THE NOTION OF FREEDOM OF CONTRACT IN CASE OF STANDARD FORM OF CONTRACTS

This article was written by Ayushi Raghuwanshi a student of NALSAR University of Law.

ABSTRACT

I have first presented the argument which is the very foundation of the analysis carried on in the research. Then I went on to expatiate on my central argument by giving a brief overview of the condition in U.S.A, U.K, and India. I argue that the the doctrine of freedom of contract is self contradictory and it frustrates the efforts of court to come to a specific conclusion about what is the limit and scope and the definition of the freedom of contracts. Towards the end of the project I have concluded by giving my opinion on the same.

INTRODUCTION

The classical theory of Law of Contracts proposes that contracts are self imposed obligations entered into by the parties in the exercise of their “freedom of contract”. The doctrine is based on the presumption that Individuals are free and equal. The natural law philosophers who also uphold the doctrine justify the same by laying down that “In providing the freedom to enter into contract , the individuals are given a piece of sovereignty”[1]. This means that state does not have monopoly in determining laws and the individuals do govern themselves by participating in a private legislation called contract. This is also indicative of decentralization of law.

However ,the application of the principle of freedom of contracts become very problematic when one takes into account the modern day Adhesion contracts or Standard from of contracts ( I shall refer to them as SFCs for the sake of convenience). On one hand ,in a free market economy such contracts are feasible as they reduce both cost and risks (due to insertion of certain clauses) whereas on the other hand they are seen as a misuse by a giant corporation or body of their higher bargaining power to the detriment of the other (who is in the present case mostly an individual). Hence the courts have to take the onerous task of deciding whether to interfere by enforcing or not enforcing some such contracts which are entered into by individuals freely and voluntarily. In addition to this the state also find itself in a dilemma of whether to make laws favoring one party more than the other.

ARGUMENT

The very problem in deciding the cases of SFCs with equal respect to the individual freedom and choice lies in the dual character of the doctrine of freedom of contract. It is the most important and difficult task to decide what is meant by this freedom. It has got two meanings Firstly, it means that the individuals are free to enter into contracts with whosoever they want and on whatever terms they want[2]. Secondly, it means that the parties should be able to do so without the interference of the state. It is the fusion of these two ideas which creates problem when it comes to the SFCs. If state interferes the strict followers of the principle take it as a violation of the freedom and if the state does not interfere the party having lower bargain power in SFCs is the one denied freedom under the same doctrine (because such contracts are take it or leave it kind and so the terms decided already by the powerful are imposed on the weak).

RESEARCH ANALYSIS

A Standard from of contract involves various issues which become pertinent while deciding a particular case. These are :-

1.Unfair terms in the contract: These can simply be present because the task of drafting is taken by one party which is mostly a giant business entity guided by self-interest.

2.Unequal bargaining power: The inequality can be due to (a).Disparity in the size of the business[3](b).offeror’s non competitive or monopolistic nature.

3.consent of the parties: This is present in most cases of SFC’S even when the abovementioned factors are present. The consent is hardly vitiated by factors like fraud or misrepresentation (In cases of SFC’S).

As the important issues related to the SFC’S are already mentioned it is important to note that these cannot be treated in isolation to the idea of freedom of contract. Hence there is a consistent skepticism with which the court deal with those cases in which a Standard from of agreement is contracted between two parties of unequal bargaining power with their free consent[4]. This is also the reason for why the courts are reluctant to justify any interference in the private contracts as being opposed to “public policy”. Because in such cases the individual choice would be restricted by the subjective interpretation of the court of the meaning of the vague entity called Public Policy.(Because anything and everything can be taken as being opposed to the public policy depending on the time and circumstances in which a contract is being made).This would be a serious restriction again on the freedom of the parties to the contract.

The jurisprudence and the outcomes of various cases involving struggle between the terms of SFC’S and the freedom of contracts is different in different countries. For the purpose of this analysis I have briefly made a comparative study of the ideals followed by the USA, U.K and India in deciding the cases. This is done in order to show the wide gamut of problems involved in this intricate issue and how various countries deal with it.

The USA

The USA being a state with liberal philosophy and a penchant for laissez-faire, is more inclined towards the individual freedom (to enter with whatever terms whichever party wants). This is with indifference to the fact that one party might not enjoy freedom. The goal is total economic interests. In 20th century, the US court set a landmark by striking down a law in the state of Kansas which forbade any anti-union terms in the formation of a standard from of contract between employer and employees[5]. The court said that it is not governments job to ensure equal bargaining power.[6] In justifying it’s decision in such terms the court clearly established that freedom of contract meant no state intervention. The court did not take into account the freedom of the party with less or no bargaining power (laborers) and undermined it under the overarching economic goal. Thirty years since the judgement the jurisprudence took  only one aspect of freedom as correct and pertinent. However, the court reversed its standing in the 1937 case of West Coastal V Parrish and upheld a Washington state law setting minimum wage.

The later developments in American situation however mitigated the situation to a large extent.  The libertarianism and laissez faire still dictate the jurisprudence but there is a realization that less harm is ensured in cases in which state interferes than in those in which it does not.

the u.k

The UK with its more welfaristic attitude find the true freedom in having equality in bargaining power and if there is inequality the state considers it as its prerogative to interfere by making certain protective laws. In various cases of SFC’S the courts have tried to develop a jurisprudence which is more protective of the party with less bargaining power. However, The courts did not assess the terms on the basis of their merits and said that we think that the clause is unreasonable and therefore cannot be enforced [7](because then it would have been a direct affront on the doctrine of freedom) instead they adapted the common law understanding to formal rules of interpreting the contents of the contracts. This was called as Construction of Contracts.

