Exclusion Clauses Under The Indian Contract

NUJS Law Review 13 NUJS L. Rev.
4 (2020)
EXCLUSION CLAUSES UNDER THE INDIAN CONTRACT

LAW: A NEED TO ACCOUNT FOR UNREASONABLENESS
MP Ram Mohan & Anmol Jain*
The Indian contract law continues to follow the classical contract law model under which parties
may, in exercise of their autonomy, limit or exclude their liability for breach of contract. As long as
parties have freely contracted, an exclusion clause remains effective. Because of this, parties have
started drafting wide exclusion clauses, highlighting creeping unreasonableness in contracting
practices. In the absence of any statutory law governing the same the only way by which a party could
be relieved from the performance of an onerous contract in India is by arguing procedural
unconscionability. This paper comprehensively traces the development and understanding of
exclusion clauses as they have evolved under the Indian Contract law and through the adoption of
common law by the courts. This being a time series study, we examine all the Indian Supreme Court
and High Court decisions reported until early 2020 and find that courts have attempted to instil just-
contracting by adopting ad-hoc mechanism against the unfair use of the exclusion clauses. However,
uncertainty continues to prevail regarding the enforceability of unconscionable exclusion clauses.
Therefore, taking a comparative approach, we argue in favour of adopting certain legislative reforms
in the Indian contract law towards empowering the court to adjudicate on claims based on
substantive unconscionability. A first step in this direction, specifically for consumer contracts, is the
statutory recognition of ‘unfair contract terms’ under the new Consumer Protection Act, 2019.
TABLE OF CONTENTS
I. INTRODUCTION ................................................................................................................... 2
II. CHARACTERISING THE GROWTH OF THE EXCLUSION CLAUSES ............................. 5
III. EVOLVING REMEDIES UNDER THE CONTRACT LAW ............................................... 11
A. REMEDIES FOR NON-FULFILMENT OF THE ‘NOTICE PROCEDURE’ ................. 11
B. REMEDIES THROUGH ‘INTERPRETATIVE MECHANISMS’ .................................... 13
1. RULE OF CONTRA PROFERENTEM ........................................................................ 15
2. MAIN OBJECT AND INTENT TEST ............................................................................ 18
C. REMEDIES FOR NON-CONFORMITY WITH THE ‘STATUTORY REQUIREMENTS’
.............................................................................................................................................. 22
D. REMEDIES AGAINST ‘UNCONSCIONABLE TERMS’ ................................................ 25
IV. THE WAY FORWARD ....................................................................................................... 28
V. CONCLUSION .................................................................................................................... 32
*
M P Ram Mohan is an Associate Professor at the Indian Institute of Management Ahmedabad (IIMA). He
directs an academic project ‘Restatement of Indian Contract Law’ at IIMA. Email: [email protected].
Anmol Jain is a Researcher with the ‘Restatement of Indian Contract Law’ project at the Indian Institute of
Management Ahmedabad. Email: [email protected]. We acknowledge the funding support of IIM
Ahmedabad. This work benefited from the excellent insights of the Editors of NUJS Law Review, Promode
Murugavelu & Gaurav Ray. Errors are authors’ alone.
October-December, 2020 1
NUJS Law Review 13 NUJS L. Rev. 4 (2020)
I. INTRODUCTION
An exclusion clause is a beneficial contractual arrangement made by either of

the parties to a contract in anticipation of future contingencies that might hinder or prevent
performance,1 with a primary aim to accomodate consequences arising out of non-
performance, part performance or negligent performance of a contract. Such clauses are also
known as exemption, exception, exculpatory or limiting clauses.2 Generally, they take
various forms,3 but mainly have an effect of immunising,4 restricting,5 or exempting a party
from liability,6 which she would have borne had it not been for the clause. 7 In other forms, an
exclusion clause might contain specific procedures for making claims, allocating liabilities
between the parties,8 limiting the right to terminate the contract on breach, 9 or restricting the
amount10 and time-period11 to claim damages on breach. Another beneficial employment of
the exclusion clauses is to limit 12 the choice of fora a plaintiff might approach by excluding
the jurisdiction of one or more of the multiple fora that have the capacity to hear the matter.13
This is done in order to reduce hardship while defending the claims, and such a clause is
particularly known as the jurisdiction clause.14 In this article, we engage with the Indian
jurisprudence on exclusion clauses that are inserted with an intention to limit or exclude
liability arising out of contractual obligations.
The reasons for the emergence and widespread use of exclusion clauses are
multi-fold. First, the exclusion of liability for breach reduces the prospective costs and risks
1
JACK BEATSON et al., ANSON’S LAW OF CONTRACT 193 (Oxford University Press, 2010); J.W. CARTER,
CARTER’S BREACH OF CONTRACT 48 (Hart Publishing, 2018).
2
BLACK’S LAW DICTIONARY 653 (12th ed., 2009).
3
See The Unfair Contract Terms Act, 1977, §13 (United Kingdom).
4
Exculpatory Clause, 15A WORDS AND PHRASES 324 (2004).
5
New Indian Assurance Company Limited v. Yallavva, 2020 Indlaw Kar 3902, ¶65.
6
H.K. SAHARAY, DUTT ON CONTRACT 37 (Eastern Law House, 2013).
