adjudicating such contracts as it is uniform in its results and also the quality of adjudication.

United States also is considering and examining this system in order to apply in their system but there are various implementation issues related to its which make Israel special in maintaining and keeping this dual system[5].

Other Countries

Whereas some countries like China are a little reluctant in terms of using SFCs in global markets. People’s Republic Of China has not yet formulated any Commercial Code. And also its law sources have reduced in numbers over the past few years. But not trading with international markets and companies. Thus the companies of P.R.C use intensive use of Standard Form of Contracts. It can also be seen through studies made by law experts on the policies and legal practices of P.R.C[6]

4.3 The benefit of the Standard form of contract in International Business

In the contemporary context where the world is itself a global village, it becomes essential for economies to work efficiently. This can be achieved by saving time and cost, the SFCs provide a haven for all kinds of business today. SFCs provide the following benefit in international business.

  • They save time in writing particular purpose drafted contracts on every occasion;
  • They save the cost of lawyers drafting a contract every time one is needed;
  • The fact that the circumstances are the same and the need to have a particular contract is not required;
  • Using a standard form contract means the parties are familiar with its terms. This makes it easier for them to use it.

CONCLUSION

Therefore, to make the best possible International standard form of contract which passes all the global legal intricacies of different countries, a thoroughly drafted Standard form of Contract is important for the smooth economic transaction. To do so the solutions can be

  1. Parliamentary Contemplation: The impact of additional regulations in this area of contract would serve as checks and balances between parties in a contractual relationship. Even where the party with the higher bargaining power has an intention of taking undue advantage of the other party through a contract of adhesion.
  2. Judicial Activism: Adoption of the doctrine of unconscionability, which helps parties to achieve fair bargains through the intervention of the court prying into the contractual relationship compelling the amendment or outright rejection of any contract that contains unfair term(s).
  3.  Consumer Education. Government agencies and regulators should equip consumers with the necessary information required and pay attention to the contract beyond the price and quality of goods but also every term of the standard form contract. This will reduce or forestall fraud and deception from merchants, and promote better buying decisions and fair contracts

Clearly, it must be noted that there is nothing like a perfect contract but a fair contract and this invariably makes contracting parties vulnerable and also suffer as a result.


[1] The Indian Contracts Act, 1872 (Act 9 of 1872) , s. 2

[2] Bank of Baroda v. Susmita Saha, 2019 Indlaw DEL 263

[3] Delhi Transport Corporation v. DTC Mazdoor Congress, 1991 Supp (1) SCC 600

[4] Gurshinder Singh v. Shriram General Insurance Company Limited, Civil Appeal No. 653 of 2020, 2020 SCC OnLine SC 80

[5] Columbia Law Review Association Inc., Comment: Administrative Regulation of adhesion contracts in Israel available at: http://www.jstor.org/sable/1120987 (last visited on August 5, 2022).

[6] Smith Alan H, Standard Form Contracts in International Commercial Transaction of The People’s Republic Of China, available at: http://www.jstor.org/stable/757629 (last visited on August 5, 2022).

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