This article is written by Esha Gautam, pursuing Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho. The article has been edited by Zigishu Singh (Associate, LawSikho) and Ruchika Mohapatra (Associate, LawSikho).
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In our current industrial society, growing standardized productions leading to standardized dealings with customers has taken a shift from customized contracts to preprinted standard contracts for even the most routine transactions. These contracts offer a host of benefits, but they come at a price. This article aims to enlist these benefits and provide solutions for the proposed disadvantages of entering into standard contracts.
What are standard form contracts?
Standard Form Contracts are a type of contract which contain standardized, preprinted and non-negotiable provisions. These are also called “boilerplate contracts” or “take it or leave it” contracts as they offer no room for negotiation. They are offered only for acceptance or rejection. These are usually used by big, multinational corporations who routinely deal in such transactions. It is drafted by, or on behalf of the corporations, which gives them superior bargaining power.
Standard form contracts fulfil an important efficiency role in the mass distribution of goods and services. Essentially, it helps to legalize a transaction by having a ready-to-sign contract without having to take the burden of making one for every single transaction. This reduces time, effort and transaction cost.
Benefits of standard form contracting
- Reduced Transaction Costs: By using a standardized contract, there is no need to make customized contracts for every transaction, thereby reducing the per transaction cost for both the contracting parties.
- Speeds up the Process: Since there are ready to sign contracts available, there is no need to get into the tedious process of negotiations,drafting and approvals. Consistency in contracts reduces the need of, and time taken, in negotiation, thus ensuring that the process gets completed quickly.
- Easy to Understand: As every contract contains the same terms and is used several times, it becomes familiar for both the parties thus making it easier for even a layman to understand and trust the contract.
- Not affected majorly by absence of negotiation: A well thought out standard form contract benefits and inures both the parties leading to terms which they ultimately would have engaged in costly bargaining for. Thus, the absence of negotiation does not necessarily imply exploitative contracts.
- Legalizes the Transaction: Legalizing the transaction eliminates the need for customized contracts for every individual transaction,making it more convenient to legalize a transaction with just a couple of signatures. This improves its admissibility without the lengthy process.
- Helps Build Trust: Since the transactions are legalized, suing for breach or remedy becomes much easier which builds the trust of the parties.
- Brings uniformity in practice: Over time, standard form contracts establish a body of case laws which can be referred to by the parties in case of disagreement over any issues. This benefits the whole industry.
- Consistency in contracts: At certain times, it has been observed that though the principal has offered a fair contract, the agent meddles and changes the contract to best suit himself; thus injuring the principal’s reputation and leading the customer to sign an unfair contract. Consistency in contracts means less room for deviation from the terms set out in the contract. Standard form contracts prevent the agent from making any unfair changes.
Disadvantages of using standard form contracts
- Boilerplate clauses: Boilerplate clauses are usually found at the end of the contract. These are usually miscellaneous clauses which contain standard language, which makes it very easy for the other party to overlook these clauses. Though these clauses do not make or break the contract like the main clauses, they are no less important especially in cases of disputes as they contain the place of jurisdiction in case of dispute, how disputes will be settled or dealt with, powers in case of a dispute etc.
Usually the area to pay attention to in a boilerplate clause is not what is written, but what is left out. Not paying attention to a boilerplate clause can leave the party at a disadvantage. For example, the boilerplate may not expressly convey that the winning party has paid the attorney’s fees, in which case it would be difficult to retrieve. Or, if the remedy to sue is not expressly allowed in the contract the parties may be forced to settle via arbitration and lose the right to sue due to the Arbitration Clause in the contract. Sometimes liquidated damages are already provided in the contract in case of a dispute, leaving no room for a bigger claim. Another such example is the place of jurisdiction, in case a dispute reaches court; this is an important clause that decides where the dispute may arise. If not seen properly, despite having the right to sue, a person may not be able to do so due to the inconvenient location of jurisdiction.
Since these clauses sound like legal jargon, even if a party decided to read it, they may not be able to understand it completely and would be bound to miss out on certain things in their favour. A layman would not be able to understand the contract.
- Price Fixing: Standardized contracts can often lead to the trap of price fixing. Price fixing is basically a practice where competitors in the market agree (verbally or written or inferred from conduct) not to sell their product, commodity or service at a price lower than the set price, thereby reducing competition in the market. This adversely affects the consumer, not to mention it is also considered illegal.
Some contracts, though standardized, leave the price blank, so parties can negotiate and agree accordingly. But the contracts in which the price is printed as part of the text, there is no room for negotiation and this can often lead to price-fixing. Trade unions have often been found guilty of this practice. Generally, if the price is part of the standardized contract, it is price-fixing. To avoid this, one should be careful, even if the price stated is a favourable one, there should always be a provision that allows for the price to be re-negotiated in the future.