7
P.S. ATIYAH, AN INTRODUCTION TO THE LAW OF CONTRACT 167 (Clarendon Press, 1981); Exclusion Clause,
15A WORDS AND PHRASES 262 (2004) citing Maimone v. Liberty Mut Ins Co., 695 A.2d 341: Exclusion clause
in insurance policy serves purpose of delimiting and restricting coverage; See 9(1) HALSBURY’S LAWS OF
ENGLAND 552 (1998); Similarly, See A.W. BAKER WELFORD, THE LAW RELATING TO ACCIDENTAL INSURANCE
126 (Butterworths, 1923) cited in New India Assurance Company Limited v. Rajeshwar Sharma, (2019) 2 SCC
671, ¶17.
8
BEATSON, supra note 1, at 186; Leslie Kelleher, Exclusion Clauses in Contract, Vol. 14(1) MANITOBA L. J.
135 (1984); See Hugh Collins, Good Faith in European Contract Law, Vol. 14(2) OXFORD J. LEGAL STUD. 241
(1994).
9
Smeaton Hanscomb & Co. Ltd. v. Sassoon I Setty Son & Co., [1953] 2 All ER 1471 (Oueen’s Bench Division,
United Kingdom); CARTER, supra note 1, 446.
10
Scruttons Ltd. v. Midland Silicones Ltd., [1962] AC 446 (House of Lords, United Kingdom); Atlantic
Shipping and Trading Co. v. Louis Dreyfus & Co., [1922] 2 AC 250 (House of Lords, United Kingdom).
11
Kenyon, Son & Craven v. Baxter Hoare & Co., [1971] 2 All ER 708; Photo Production v. Securicor
Transport, [1980] 1 All ER 556 (House of Lords, United Kingdom).
12
Patel Roadways Ltd v. Prasad Trading Company, (1991) 4 SCC 270; New Moga Transport Co. v. United
India Insurance Co. Ltd., (2004) 4 SCC 677, ¶¶ 9, 19.
13
Union of India v. Alok Kumar, (2010) 5 SCC 349, ¶43; New Moga Transport Co. v. United India Insurance
Co. Ltd., (2004) 4 SCC 677, ¶19; A.V.M. Sales Corporation v. Anuradha Chemicals Private Limited, (2012) 2
SCC 315; A.B.C. Laminar (P) Ltd. v. A.P. Agencies, (1989) 2 SCC 163, ¶16; Swatik Gas Private Limited v.
Indian Oil Corporation Limited, (2013) 9 SCC 32; See Patel Roadways Ltd. v. Prasad Trading Co., (1991) 4
SCC 270, ¶13.
13
SAHARAY, supra note 6, at 37.
14
InterGlobe Aviation Limited v. N. Satchidanand, (2011) 7 SCC 463, ¶21.
attached to a contractual transaction and thus, enhances economies of scale of a business

enterprise.15 This, in turn, comes with the possibility of enhancing the number of contractual
relations that an entity might have. This can be proved by the application of game theory.16
While entering into a contract, the parties are always interdependent on their counterparts and
they work in an atmosphere of imperfect information. Therefore, exclusion clauses function
as a necessary security and risk-reduction mechanism to deal with the possibility of
prospective liability. They become a strategic tool to account for the implications arising out
of contractual obligations due to future uncertainties. In the words of Prof. Raymond Wacks:
[W]e do not always act in a rational manner in deciding, for instance, whether
to enter into contractual relations. Factors such as the likelihood or otherwise
of litigation or the prospects of losing face often influence what may appear to
be a decision based exclusively on legal rules and principles.17
Second, the gradual shift in the manner of calculating damages from the
principle of ‘foreseeability’ as laid down in Hadley v. Baxendale to the theory of ‘adequate
causation’ has made entities prone to payment of higher damages on breach. The
‘foreseeability’ principle emphasises that only such losses could be compensated on breach of
contract that could be reasonably foreseen by the parties at the time of contracting.18 As it had
happened in the case, Hadley, a mill owner, had a broken engine crankshaft to be transported
to W. Joyce & Co., an engineering company, to serve as a model for supplying a new one.
For the same, Hadley contracted with Baxendale to deliver the broken shaft by a certain date.
When delivery was not completed by the said date, Hadley sued Baxendale for damages due
to loss of business. However, the court disallowed the claim noting that it was reasonably
unforeseeable for Baxendale to contemplate Hadley’s losses as he had failed to convey the
urgency of the circumstances at the time of contracting.
Unlike this, the ‘adequate causation’ principle, which was developed in

contrast to the principle as laid down in Hadley, makes provision for compensating all the
losses adequately caused by breach of the contract, irrespective of the fact that certain losses
were not foreseeable.19 It obliges the party at fault to compensate consequential or indirect
damages as well, such as the loss of profit and business.20 In such a scenario, exclusion
clauses have helped the contracting parties to absolve themselves from any indirect damages
and check the uncertain nature of such damages.21
15
See BEATSON, supra note 1, 187.
16
See Randal C. Picker, An Introduction to Game Theory and the Law, Coase-Sandor Institute for Law &
Economics Working Paper No. 22 (1994).
