Is going beyond the 'terms of a contract' sacrilegious?

More often than not, you may have come across several decisions upholding repudiation of claims by insurers holding that ‘courts cannot go beyond the terms of the contact’ and ‘the terms have to be strictly construed.’

To illustrate, let us consider, for instance, two cases decided by the Hon’ble NCDRC - LIC of India  Vs  Kamlesh ( RP No.4476/2012, decided on 09.01.2014 ) & SBI Life Insurance Co. Ltd  Vs  Kiritchandra B Modi ( RP No.3805/2012, decided on 07.10.2014 ). Both cases pertain to repudiation of disability benefit by the respective insurers. The insurer’s case was that the disability suffered by the policyholder was only partial i.e. not 100% as envisaged under the policy and hence, as per the policy terms & conditions, disability benefit was not payable. ( Note: Further down, I have highlighted all important points relevant to the discussion by red fonts. Of course, the wordings are of the Supreme Court. All judgment parts are given in italics).

The Hon’ble NCDRC decided both the cases in favour of the insurers based on facts and merits of the respective cases. Besides, the court, inter alia, had placed reliance on many Supreme Court judgments in support of its decision. All cases referred to therein pertain to ‘interpretation of terms of a contract’. Following are the excerpts from  LIC of India  Vs Kamlesh:

“...it is evident that real controversy between the parties is about definition and scope of term accident as envisaged by the insurance policy.”

“Before venturing into finding the answer to the above question, it would be useful to have a look on the law relating to interpretation of the insurance contract.  The question relating to interpretation of an insurance contract came up before the Supreme Court in the case of Oriental Insurance Co. Ltd. V. Sony Cheriyan (1996) 6 SCC 451 wherein Hon’ble Supreme Court  observed thus:

“The insurance policy between the insurer and the insured represents a contract between the parties.  Since the insurer undertakes to compensate the loss suffered by the insured on account of risks covered by the insurance policy, the terms of the agreement have to be strictly construed to determine the extent of liability of the insurer.  The insured cannot claim anything more than what is covered by the insurance policy”.

Similarly in the case of General Assurance  Society Ltd. V. Chandumull Jain (1996) 3 SCR 500 the Constitution Bench of the Hon’ble Supreme Court observed thus:

“In interpreting documents relating to a contract of insurance, the duty of the court is to interpret the words in which the contract is expressed by the parties, because it is not for the Court to make a new contract, however reasonable, if the parties have not made it themselves.  Looking at the proposal, the letter of acceptance and the cover notes, it is clear that a contract of insurance under the standard policy for fire and extended to cover floor, cyclone, etc. had come into being”. 

Similar view was taken by the Hon’ble Supreme Court in the matter of United India Insurance Co. Ltd. V. Harchand Rai Chandan Lal (2004) 8 SCC 644, wherein it was observed thus:

“Therefore, it is settled law that the terms of the contract have to be strictly read and natural meaning must be given to it.  No outside aid should be sought unless the meaning is ambiguous”.

I request the readers to note that the nature of contracts in LIC of India  Vs  Kamlesh & SBI Life Insurance Co. Ltd  Vs Kiritchandra B Modi, were non-commercial in nature. It may also be borne in mind that, going by the facts of those cases of the Supreme Court stated supra ( referred to by the Hon’ble NCDRC ), they were all commercial contracts. We shall now see whether the aforesaid case laws of the Supreme Court are applicable to non-commercial contracts.

In order to examine the point in question, the following judgments of the Hon’ble Supreme Court will be apposite. The most important judgment follows:

CENTRAL INLAND WATER TRANSPORT  CORPORATION LTD. & ANR. ETC.

Vs. BROJO NATH GANGULY & ANR.

DATE OF JUDGMENT 06/04/1986

(Reported in 1986 AIR 1571; 1986 SCR (2) 278; 1986 SCC (3) 156

“The word ‘unconscionable’ is defined when used with reference to actions as showing no regard for conscience; irreconcilable with what is right or reasonable". An unconscionable bargain would, therefore, be one which is irreconcilable with what is right or reasonable. If a contract or term thereof is unconscionable at the time the contract is made, the Court may refuse to enforce the contract. An unconscionable bargain could be brought about by economic duress even between parties who may not in economic terms be situate differently.”