The rules of construction:

 The clause excluding liability is incorporated if it is the part of the contract and it becomes a part of contract when reasonable notice[8] is given to the party consenting.  Further  for a reasonable notice to be given the document so agreed upon should be a contractual document[9] and not a mere receipt. The courts further take the time at which the reasonable notice is given into account to decide whether the notice is given at all.

After it is decided that a clause has been incorporated, the task of construing whether the the clause in question contains the breach that had occurred. For this rules like Contra Proferentem[10] are applied and they again favor the party who has to accept the clauses without any negotiating power. There is yet another powerful doctrine of Fundamental breach which in current position is not applied (after the photo production case) while deciding cases.

The jurisprudence however is not very explicate about the demarcations between the do’s and don’ts in SFC’S in order to both protect the weak party and at the same time uphold the freedom of contract (with respect to the terms and clauses) of the other party. For example, The approach of interpretation involving straining the meaning of clauses in a commercial contract in order to limit their effect has been criticized by The House of lords.[11] This again shows a tension between the Freedom of contract and the curb on its misuse.

THE INDIAN POSITION:

The ICA, 1872 being a British Indian law is heavily influenced by the common law principles. And the State again favors fair and just transactions between individuals. The courts and the state do recognize the freedom of contract but at the same time find it just to interfere in SFC’s where there is no actual freedom with one of the parties. The apex court in a decision said that “If a clause in a contract is found unreasonable or unfair, one must look at the relative bargaining  power of the parties”[12] This shows that the Indian courts are keen on protecting the freedom of the parties in terms of their equality. The courts have used Phrases like “So unconscionable so as to shock the conscience of the Court”[13] in order to justify any interference.

But when the question arises about the State interference by the way of making laws which forbid any specific terms in a SFC there are two sides to the story. Laws like minimum wage laws prima facie are in interest of the laborers in whose interest they are made as the employee with higher power can then not contract with its employees for less than a wage so fixed by the law. But on a darker side such laws may lead to low employment as the employer would then only want to contract an employment agreement with less number of workers to avoid losses. Also there are laborers who might be willing to work for a wage lower than that set by the statute, but they are not employed. Here again comes a critique of such laws and it becomes much easy to criticize in terms of violation of freedom of contract (due to state interference). So in a dispute between parties  to such a SFC in which the employee agrees to work on a lower wage the court by applying its unequal bargaining power doctrine might unjustly set aside a happily entered into contract between the parties. In such a case “the government in it’s paternalistic wisdom takes away the choice of the workman”.[14] The Industrial disputes act 1947 set a threshold limit after which the companies have to take permission of the state to fire the workers. This is again a serious restraint on the freedom of the contract of the companies.

CONCLUSION

Among the three countries the American understanding of the freedom is the most stringent one whereas that of India and U.K is on similar lines. The courts in all the three countries have to make a hard choice in deciding the cases involving such issues. The two folded nature of the doctrine of Freedom of contract needs a scholarly intervention and it needs to be redefined first so that the courts are not under a persistent dilemma of upholding one of its principle at the cost of the other. If the contracts are assumed to be of utmost sanctity, it is equally important to consider that they are meant to benefit the society as a whole instead of just the two individuals involved in it. Hence in the wake of development in the philosophies of both state and governments it is feasible to strike down that aspect of the freedom doctrine which espouses no state intervention. A whole gamut of problems can be solved if state and judiciary are considered separate (which in fact is the case) and it is left with the courts to decide based on the laws which are made for general public welfare whether a particular clause or contract itself  is uphoding the freedom of the two parties. This  For this purpose freedom of contract should become the freedom of fair contracts which can be defined as the freedom to enter into an agreement with the parties of one’s choice with involvement of such terms which cater to the interests of both the parties.

[1] Freidrich Kessler, Cohen, The Basis of Contract (1933) 46 HARV. L. Rev

[2]Ibid.

[3]Dicey, Law And Public Opinion In England, 2nd edition (19140 p. 157

[4] section 13, The Indian Contract Act ,1872;consent is said to be free when it is not vitiated by Fraud , misrepresentation, mistake, coercion or undue influence.

[5] See Coppage v. Kansas, 236 U.S. 1 (1915) S.C.Justice Pitney in his opinion said that “it is evident that some persons will have more property than the others based on which there would be inequalities of fortune; and it is impossible to uphold freedom of contract and the right to private property without at the same time recognizing as legitimate those inequalities of fortune that are necessary results of the exercise of those rights”.

[6] Ibid.

[7]Richard Stone, Contract law (Cavendish) (2003)

[8]Henderson v Stevenson, (1875) 32 LT 709.The reasonable notice of the printed terms and conditions is necessary. In case of Henderson v Stevenson, it was held that if the party is not duly directed with the help of a conspicuously visible mark on the contract document about the exclusion liability, it is considered as not incorporated in the contract.

[9]Parker v South Eastern Railway co,(1877) 2 CPD 416. A document is said to be contractual if it embodies the contract that is to say, if the person to whom it is delivered should know that it is supposed to contain the conditions. In any other case the paper would be taken as a mere voucher or receipts which are not contractual document.

[10]Richard Stone, Contract law (Cavendish) (2003)If there is any ambiguity in an exclusion clauses, then it is interpreted against the person putting it forward.

[11]Mitchell George v Finney Lock seeds (1983).

[12] Life Insurance Corporation Of India v Consumer Education and Research Center (1995) AIR 1811, 1995 SCC (5) 482.

[13] Ferro Alloys Corp ltd v AP State Electricity board (1993) AIR 2005, 1993 SCR (3) 199

[14] India Institute, The road to hell is paved with good intentions ,Employment contracts and labour laws, 2014, at 1, http://indiai.org/blog/the-road-to-hell-is-paved-with-good-intentions-employment-contracts-and-labour-law/ (last visited Apr 9, 2015)