17
RAYMOND WACKS, UNDERSTANDING JURISPRUDENCE 219 (2012).
18
Hadley v. Baxendale, 156 ER 145 (1854) (Court of Exchequer, Untied Kingdom) (the Indian law also
recognises and follows this rule. Under the Indian Contract Act, 1872, §73, it is stated that: “When a contract
has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the
contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course
of thing from such breach, or which the parties knew, when they made the contract, to be likely to result from
the breach of it.”)
19
Jan Hellner, Consequential Loss and Exemption Clauses, Vol. 1(1) OXFORD J. LEGAL STUD. 13 (1981); See
A.T. Brij Paul Singh v. State of Gujarat, (1984) 4 SCC 59, ¶9, 11; Bharat Coking Coal Ltd. v. L.K. Ahuja,
(2004) 5 SCC 109, ¶24.
20
See UNITED NATIONS COMMISSION ON INTERNATIONAL TRADE LAW, UNGA Res. 2205 (XXI), 1966, Art.74.
21
See McDermott International Inc. v. Burn Standard Co. Ltd. and Ors., (2006) 11 SCC 181, ¶116.
Third, exclusion clauses bring certainty in the post-breach situation and allows
the parties to correctly anticipate the damages to be incurred on breach. It acts as a defence to
a legal action for the breach of the contract. 22
Fourth and last, an ‘exception clause’, in the terms of Prof. Brian Coote,
enables a party to delimit or qualify its duties arising out of a contract, which helps them in
reasonable distribution of risks by clearly marking out the conditions when a liability shall
arise.23 In other words, the exclusion clauses creates the legally secured boundaries of the
primary obligations arising under a contract and thus, defines the ‘standard of performance’. 24
In this manner, exception clauses can be used in the form of forward-looking contracts.25 In
2016, the United Kingdom Supreme Court upheld the use of exemption clauses in the form of
duty-delimitation clauses in Impact Funding Solutions Limited v. AIG Europe Insurance
Ltd.26 In this case, the appellant had entered into an agreement with Barrington Support
Services Ltd. (‘Barrington’) under which the latter was supposed to use the loan money
extended from the appellant to make disbursements in the conduct of its client’s litigation.
Barrington misapplied the funds and failed to perform its professional duties, thereby
breaching a warranty of the contract. The appellant sued Barrington for the repayment of the
loan amount; however, owing to Barrington’s insolvency, the appellant sued its professional
indemnity insurer, the respondent. The respondent claimed that the insurance cover included
only the liability of the insured arising out of performance or failure to perform legal services.
It was argued that there was a clear exclusion of trading liabilities, such as trading debt,
incurred by the insured and any loss arising out of guarantee, indemnity or undertaking by the
insured in connection to certain benefits directly or indirectly accruing to the insured. While
noting that the exclusion clause specifically restricted respondent’s liabilities to the debts
arising out of professional services, the court decided in favour of the respondent:
Barrington and Impact made a commercial agreement as principals for their

mutual benefit, as well as for the benefit of Barrington’s clients. Impact was
not a client or quasi-client of Barrington, and the promise by Barrington which
led to the judgment obtained by Impact was part of the commercial bargain
struck by them. It did not resemble a solicitor’s professional undertaking as
ordinarily understood, and it falls aptly within the description of a “trading
liability” which the minimum terms were not intended to cover. 27
The common law grants validity to the exclusion clauses based on the idea of
absolute freedom of contract. 28 During the nineteenth century and large part of the twentieth
century, the common law rule was to ensure freedom of contract of the parties, as they are the
22
Owners of SS Istros v. FW Dahlstroem & Co., [1931] 1 KB 247, at 252-3 (Kings Bench Divison, England);
See CARTER, supra note 1, at 50, 51.
23
BRIAN COOTE, EXCEPTION CLAUSES (1964).
24
CARTER, supra note 1, at 50; See Photo Production v. Securicor Transport Ltd., [1980] AC 827 (House of
Lords, United Kingdom).
25
J.A. Weir, Exception Clauses. By Brian Coote, LL.M.(N.Z.), PH.D.(Cantab.), Barrister of the Supreme Court
of New Zealand; Senior Lecturer in Law, University of Auckland. [London: Sweet & Maxwell. 1964. xxii, 156
and (index) 7 pp. 30s. net.], Vol. 23(2) CAMBRIDGE L. J. 301 (1965).
26
Impact Funding Solutions Limited v. AIG Europe Insurance Ltd., [2016] UKSC 57 (Supreme Court, United
Kingdom).
27
Id., ¶46, (per Lord Toulson).
28
Eike Von Hippel, The Control of Exemption Clauses – A Comparative Study, Vol. 16(3) INT’L & COMP. L. Q.
591 (1967).
best judge of their interests and positions. Prime focus, in a case of unreasonableness of
clauses, was cast on procedural fairness rather than substantive fairness based on the ‘will’
theory and the principles of laissez-faire economics.29 The courts lacked the power and
showed restraint in the common law to strike down a contractual clause merely because it
was unreasonable30 and were tasked to only ensure that contracts were made with free
consent.31 Therefore, if a party seeking relief from a court failed to establish the presence of
coercion, undue influence or other such vitiating elements which could have impacted the
emergence of the contract, it was immaterial to argue that the substantive clauses of the
contract were oppressive.