“Although certain types of contracts were illegal or void, as the case may be, at Common Law, for instance, those contrary to public policy or to commit a legal wrong such as a crime or a tort, the general rule was of freedom of contract. This rule was given full play in the nineteenth century on the ground that the parties were the best judges of their own interests, and if they freely and voluntarily entered into a contract the only function of the court was to enforce it. It was considered immaterial that one party was economically in a stronger bargaining position than the other; and if such a party introduced qualifications and exceptions to his liability in clauses which are today known as "exemption clauses" and the other party accepted them, then full effect would be given to what the parties agreed. Equity, however, interfered in many cases of harsh or unconscionable bargains, such as, in the law relating to penalties, forfeitures and mortgages.”

“Should then our courts not advance with the times? Should they still continue to cling to outmoded concepts and outworn ideologies? Should we not adjust our thinking caps to match the fashion of the day? Should all jurisprudential development pass us by, leaving us floundering in the sloughs of nineteenth-century theories? Should the strong be permitted to push the weak to the wall? Should they be allowed to ride roughshod over the weak? Should the courts sit back and watch supinely while the strong trample under foot the rights of the weak? We have a Constitution for our country. Our judges are bound by their oath to "uphold the Constitution and the laws". The Constitution was enacted to secure to all the citizens of this country social and economic justice. Article 14 of the Constitution guarantees to all persons equality before the law and the equal protection of the laws. This principle is that the Courts will not enforce and will, when called upon to do so, strike down an unfair and unreasonable contract, or an unfair and unreasonable clause in a contract entered into between parties who are not equal in bargaining power. The above principle will apply where the inequality of bargaining power is the result of the great disparity in the economic strength of the contracting parties. It will apply where the inequality is the result of circumstances, whether of the creating of the parties or not. It will apply to situations in which the weaker party is in a position in which he can obtain goods or services or means of livelihood only upon the terms imposed by the stronger party or go without them. It will also apply where a man has no choice, or rather no meaningful choice, but to give his assent to a contract or to sign on the dotted line in a prescribed or standard form or to accept a set of rules as part of the contract, however, unfair unreasonable or unconsionable a clause in that contract or form or rules may be. This principle will not apply when the bargaining power of the contracting parties is equal or almost equal. This principle may not apply where both parties are businessmen and the contract is a commercial transaction. In today’s complex world of giant corporations with their vast infrastructural organisations and with the State through its instrumentalities and agencies entering into almost every branch of industry and commerce, there can be myriad situations which result in unfair and unreasonable bargains between parties possessing wholly disproportionate and unequal bargaining power. The Court must judge each case on its own facts and circumstances when called upon to do so by a party under section 31(1) of H the Specific Relief Act, 1963. [370 A-G] 290”.

“In the vast majority of cases, however, such contracts with unconscionable term are entered into by the weaker party under pressure of circumstances, generally economic, which results in inequality of bargaining power. Such contracts will not fall within the four corners of the definition of "undue influence" as defined by section 16(1) of the Indian Contract Act. The majority of such contracts are in a standard or prescribed form or consist of a set of rules. They are not contracts between individuals containing terms meant for those individuals alone. Contracts in prescribed or standard forms or which embody a set of rules as part of the contract are entered into by the party with superior bargaining power with a large number of persons who have far less bargaining power or no bargaining power at all. Such contracts which affect a large number of persons or a group or groups of persons, if they are unconscionable, unfair and unreasonable are injurious to the public interest. To say such a contract is only voidable would be to compel each person with whom the party with superior bargaining power had contracted to go to Court to have the contract adjudged voidable. This would only result in multiplicity of litigation which no Court should encourage and also would not be in public interest. Such a contract or such a clause in a contract ought, therefore, to be adjudged void under section 23 of the Indian Contract Act, as opposed to public policy.”

“Another theory which has made its emergence in recent years in the sphere of the law of contracts in the test of reasonableness or fairness of a clause in a contract where there is inequality of bargaining power. In such cases it is recognised that the freedom of contract is absent. In such cases, judicial review is permitted and consequential relief allowed.”

The normal rule of Common Law has been that a party who seeks to enforce an agreement which is opposed to public policy will be non-suited. The types of contracts to which the principle formulated in this case applies are not contracts which are tainted with illegality but are contracts which contain terms which are so unfair and unreasonable that they shock the conscience of the Court. 

An "adhesion contract" is defined in Black’s Law Dictionary, Fifth Edition, at page 38, as follows :

"’Adhesion contract’. Standardized contract form offered to consumers of goods and services on essentially ’take it or leave it’ basis without affording consumer realistic opportunity to bargain and under such conditions that consumer cannot obtain desired product or services except by acquiescing in form contract. Distinctive feature of adhesion contract is that weaker party has no realistic choice as to its terms. Not every such contract is unconscionable."

