Unfair Contract's Conditions Amount To Unfair Business Practises

Case title:

M/s Texco Marketing Pvt. Ltd. v TATA AIG General Insurance Company Ltd. & Other

Date of Order:

09th November, 2022

Bench:

Justice M.M. Sundresh

Parties:

Petitioner: M/s Texco Marketing Pvt. Ltd

Defendant: TATA AIG General Insurance Company Ltd. & Other

Facts:

• On July 28, 2012, the appellant obtained a Standard Fire & Special Perils insurance from the respondent. It was designed to cover a store that was located in the building's cellar. The contract's exclusion provision, however, clearly states that the basement is not covered. The appellant added more construction, for which proper notice and inspection were also conducted.
• The appellant filed a claim after the shop experienced a fire catastrophe. The surveyor of respondent No. 1 also conducted an inspection, and the appellant was given the go-ahead to re-furnish its store in order to conduct a proper assessment. The surveyor took note of the earlier inspections' completion and the insurer's understanding of the shop's basement location when he arrived at the amount payable.
• Respondent No. 1 denied the claim, objecting to it because of the exclusion provision. The State Consumer Disputes Redressal Commission denied respondent No. 1's argument on the grounds that there had been insufficient disclosure and that the mandatory rules had not been followed, rendering the insurer's services inadequate and indulging in unfair business practises. 
• It was undeniable that a business in a comparable location was likewise covered. Only after properly deducting the products intended for the third party is the money owed.
• The National Consumer Disputes Redressal Commission overturned this judgement. The exclusion clause was invoked in order to overturn the State Commission's decision and award an amount of Rs. 7.5 lakhs. The current appeal is filed in protest of the same.

Issue Raised:

Is it possible for a party that deliberately entered into a contract, included the exclusion provision, and afterwards became a beneficiary, to do so in order to escape liability by relying on the clause?

Arguments:

• When an exclusion clause conflicts with the primary objective for which the contract was entered into by the Parties, the Court emphasised a wide range of decisions to hold that the Respondent cannot rely on it. The "primary purpose rule," which essentially mandates that clauses incongruous with the principal objective of the contract be read down, was the basis on which SC based its decision. To support this, the SC also cited the "Doctrine of Blue Pencil," which considers how to treat clauses that are incompatible with the main contract and can be eliminated while keeping the other terms, as such incompatible clauses are detrimental to the execution of the main contract and surrender the very purpose of the contract.
• The SC upheld the fundamental significance of good faith principles, which are expressed in the legal maxim "uberrimae fidei," and how they should be protected and remembered by the Parties entering into an insurance contract, which is a unique contract meant to benefit a customer. According to the SC, the Respondent owes the Appellant a responsibility to disclose important information and provide a copy of the exclusion provision, which renders the contract void as of the date of execution. The exemption clause should be regarded as nonexistent in the event that the Respondent does not follow a fair procedure. The phrase "material fact" for the purpose of an insurance contract was determined to mean any fact that has an influence on the insurance contract and the risk that is covered by it.
• The SC overturned the NCDRC's ruling, finding that they had neglected to take into account the Respondent's obligation to disclose information. The terms of the exclusion clause, which were in fact examined by SCDRC, were not disclosed to the appellant.
• The SC examined clauses 3(2) and 3(4) of the Regulations to analyse the Respondent's obligation to disclose material policy information to the Appellant as well as the Respondent's obligation to attach a certificate at the end of the proposal form stating that the contents of the policy have been adequately explained to the Appellant and the Appellant fully understands the significance of the proposed contract.
• The SC further drew attention to Rules section 4 (Proposal of Insurance), which requires the Respondent to provide a copy of the proposal form to the Respondent free of charge within 30 days of their acceptance.
• The Supreme Court (SC), in discussing the scope of various sections of the Indian Contract Act of 1872 (ICA), held that a voidable contract (as defined under section 2(i) of ICA), i.e., a contract enforceable at the instance of one party but not at the option of others, becomes voidable at the option of the party whose consent was obtained through such means if it was consented to fraudulently (as defined under section 17 of ICA) or by mis (as defined under section 19 of ICA). It was decided that in such cases, relief would be given to the party who had been wronged by the fraud and/or deception once it had been established in court that it had occurred at the time the contract was executed by suppressing the existence of an exclusion clause.
• The SC further noted that NCDRC and SCDRC are enabled to not only recognise an unfair contract but also to examine the problems concerning the terms of the contract and determine whether they are unfair (under section 46 of CPA 2019) and summarise that an unfair trade practise has been adopted (under section 2(1)(r) of the CPA 1986 and section 47 of the Consumer Protection Act of 1986).
• The SC concluded by issuing a "word of caution" to all insurance companies urging them to abide by the Rules, which demand fair and transparent disclosure of all significant policy provisions; failure to do so will render the insurer helpless when rejecting or refusing a claim.

Analysis:

• The honourable court noted that "the forums have held simultaneously that respondent No. 1 was aware that the contract was entered into for ensuring a business located in the basement. As no objection has been raised to the contested order, the aforementioned position is not only factually accurate but also acknowledged by the respondents. 
• In a similar vein, the lack of compliance with adequate notice was not specifically denied. Although the State Commission addressed this issue extensively, the National Commission has not made any conclusions regarding it. 
• The Consumer Protection Act of 1986's Section 21(A) is not the same as Section 96 of the Code of Civil Procedure of 1908, as may be shown from a reading of that provision. The State Commission took note of all the pertinent data, but the order does not take them all into account. 
• The contract's conditions, especially the exclusion clause, are unfair, and respondent No. 1 has engaged in unfair business practises. In light of this, the National Commission's decision cannot be upheld because the Forum is required by Sections 14(d) and 14(f) of the Consumer Protection Act of 1986, which call for the payment of adequate compensation in the form of an award, to grant the consequential relief. 
• The appellant cannot be denied relief based solely on a service deficiency.

Conclusion:

The decision emphasises the significance of giving conflicting sections in a contract a fair reading while paying close regard to the contract's primary goal. The judgement determines the enforceability of exclusion clauses, which are typically for the benefit of one party and may be burdensome to the other party, particularly when sufficient notice of the existence of such exclusion clauses is not supplied, in light of the aforementioned criteria.Additionally, it is a historic decision in the area of insurance law because adhesion contracts, which cover insurance contracts, are typically one-sided, non-negotiable, and bind uninformed consumers to fine print terms, rendering the latter helpless and exonerating such insurance companies from their financial responsibility.