The Indian Contract Act, 1872 (‘Act’)32 recognises exclusion clauses as its
framework is built around the idea of freedom of contract, allowing the parties to limit their
liability during contractual negotiations. This paper is a doctrinal attempt to exhaustively
trace the development and understanding of the exclusion clauses in India. In Part II, we map
the extended acceptance and misuse of the exclusion clauses. In Part III, we cover legal
remedies developed by the courts to check its misuse. For Part IV, while taking inspiration
from the Constitution of India, Law Commission Reports and the law in the United Kingdom
(‘UK’), we present certain mechanism to check the misuse through statutory means.
Concluding remarks follow in Part V.
II. CHARACTERISING THE GROWTH OF THE EXCLUSION CLAUSES
Exclusion clauses have effects similar to any other clause of a contract and
thus, possess a binding nature enforceable in a court of law. Consequent hardship is not a
ground to deny the enforceability of such clauses. For instance, in the case of Bharti Knitting
Company v. DHL Worldwide Express Courier Division of Airfreight Ltd. 33, the appellant had
a contract of sale with a German buyer for summer season apparels. Pursuant to the
agreement, the appellant consigned certain goods and documents to the buyer (consignee),
but they never reached their destination. The appellant sent another package; however, by the
time it reached, the season got over. Resultantly, the consignee agreed to pay only DM
35,000 instead of the invoice value of DM 56,469.63. The appellant sued the respondent, a
courier delivery company for the difference amount. When the case went in appeal to the
Supreme Court of India, the Court limited the liability of the respondent to USD 100
considering the fact that the consignment note limited the liability of the respondent to
USD100 in case of deficiency in service. The Court referred to the Anson’s Law of Contract,
which states that the terms normally bind a person who signs the contractual document even
though she has not read them, and even if she is ignorant of their precise legal effect. 34 This is
29
BEATSON, supra note 1, 4.
30
Suisse Atlantique Societe d’Armament Maritime SA v. N.V. Rotterdamasche Kalen Centrale, (1967) 1 AC
361 (House of Lords, United Kingdom).
31
H.G. BEALE CHITTY ON CONTRACTS, Vol. I, 11 (Sweet & Maxwell, 2008); BEATSON, supra note 1, at 4;
ATIYAH, supra note 7, at 282; Central Inland Water Transport Corporation Limited v. Brojo Nath Ganguly,
(1986) 3 SCC 156, ¶77.
32
The Indian Contract Act, 1872.
33
Bharti Knitting Company v. DHL Worldwide Express Courier Division of Airfreight Ltd., (1996) 4 SCC 704.
34
See L’Estrange v. F. Graucob, Limited, [1934] 2 KB 394 (Court of Appeal, United Kingdom) (“When a
document containing contractual terms is signed, then, in the absence of fraud, or, I will add, misrepresentation,
the party signing it is bound, and it is wholly immaterial whether he has read the document or not.”, cited in
BEATSON, supra note 1, at 188. The Court also noted that “[t]he present case is not a ticket case, and it is
distinguishable from the ticket cases. … In cases in which the contract is contained in a railway ticket or other
a typical exposition of the ‘duty to read’ doctrine developed under the classic theory of
contract in the paradigm of ‘individually negotiated contracts’, which entails a presumption
that the parties know the terms of the contract. 35
Such comprehensive acceptance of the exclusion clauses granted a free

domain for its operation and further development, for instance, in the form of a ‘Himalaya
Clause’.36 A contractual clause ordinarily binds only parties to the contract; however, on
multiple instances, the contracting parties do not actually executive the contract themselves,
but do so through their employees or agents. In such circumstances, the ‘Himalaya clause’
helps the parties to extend the benefits of the exclusion clause to such third parties working
under the contract by explicating the extended application of the exclusion to the employees
working under the contract. 37 Though the courts have taken flexible as well as stringent
approach while upholding such extension.38 Nevertheless, this depicts the widespread
acceptance and extended effects of exclusion clauses in its multi-fold manifestations.
unsigned document, it is necessary to prove that an alleged party was aware, or ought to have been aware, of its
terms and conditions. These cases have no application when the document has been signed.” This observation
was made to differentiate the cases involving written agreement from those involving unsigned document. In the
former, the signature in itself binds the signing party, wherein in the case of latter, an additional factum of
knowledge of the conditions on part of the receiving party must be established.) See Parker v. South Eastern
Railway, (1877) 2 CPD 416 (Court of Appeal, United Kingdom) cited in BEATSON, supra note 1, at 188 (“Now
if in the course of making a contract one party delivers to another a paper containing writing, and the party
receiving the paper knows that the paper contains conditions which the party delivering it intends to constitute
the contract, I have no doubt that the party receiving the paper does, by receiving and keeping it, assent to the
conditions contained in it, although he does not read them, and does not know what they are.”); See Bihar State
Electricity Board, Patna v. Green Rubber Industries and Ors., (1990) 1 SCC 731, ¶23; See also Henderson v.
Stevenson, (1875) LR 2 HL (Sc) 470, at 474 (Scottish Court of Session); Hood v. Anchor Line, [1918] AC 837,
at 845 (House of Lord, United Kingdom); Singhal Transport v. Jasaram Jamumal, AIR 1968 Raj 89, ¶11.
