To be self-reliant, first pass Unfair Contract Terms Bill

Prime Minister Narendra Modi’s call for Self-reliant India is being viewed with great hope. To achieve this Four ‘Ls’ are being taken into account – Land, Labour, Liquidity and Laws. This has given an option to many Western, Japanese and Korean companies which were thinking of shifting their manufacturing from China as a possible destination. Many state governments have started taking proactive steps to attract such foreign investors while providing business-friendly atmosphere. India has vast land and human resources which need some fine-tuning as per the requirement of the industries. Many measures have been taken through 20-lakh-crore stimulus package announced by the Prime Minister, for liquidity. The issue of laws is the one both Centre and states need to address.

Certain state governments have already relaxed several labour laws to woo foreign investments. A five-year tax holiday for the enterprises working in the development of infrastructure facilities has also been mooted. Foreign companies are allowed to do multimodal transport services in India even though they do not have registered offices here. RBI allows 100 per cent of foreign investment in the construction of roads and bridges. But still we could not attain the expected levels of FDI in the infra sector, maybe mainly because of bureaucratic hassles created due to unfairness in the contracts, latter leads to lengthy and unnecessary litigations. Amending the Indian Contract Act 1872, as recommended by 103rd Law Commission will be a solution for it.

Effective dispute resolution systems are the need of the hour for the business community. As we know, business and contracts cannot be separated at any point. Already the arbitration and conciliation act had been amended in 2019 which increases the effectiveness of arbitration process. But our contracts act needs to be amended while adding the ‘Unfair (Procedural and Substantive) Terms of Contract’ which exists in most of the developed countries in order to protect consumers and even smaller businessmen from bigger commercial entities and corporations. “Unfair terms” laws exist in UK, USA, Australia, New Zealand and Canada, etc., either as a separate law or part of a law.

The Law Commission of India in its 103rd Report (1984) on “Unfair Terms of Contract”, had dealt with the subject and proposed insertion of Section 67A into the Contracts Act. The main highlight of the report is the consideration of Unfair Terms of Contract by separating the ‘procedural unfairness’ and the ‘substantive unfairness’ in the matter of contracts or their terms.

The ‘procedural unfairness’ is whether there is unfairness in the manner in which the terms of the contract are arrived at or are they actually entered into by the parties, or in the circumstances relating to the events immediately before the entering into the contract, or in the conduct of the parties, their relative position, or literary knowledge, or whether one party had imposed standard terms on the other or whether the terms were not negotiated. These and other circumstances relate to procedural unfairness. Whereas ‘substantive unfairness’ is that a term by itself may be either one-sided, harsh or oppressive or unconscionable and therefore unfair. One party may have excluded liability for negligence or for breach of contract or might have imposed terms on the other which are strictly not necessary or might have given to himself power to vary the terms of the contract unilaterally etc. Such terms could be unfair by themselves.

The Indian Contract Act, 1872 has several provisions relating to ‘voidable contracts’. These are undue influence, coercion, fraud, mistake, misrepresentation, etc. These are indeed ‘procedural’ provisions already contained in the Act. Likewise, the Contract Act deals with ‘void’ contracts or ‘void’ terms. These are ‘substantive’ provisions already contained in the Act. Similarly, the Specific Relief Act, 1963 contains provisions for granting relief where there is procedural or substantive unfairness. But now we need additional provisions of ‘procedural unfairness’ and ‘substantive unfairness’ and remedies for removing such types of unfairness. These new remedies can be granted by the Civil Courts, arbitral tribunals and other fora under insurance regulatory, consumer protection etc..

The proposed Bill in the cold storage called “Unfair Terms (Procedural and Substantive) of Contracts Bill, 2006” need to be passed in Parliament and amendment the Indian Contract Act 1872 with “Unfair Terms”. Which largely helps the business to confidently get in to contracts, same save lot of time in the litigation. While reducing the abusing of the powers and exploitation of all type of contractors from large corporates and even government entities. In turn during legal vetting the unfair clauses will be removed from the contracts, reducing the claims, hence the government will save huge money, which today spills out through arbitration claims. The amendment encourages the foreign investments contrary to some speculations that it is discouraging.