Unfair contract

Posted on by user

Introduction

“Unfair contract” is not a freestanding concept sui generis in Indian law, but it sits at the intersection of contract law, consumer protection and regulatory controls. Practically, the phrase describes contractual terms or entire agreements that produce a significant imbalance in rights and obligations in favour of one party — often a seller, lender or service-provider — and to the detriment of the weaker party (consumer, borrower, contractor). For practitioners, identifying an unfair contract means translating doctrinal tools (undue influence, unconscionability, penalty, public policy) into pleadings, evidence and remedies (declaration, injunction, consumer relief, damages or rescission). This article sets out the statutory anchors, everyday litigation and transactional applications, authoritative jurisprudence, and tactical pointers for lawyers.

Core Legal Framework

Primary statutes and provisions to invoke or examine when confronting an “unfair contract”:

  • Indian Contract Act, 1872
  • Section 10 – Essentials of a valid contract (consent, lawful consideration).
  • Sections 14–18 – Defects in consent: coercion (s.15), undue influence (s.16), fraud (s.17), misrepresentation (s.18). These sections are the classical gateway to attack contracts obtained by pressure or exploitation of a dominant position.
  • Section 23 – Agreements void if consideration or object unlawful or opposed to public policy (used where terms offend public interest).

  • Section 74 – Compensation for breach where sum is named in contract (penalty vs genuine pre-estimate of loss; relevant to excessive liquidated damages or forfeiture clauses).

  • Consumer Protection Act, 2019

  • Section 2(47) – Definition of “unfair contract” (a contract between a consumer and trader/service provider which causes significant imbalance in the parties’ rights) and allied definitions.

  • Chapters on enforcement and the Central Consumer Protection Authority (CCPA) provide administrative and quasi‑criminal means to challenge unfair terms and obtain directions (recall, refund, discontinuation of unfair practice).

  • Competition Act, 2002

  • Sections 3 and 4 – Agreements or conduct that appreciably restrict competition or abuse dominant position can include contractual clauses that impose unfair conditions, particularly in B2B or platform contexts.

  • Sectoral/regulatory instruments

  • RBI guidelines (loan pre‑payment/foreclosure charges; transparency rules), IRDA (insurance), TRAI (telecom standards) and SEBI (standard documents for capital markets) often proscribe or regulate specific “unfair” clauses in those markets. These instruments are critical when the contract involves a regulated industry.

Practical Application and Nuances

How the concept plays out in courtrooms, consumer fora and transactional practice.

  1. Common factual species of “unfairness”
  2. Disproportionate penalty or forfeiture clauses (e.g., for delayed performance or contract termination).
  3. Unilateral variation or termination clauses (service-provider may terminate at will; consumer cannot).
  4. Prohibition on early repayment of loans or prepayment penalties that are excessive, opaque or contravene RBI norms.
  5. Excessive security deposits, non-refundability of advance payments, or non‑proportional liquidated damages.
  6. Adhesion/standard form contracts with buried exclusion clauses, limiting liability or forum for relief.

  7. Clauses requiring waiver of statutory or fundamental rights (forum, consumer remedy, access to courts).

  8. How to frame the challenge in pleadings

  9. Plead primary facts: standard form nature of contract, absence of negotiation, size & bargaining power disparity, one-sided clause(s), market practice, and tangible prejudice (monetary loss or inability to exit).
  10. Rely on statutory knobs: undue influence (s.16) where bargaining power was exploited; fraud/misrepresentation (ss.17–18) if material facts were concealed; public policy (s.23) where a clause is oppressive; and s.74 to contest exorbitant liquidated damages as penal.

  11. In consumer fora, specifically invoke CPA 2019’s definition of “unfair contract” and ask for reliefs available to the forum — refund, replacement, removal of offending terms, discontinuation of unfair practice, compensation.

  12. Evidence you must marshal

  13. The contract (full text, annexures, T&Cs as displayed), audit trail of offer and acceptance (emails, SMS, WhatsApp), drafts or contemporaneous negotiations (or their absence), proof of market rates or comparables, internal policies (for banks/telecoms), regulatory circulars (RBI/TRAIs), advertisement or representations, and witness statements showing lack of choice or compulsion.
  14. Expert evidence: industry practice or standard charge rates; forensic/comparative analyses showing asymmetry.

  15. If seeking immediate relief, contemporaneous correspondence showing irreparable loss and urgent need for interim protection.

  16. Remedies and where to go

  17. Contractual relief: declaration of unconscionability/voidness, rescission, disgorgement of amounts, or specific performance where equitable.
  18. Damages: claim under s.74 where appropriate; but also seek “reasonable compensation” rather than the contractual penal sum.
  19. Consumer fora / CCPA: seek orders under CPA 2019 to restrain unfair practice, withdraw a clause, award compensation or order recall of products/services.
  20. Regulatory complaints: approach RBI/SEBI/IRDA/TRAI to enforce sectoral rules (can be quicker and effective for injunctive relief or reversal of unfair charges).
  21. Interim relief: ad‑interim injunction against enforcement of the unfair clause, attachment of funds, or stay of arbitration in appropriate cases (early and carefully reasoned affidavits are essential).