35
Law Commission of India, Unfair (Procedural and Substantive) Terms in Contract, Report No.199, 76-119
(August, 2006).
36
Adler v. Dickson, [1955] 1 QB 158 (England and Wales Court of Appeal) (here, the plaintiff was travelling
through a cruise ship named ‘The Himalaya’. Due to the negligence of the master and the boatswain, she was
injured. The ship-owner was contractually exempted from the entire liability and thus, she sued the master and
the boatswain of the ship and succeeded against them for negligence and breach of duty of care. It was noted by
the Court that unless the contract between the ship-owner and the plaintiff expressly or impliedly extended the
effects of exclusion to the employees working under the ship-owner, which in the present case was absent, such
employees cannot take benefit of the exclusion); See Michael F. Sturley, International Uniform Law in National
Courts, Vol. 27 VIRGINIA J. INT’L L. 729 (1987) (here, the author has highlighted the manner in which
proceeding against the agents virtually nullified the inclusion of the exclusion clauses – ‘The carrier (‘The
Himalaya’), having indemnified its employees, ultimately paid the damages, It thus lost its contractual
exemption indirectly’); ROY GOODE, GOODE ON COMMERCIAL LAW 1175 (Penguin, 2010); Law Commission of
India, Unfair Terms in Contract, Report No.103, 2 (May, 1984).
37
New Zealand Shipping Co. Ltd. v. A.M. Satterthwaite & Co. Ltd., [1975] AC 154 (Privy Council of the
United Kingdom).
38
In certain cases, the courts have extended the benefits of exclusion clause in the absence of the Himalaya
clause as well: London Drugs Ltd. v. Kuehne & Nagel International Ltd., [1992] 3 SCR 299 (Supreme Court of
Canada) cited in Baf Distributors Ltd. v. George W. Bennett Brysons & Co. Ltd., Claim No.:
ANUHCV2012/0680 (Eastern Caribbean Supreme Court – Antigua and Barbuda) (in this Canadian case, the
matter was concerning the employees of the contracting party. Though the employees were strangers to the
contracts, the Court found that they were beneficiaries of the exemption clauses because there was an identity of
interest between the employees and the warehouse company. Per contra, in certain cases, the courts have held
that Himalaya clauses in itself are not sufficient and the desired exclusion must be conveyed through a separate
collateral contract between the employers and its agents). Homburg Houtimport BV v. Agrosin Private Ltd.,
Such widespread acceptance had brought with itself the vice of misuse as
entities had started drafting exclusion clauses with the widest possible exclusion.43 This was
especially true in cases where parties shared unequal bargaining power in the contractual
negotiation, and one of the parties had no choice but to accept the terms of contract,44 for
instance, in a standard form contract. 45 Consider a situation where a business organisation
(private or public) is transacting with an individual consumer having comparatively lesser
bargaining power or no negotiating powers at all,46 but to sign the contract.47 This
arrangement enables a seller to introduce favourable terms in the contract,48 and state “if you
(the other party) want these goods or services at all, these are the only terms on which they
are available. Take it or leave it.”49 Given the pervasive nature of the standard form
contracts,50 instead of being a contextual necessity, some scholars have argued that the
freedom of contract is becoming restricted,51 a situation that strikes at the roots of the basic
principles of the law of contract. 52 Eike von Hippel, specifically on exemption clause has
gone on to state that ““freedom of contract” […] has become a fiction.”53
[2003] 2 WLR 711 (England and Wales Court of Appeal); SAHARAY, supra note 6, at 40; G.H. TREITEL, THE
LAW OF CONTRACT, ¶14-071 (Sweet & Maxwell, 2007).
43
ATIYAH, supra note 7, at 197; See Elgin Brown & Hamer (Pty) Ltd. v. Industrial Machinery Suppliers (Pty)
Ltd., Case No. 272/93 (Supreme Court of South Africa); Onego Shipping & Chartering BV v. JSC Arcadia
Shipping M/V ‘SOCOL 3’, [2010] EWHC 777 (Comm) (England and Wales High Court); S.J. Leacock,
Fundamental Breach of Contract and Exemption Clauses in the Commonwealth Caribbean, Vol. 4(2) ANGLO
AM. L. REV. 181 (1975) at 188; See also Law Commission of India, Unfair Terms in Contract, Report No.103,
1, 2 & 5 (May, 1984).
44
ATIYAH, supra note 7, 197.
45
BEATSON, supra note 1, 187 (defines a standard form contract as a uniform set of printed conditions which
can be used time and time again, and for a large number of persons, and at less cost than an individually
negotiated contract.)
46
Law Commission of India, Unfair Terms in Contract, Report No.103, 1 (May, 1984); See Central Inland
Water Transport Corporation Ltd. and Anr. v. Brojo Nath Ganguly and Anr., (1986) 3 SCC 156, ¶¶84 & 91; See
Kumari Shrilekha Vidyarthi v. State of UP, (1991) 1 SCC 212, ¶21; H.B. Sales, Standard Form Contracts, Vol.
16(3) MODERN L. REV. 318 (1953).