The aforesaid decision has been discussed in National Insurance Co. Ltd  Vs. M/s. Boghara Polyfab Pvt. Ltd.

“It will also not be out of place to refer to what this Court had said in Central Inland  Water Transport Corporation Ltd. vs. Brojo Nath Ganguly – 1986 (3) SCC 156 in a different context (not intended to apply to commercial transactions) :

“(This) principle is that the courts will not enforce and will, when called upon to do so, strike down an unfair and unreasonable contract, or an unfair and unreasonable  clause in a contract, entered into between parties who are not equal in bargaining power.  It is difficult to give an exhaustive list of all bargains of this type. No court can visualize the different situations which can arise in the affairs of men. One can only attempt to give some illustrations. For instance, the above principle will apply where the inequality of bargaining power is the result of the great disparity in the economic strength of the contracting parties. It will apply where the inequality is the result of circumstances, whether of the creation of the parties or not. It will apply to situations in which the weaker party is in a position in which he can obtain goods or services or means of livelihood only upon the terms imposed by the stronger party or go without them. It will also apply where a man has no choice, or rather no meaningful choice, but to give his assent to a contract or to sign on the dotted line in a prescribed or standard form or to accept a set of rules as part of the contract, however unfair, unreasonable and unconscionable a clause in that contract or form or rules may be. This principle, however, will not apply where the bargaining power of the contracting parties is equal or almost equal. This principle may not apply where both parties are businessmen and the contract is a commercial transaction. In today's complex world of giant corporations with their vast infrastructural organizations and with the State through its instrumentalities and agencies entering into almost every branch of industry and commerce, there can be myriad situations which result in unfair and unreasonable bargains between parties possessing wholly disproportionate and unequal bargaining power. These cases can neither be enumerated nor fully illustrated.”

Last, the Hon’ble Supreme Court, in Export Credit Guarantee Corporation of India Ltd. Versus M/s Garg Sons International has clarified ( incidentally with reference to the judgments referred to by the Hon’ble NCDRC ) that a strict interpretation of the contract would be applicable only to commercial contracts:

“The insured cannot claim anything more than what is covered by the insurance policy.  ‘…the terms of the contract have to be construed strictly, without altering the nature of the contract as the same may affect the interests of the parties adversely. The clauses of an insurance policy have to be read as they are…’.  Consequently, the terms of the insurance policy, that fix the responsibility of the Insurance Company must also be read strictly. The contract must be read as a whole and every attempt should be made to harmonize the terms thereof, keeping in mind that the rule of contra proferentem does not apply in case of commercial contract, for the reason that a clause in a commercial contract is bilateral and has mutually been agreed upon. (Vide : Oriental Insurance Co. Ltd. v. Sony Cheriyan AIR 1999 SC 3252;Polymat India P. Ltd. v. National Insurance Co. Ltd., AIR 2005 SC 286; M/s. Sumitomo Heavy Industries Ltd. v. Oil & Natural Gas Company, AIR 2010 SC 3400; and Rashtriya Ispat Nigam Ltd. v. M/s. Dewan Chand Ram Saran AIR 2012 SC 2829)”.

By now, it should be clear from the aforesaid judgments of the Supreme Court that non-commercial contracts stand on a different footing and in the words of the Supreme Court itself “the Courts will not enforce and will, when called upon to do so, strike down an unfair and unreasonable contract, or an unfair and unreasonable clause in a contract entered into between parties who are not equal in bargaining power”.

Before parting, let us recall the excerpts of the Supreme Court’s judgment in the case of General Assurance  Society Ltd. V. Chandumull Jain (1996) 3 SCR 500, followed by the NCDRC in LIC of India  Vs  Kamlesh(Supra):

“In interpreting documents relating to a contract of insurance, the duty of the court is to interpret the words in which the contract is expressed by the parties, because it is not for the Court to make a new contract, however reasonable, if the parties have not made it themselves.  Looking at the proposal, the letter of acceptance and the cover notes, it is clear that a contract of insurance under the standard policy for fire and extended to cover floor, cyclone, etc. had come into being”. 

Have Courts not, particularly the Hon’ble NCDRC, gone beyond the terms of the contract overlooking ‘unreasonable’ or ‘unfair’ terms in a non-commercial contract to help consumers, ironically in the very same cases pertaining to disability benefit?

In my next article, please.