Concrete examples (typical case scenarios)
– Banking/Loans: borrower refinances but bank refuses prepayment or imposes 5% foreclosure fee contrary to RBI circular. Strategy: cite RBI circulars, plead unfair contract under CPA 2019, seek refund or block enforcement. Evidence: loan agreement, account statements, communications, RBI master circulars.
– Commercial supplier vs. MSME: supplier’s standard contract imposes 25% non‑refundable deposit with no right to terminate. Strategy: plead adhesion and unconscionability; seek restitution and striking down of clause as contrary to s.23/public policy where it amounts to oppressive bargain.
– Telecom/OTT: T&Cs allow unilateral price increase and deny termination or refund. Strategy: invoke consumer law; ask CCPA/NCDRC for discontinuation of unilateral variation clause and refund for over‑charges; use TRAI norms on transparency.

Landmark Judgments

(Principles condensed for practice—citations are provided by name for further lookup.)

  • Fateh Chand v. Balkishan Dass (Supreme Court) — principle on liquidated damages and penalty

  • The Court explained the distinction between a genuine pre‑estimate of loss (liquidated damages) and a penalty. If a sum is extravagant and unconscionable, courts will not enforce it as a penalty; instead reasonable compensation may be awarded. This line of authority anchors most arguments against excessive forfeitures and disproportionate break fees.

  • National Insurance Co. Ltd. v. Boghara Polyfab Pvt. Ltd. (Supreme Court)

  • The Court analysed the scope of Section 74 and the assessment of damages where a pre‑stipulated amount is payable. The decision emphasises that the parties’ intention and the genuine pre‑estimate question are relevant; the court may award reasonable compensation when the contractual stipulation is punitive.

(Practitioners should read these rulings in tandem: they provide the toolkit to challenge penalty clauses and seek judicial recalibration of contractual sums. For consumer‑centric unfair‑term jurisprudence, numerous NCDRC/State Commission decisions and recent orders by the CCPA illustrate administrative relief against abusive standard terms.)

Strategic Considerations for Practitioners

  1. Pick the right forum

  2. Consumer fora are pragmatic for individual consumers and can grant quick, cost‑effective remedies against standard form unfair terms. For commercial parties, civil courts and arbitration forums are typical—yet consider constitutional or regulatory routes where statutory bodies (RBI/TRAIs) can act faster.

  3. Combine causes of action

  4. Don’t rely on a single theory. Plead undue influence/absence of free consent (Contract Act) + unfair contract (CPA) + regulatory non-compliance (RBI/TRAI/IRDA) + an alternative claim under equity (restitution). This multi-pronged approach increases chances of interim relief and substantive success.

  5. Seek interim relief quickly and convincingly

  6. The enforcement of unfair clauses often causes irreparable loss (forfeiture, bank set-offs). Seek ad‑interim injunctions, stay of arbitration or interim restitution with detailed affidavits of harm and a clear balance of convenience analysis.

  7. Use regulatory law to amplify leverage

  8. For sector‑specific unfairness (bank charges, telecom termination fees), an RBI/Trai/IRDA advisory or complaint can produce immediate administrative relief and be persuasive in court. Always cite applicable circulars and show non-compliance in pleadings.

  9. Evidence of bargaining power and market norms is decisive

  10. Courts care about context. Produce contemporaneous evidence showing lack of negotiation, existence of alternatives, and the expected market standards. Comparative contracts, rate sheets, and expert affidavits are useful.

  11. Beware of arbitration and forum‑selection clauses

  12. Standard contracts often include clauses attempting to oust consumer fora/judicial scrutiny. Consumer forums have sometimes retained jurisdiction despite arbitration clauses where fundamental consumer rights are involved; but outcomes vary. Challenge such clauses early and consider invoking public policy to resist an interlocutory stay of court proceedings.

  13. Drafting and transactional advice to clients

  14. For corporate counsel: avoid drafting one‑sided terms that cannot be justified by legitimate business needs. If insisting on liquidated damages, document rationale and quantification to survive later scrutiny under s.74. For lenders and suppliers: ensure transparency, obtain signed acknowledgement of critical T&Cs, and periodically update terms with clear notice provisions.

Common pitfalls to avoid in litigation
– Merely asserting “unfair” as a descriptive term without factual matrix or comparative market proof.
– Delaying challenge until after huge sums have been forfeited — courts are less sympathetic where remedies could have been sought earlier.
– Failing to plead statutory/regulatory non‑compliance (e.g., omitting RBI circulars when contesting prepayment penalties).
– Overreliance on arbitration clauses without testing the clause’s validity in circumstances of consumer protection and unequal bargaining power.

Conclusion

“Unfair contract” disputes in India are litigated and solved by threading statutory doctrines (undue influence, misrepresentation, public policy, Section 74), consumer‑protection mechanisms and regulatory interventions into a coherent factual narrative. Practitioners must translate power asymmetry into admissible proof — the contract text, negotiation history (or its absence), market comparators and regulatory norms — and choose the forum most likely to produce timely relief. Tactical use of interim measures, sectoral regulator complaints, and multi‑theory pleadings combine to make a challenge to unfair terms effective. In transactions, the antidote is transparency, reasoned liquidated damage clauses with documentary justification, and clear exit/termination rules that survive courtroom scrutiny.