47
Central Inland Water Transport Corporation Ltd. and Anr. v. Brojo Nath Ganguly and Anr., (1986) 3 SCC
156, ¶89; E. Mohan v. Madras Fertilizers Ltd., 2010 Indlaw MAD 1873, ¶20; See Miss. Tshering Diki Bhutia v.
State of Sikkim, 1998 SCC OnLine Sikk 1, ¶16.
48
Law Commission of India, Unfair Terms in Contract, Report No.103, 1, 2 (May, 1984); Friedrich Kessler,
Contracts of Adhesion - Some Thoughts about Freedom of Contract, Vol. 43 COLUM. L. REV. 630 (1943).
49
Schroeder Music Co. Ltd. v. Macaulay, [1974] 3 All ER 616 (Judicial Functions of the House of Lords) cited
in Central Inland Water Transport Corporation Ltd. and Anr. v. Brojo Nath Ganguly and Anr., (1986) 3 SCC
156, ¶ 84; Savita Samriya and Ors. v. State of Rajasthan, 2009 (4) RLW 2933, 2009 Indlaw RAJ 769, ¶13.
50
W. David Slawson, Standard Form Contracts and Democratic Control of Lawmaking Power, Vol. 84(3)
HARV. L. REV. 529 (1971) (standard form contracts probably account for more than ninety-nine percent of all
the contracts now made.) This high percentage was reaffirmed in John J.A. Burke, Contract as Commodity: A
Nonfiction Approach, Vol. 24 SETON HALL LEGIS. J. 290 (2000); See Joanne P. Braithwaite, Standard Form
Contracts as Transactional Law: Evidence from the Derivatives Markets, Vol. 75(5) MODERN L. REV. 779
(2012).
51
(August, 2006).; BEATSON, supra note 1, at 4, 7 cited in Delhi Transport Corporation v. DTC Mazdoor
Congress, (1991) Supp (1) SCC 600, ¶280.
52
At this point, it is clarified that the economic benefits of standard form contracts are nowhere declined. As
Friedmann puts it in WOLFGANG FRIEDMANN, LAW IN A CHANGING SOCIETY 102 (1959): ‘The working out of
thousands of individual contract terms for substantially similar transactions would be as uneconomical as the use
of antiquated machinery.’ Therefore, the pervasive acceptance of standard form contracts lies in the positive
economies attached to them such as time saving, cost cutting, utilisation of junior employees for contract
finalisation, fewer requirements to negotiate the terms on a recurring basis, constantly plugging the loopholes in
Here, one might argue that signing a standard contract is an individual’s

volition and thus, the signature shows free consent to enter into a bargain. There are three
arguments to contradict such a claim. First, could the individual have negotiated the removal
of an unreasonable exclusion clause from the contract? The Law Commission of India (‘Law
Commission’), in its 103rd Report,54 raised some of the initial concerns on these lines. The
Commission critically deliberated upon a number of cases involving the use of
unconscionable exclusion clauses by transport carriers, which intended to limit or exclude
their liability. In these cases, various High Courts in India favoured the carriers on the ground
that since the conditions of the tickets were already presented to the consumers in printed
form, they were deemed to know those terms irrespective of whether it was read or not.55
However, the Law Commission raised a concern, stating: “Assuming that he knows the
conditions, if he wanted to change them, could he negotiate and do so? If he cannot, what
does it matter, and how are the courts to come to his rescue?”.56 This lack of negotiating
power (a kind of circumstantial powerlessness) is one of the strongest factor restricting the
true freedom of contract. This argument also touches upon or in many ways contradict the
core of the ‘duty to read’ doctrine developed under the classic theory of contract and thus
questions the justifiability of its continued application because:
Free contract presupposes free bargain; and free bargain presupposes free
bargaining; and that where bargaining is absent in fact, the conditions and
clauses to be read into bargain are not those which happen to be printed on the
unread paper, but are those which a sane man might reasonably expect to find
on that paper.57
Second is an argument furthered by Prof. Friedrich Kessler, that a person in

need of goods and services being sold under abusive contractual terms shall not be able:
[t]o shop around for better terms, either because the author of the standard
contract has a monopoly (natural or artificial) or because all competitors use
the same clause. His contractual intention is but a subjection more or less
voluntary to terms dictated by the stronger party. … Thus, standardised
contracts are frequently contracts of adhesion; they are á prendre ou à laisser. 58
Third, standard form contracts are generally used to avail necessary services
such as insurance, travel, banking, employment, e-commerce services 59 etc. and the classical
contract drafting ensuring that similar mistakes are not repeated, inter alia: See CHESHIRE ET AL, LAW OF
CONTRACTS 21 (1991) cited in Pawan Alloys & Casting (P) Ltd. v. U.P. State Electricity Board, (1997) 7 SCC
251, ¶46.
53
Eike Von Hippel, The Control of Exemption Clauses – A Comparative Study, Vol. 16(3) INT’L & COMP. L. Q.
591, 606 (1967).
54
Law Commission of India, Unfair Terms in Contract, Report No.103 (May, 1984).