- Legal jargon: As contracts use legal jargon and not common English, it remains a fact that a layman cannot completely understand all the connotations of every single word. The understanding of a word we have in English does not have the same connotations. So, even if one reads word by word, it is not possible for a common man to perceive the entire text. This leaves a layman with two options, either to hire a lawyer and have the contract interpreted to them, which is going to cost money, time and effort or to go into the contract with incomplete understanding which might leave him at a disadvantage at a later stage.
- Favoring one party over another: Though standardized contracts claim to be neutral, they favor the party who has made it, because it is the attorney of that party who has drafted it. Usually standardization is done by big companies and offered to small customers showing unequal bargaining power.
- Literacy rate: It is a fact that not all the parties transacting, especially small consumers would be literate. Even those who are educated, may not be able to understand all the terminologies of the contract and may end up making uninformed and irrational decisions. They are more likely to misplace their trust and get entrapped for whatever is written in such contracts.
There is a lack of legislation that governs exclusion of contractual liability due to unfair terms or in case of unequal bargaining power. As of now, it’s upon the court’s discretion to decide.
Some solutions to make standard form contracts more fair
Though standard form contracting faces certain disadvantages, those do not necessarily make it a redundant concept as it has many advantages as well. So to make standard form contracts more fair and favourable to both parties, there are some practices that can be incorporated.
- Contracts should be formed on the principle of ‘full disclosure’ so that it is fair to the other party and the contract occurs on actual meeting of the mind of the parties. Also these disclosures should be clear, unambiguous and simple, not pages after pages of incomprehensible fine print. These should be for lawyers to interpret but for a common man to understand.
- It should also be understandable. Sometimes it is observed that the companies disclose everything in the fine print, using this principle to defraud the consumers, thinking the more they disclose in fine print the more they can get away with. Many deceptive policies are buried in the fine print waiting to be overlooked.
- No matter how much they try, a layman will not be able to understand and interpret the entire contract. It would be advisable for him to hire a lawyer. The lawyer will briefly explain the entire contract to them without leaving anything out. Since standard form contracts save a lot of cost, some of those savings can be put to use here in order to actually have a fair transaction.
- The regulators which are responsible for industries which often use standard form contracts should require copies of the contracts to be submitted to the government agencies and be made easily available from the government database.
- The party making these contracts should suggest the other party to go through the contract thoroughly to avoid disputes later.
- Unfair terms and provisions which only benefit one party should be avoided, such as forced arbitration and waiver of the right to sue.
Legislation on standard form contracts
The Indian Contract Act, 1872 gives the essentials of a valid contract, which requires a valid offer and acceptance. This means that the acceptance must be with the full knowledge of all the clauses and provisions of the contract so as to ensure exact meeting of the minds. Though this provision does not protect a negligent person who chooses not to go through the contract, he must have had reasonable opportunity to have done so.
In Henderson v. Stevenson, the plaintiff bought a steamer ticket on the back of which there was a condition printed which excluded the liability of the company for loss, injury or delay to the passenger or his luggage. There was no indication of a condition written at the back and naturally, the plaintiff failed to see it. Later the plaintiff’s luggage got lost due to the company’s fault. The court held that the company was liable despite the clause which excluded its liability as the plaintiff was bound to miss it.
Generally, the opinion of the courts on this matter is that if there is an indication as to the conditions are given in the back on the face of the ticket then the party signing will be bound by it as the courts won’t protect against negligence, but if there is no indication or sign on the fact that there is a condition on the back, the party signing will not be bound by it.
In case of an unfair term in the contract, courts have sided with the party whose loss the term causes despite the party has signed the contract. If a term is unfair to any party to the contract or if it is not in the public interest or if it is against public policy, the courts have ruled against it. No test has been established to identify these terms. It rests on the court’s discretion.
Unlike England, where the Unfair Contract Term Act 1977 exists, there is no legislation in India as of now which rules on unfair terms or exclusion clauses. In Central Inland Water Transport Corp. Ltd v. Brojo Nath, the Supreme Court struck down a clause on the ground of being unreasonable and against public policy. The clause provided that the service of a permanent employee could be terminated by giving a 3 months’ notice or 3 months’ salary.
Standard form contracts having their share of advantages are not free from disadvantages. These have to be used and signed with a lot of care. Signing them without thoroughly going through all the fine print is a mistake that can cost one a great deal. Since these contracts are often between parties with unequal bargaining power, it is easier to exploit the vulnerable party in the contract. The courts have time and again protected such parties by ruling in their favour. However, despite having drawbacks, they should not be declared redundant as they offer exemplary benefits. With a few fixes and solutions, they can be beneficial to both parties.
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