55
Indian Airlines Corporation v. Jothaji Maniram, AIR 1959 Mad 285; Rukmanand Ajitsaria v. Airways (India)
Ltd., AIR 1960 Assam 71; Indian Airlines Corporation v. Madhuri Chowdhuri, AIR 1962 Cal 544; Singhal
Transport v Jesaram Jamumal, AIR 1968 Raj 89.
56
Law Commission of India, Unfair Terms in Contract, Report No.103, 4 (May, 1984).
57
Karl Llewellyn, Book Review: The Standardization of Commercial Contracts in English and Continental Law,
By O. Prausnitz, Vol. 52(4) HARV. L. REV. 700 (1939).
58
Friedrich Kessler, Contracts of Adhesion - Some Thoughts about Freedom of Contract, Vol. 43 COLUM. L.
REV. 630 (1943).
59
See generally Govind Rubber Limited v Louis Dreyfus Commodities Asia Private Limited, (2015) 13 SCC
477, ¶16.
theory fails to check the abuse of bargaining power by the service provider. This is because
such abuse does not fall within the existing vitiating elements of a contract, i.e. coercion,
undue influence, fraud, misrepresentation or mistake,60 which essentially denote procedural
unfairness. On the contrary, the abuse of unequal bargaining power by the service providers
as manifested through unfair contractual clauses depicts circumstantial powerlessness and
falls under substantive unfairness. In the words of the Supreme Court of India,
[t]he ‘standard form’ contract is the rule. [One] must either accept the terms of
[the] contract or go without. Since, however, it is not feasible to deprive
oneself of such necessary services, the individual is compelled to accept on
those terms. In view of this fact, it is quite clear that freedom of contract is
now largely an illusion.61
The situation turned worrying when the courts disallowed challenges against
unreasonable exclusion clauses. 62 Owing to the lack of jurisdiction due to statutory void to
entertain claims based on the ‘unequal bargaining power’,63 ‘economic dominance’ or
‘circumstantial powerlessness’,64 the courts allowed any exclusion clause using the argument
of freedom of contract, 65 without analysing whether the parties, in reality, possessed any
freedom to negotiate the terms or not. 66 The contract law had no concerns with the outcomes
of the contract.67 Similarly, the courts ruled out the application of the principles of good faith
in contractual arrangements:68 “there is no general doctrine of good faith in the English law
of contract. The parties are free to act as they wish, provided that they do not act in breach of
a term of contract.”69
Taking this conception of contractual autonomy further, the South African

Supreme Court of Appeal, in Afrox Health Care (Pty) Ltd v. Strydom,70 upheld a contractual
clause that excluded the liability of the appellant for negligence. In vain, the respondents had
argued that the exclusion clause is unenforceable for being contrary to public policy as it
violated the right to health care enshrined under §27 of the Constitution of South Africa. The
Court noted that the constitutional right did not prohibit the hospital from contracting certain
conditions before rendering the health care services and that the right to health care needs to
be balanced with the principle of freedom of contract, which was also supported by
constitutional values.
The law in India has been written and interpreted on similar lines and has
favoured party autonomy. §10 of the Act states that: “All agreements are contracts if they are
60
The Indian Contract Act 1872, §15-22.
61
Delhi Transport Corporation v. D.T.C. Mazdoor Congress and Ors., 1991 Supp (1) SCC 600, ¶280.
62
See Law Commission of India, Unfair Terms in Contract, Report No.103, 1-3 (May, 1984).
63
National Westminster Bank Plc. V. Morgan, [1984] 1 AC 686 (Judicial Functions of the House of Lords).
64
Consider a situation where the sole governmental railway organisation issues the travel tickets with certain
exclusion clauses.
65
Central Inland Water Transport Corporation Limited v. Brojo Nath Ganguly, (1986) 3 SCC 156, ¶77.
66
ATIYAH, supra note 7, at 200.
67
Id., 283.
68
BEALE, supra note 31, at 20.
69
James Spencer & Co. Ltd. v. Tame Valley Pudding Co. Ltd., (Unreported) April 8 1998, CA (Civ. Div.)
(England and Wales Court of Appeal) cited in BEALE, supra note 31, at 21; Walford v. Miles, [1992] 2 AC 128
(House of Lords, United Kingdom).
70
Afrox Health Care (Pty) Ltd. v. Strydom, 2002 (6) SA 21 (Supreme Court of Appeal, South Africa).
made by the free consent of parties…”71 and §14 defines free consent as the one that is not
caused by coercion, undue influence, fraud, misrepresentation or mistake. 72 The Act does not
envisage any provision prohibiting unfair contracts or substantive unconscionability. But for
a public policy exception, 73 the Act is centred on the protection from procedural fairness. The
Supreme Court of India has also endorsed this scheme of the Act, especially in commercial
contracts. For instance, in S.K. Jain v. State of Haryana,74 the parties inserted an additional
clause in their contract, which the appellant found to be unconscionable. However, the Court
denied the application of the doctrine of unequal bargaining power by reasoning that if people
entered into unconscionable bargains with their knowledge and will, they cannot
subsequently seek the protection of law.75
One could argue that such emphasis on procedural fairness while ignoring
substantive fairness should be given a rethought to ensure that one does not exploit
circumstantial powerlessness to obtain unfair benefits out of the contract. Freedom of
contract is supposed to be a reasonable social ideal, 76 which must be based on the equality of
bargaining powers between the contracting parties 77 to ensure that no injury is done to their
economic interests. 78 Atiyah has noted that “the fairness of the outcomes of a bargain in the
marketplace is dependent on the initial distribution of wealth and resources with which the
parties have entered the market.”79 Given the imperfect market information and wide
coverage of a business in the market, imagining an equitable distribution of wealth and
resources is purely unreasonable. As Anson has noted, “in many areas of contract, freedom of
contract in the classical sense is manifestly lacking … It may be objected that the general
principles of contract law therefore, present an inadequate, if not distorted, picture of modern
economic life.”80 Therefore, it becomes imperative to ensure that parties holding dominant
bargaining position do not abuse such dominance and insert unreasonable clauses excluding
their liability.
In order to provide remedies for such situations, the UK Parliament enacted

the Unfair Contract Terms Act, 1977 [‘UCTA’], which empowers the courts to strike down
an unreasonable exclusion clause of a contract; 81 and the Consumer Rights Act, 2015, which
deems unfair contractual terms as non-binding.82 On similar lines, India has also enacted the
Consumer Protection Act, 2019, which envisages remedies against unfair consumer contracts.
71
The Indian Contract Act 1872, §10.
72
73
74
S.K. Jain v. State of Haryana, (2009) 4 SCC 357, ¶8.
75
Sundarambal Ammal v. Yogavanagurukkal, AIR 1915 Mad 561; Mackintosh v. Wingrove, (1878) 4 Cal 137;
Satish Chunder Giri v. Hem Chunder Mookhopadhya, (1902) 29 Cal 823; See also Karnal Distillery Co. Ltd. v.
Ladli Parsad Jaiswal, AIR 1958 Punj. 190; See also Raghunath Altia v. Arjuno Altia, AIR 1973 Ori 76.
76
BEATSON, supra note 1, 4; CHITTY ON CONTRACTS ¶4 (A.G. Guest, ed., 1983 cited in Central Inland Water
Transport Corporation Limited v. Brojo Nath Ganguly, (1986) 3 SCC 156, ¶79; See State of Kerala v. State of
Tamil Nadu, 2018 Indlaw SC 71, ¶¶111-114.
77
LIC of India v. Consumer Education and Research Centre, (1995) 5 SCC 482, ¶¶32, 37.
78
Id.
79
80
BEATSON, supra note 1, 6.
81
The Unfair Contract Terms Act, 1977, Chapter 50 (United Kingodm); See Law Commission of India, Unfair
Terms in Contract, Report No.103, 7 (May, 1984).
82
The Consumer Rights Act 2015, Chapter 15 (United Kingdom), §62(1).
We are yet to see courts’ interpretation of unfair terms in consumer contracts and in
comparison with the UK consumer law, the scope of Indian law seems restrictive.
However, a statutory void still prevails in the Indian jurisdiction with regard to
contracts other than consumer contract. The courts in India will need to continue to decide,
within the limited scope of interpretation, what constitutes a possible misuse of the exclusion
clauses. It is desirable that statutory safeguards,83 are structured to ensure that unequal
bargaining power is not misused and unreasonable exclusion terms do not defeat one of the
fundamental principles of the contract law: one must honour the promises made.84
III. EVOLVING REMEDIES UNDER THE CONTRACT LAW
The specific nature of the exclusion clauses, which operates in favour of one
of the parties of the contract, has led to a high number of litigation over the years, which
made it imperative for the courts to derive and adopt a variety of methods.85 These methods
primarily focussed on granting remedies to the plaintiffs by either undoing the effects of the
unfairness attached with the exclusion clauses or by deeming such clause devoid of any legal
effect. Based on the study of the case laws, the remedies can be classified under four broad
heads: (A) remedies against non-fulfilment of the ‘notice procedure’; (B) remedies through
‘interpretative mechanism’; (C) remedies against non-conformity with the ‘statutory
requirements’; and (D) remedies against ‘unconscionable terms’. In the following part,
elaboration is made on these remedies and their shortfalls.
A. REMEDIES FOR NON-FULFILMENT OF THE ‘NOTICE PROCEDURE’
To be effective and enforceable, the drafter of the exclusion clause must

endeavour to sufficiently bring its existence to the notice of the other party.86 Once the
knowledge is established and freedom of contract ensured, it is imperative for the courts to
enforce it.87 If the party inserting the exclusion clause fails to disclose the exclusion in the
terms of the contract, then it is treated as foreign to the contract and thus, non-enforceable.88
For instance, in Modern Insulators v. Oriental Insurance Co Ltd,89 the insurer failed to
communicate certain terms and conditions including the exclusion clause while forwarding
the schedule of insurance policy to the insured. The exclusion clause intended to cease the
liability of the insurer if the insured used second-hand property in a particular mechanical
test. When the structure collapsed due to the use of second-hand property, the Supreme Court
denied the benefits of the exclusion clause to the insurer because it was ‘neither a part of the
contract of insurance nor disclosed’ to the insured, and held the insurer bound to bear the
costs.
83
Infra, Part IV.
84
Indian Contract Act 1872, §37.
85
ATIYAH, supra note 7, 199..
86
Road Transport Corporation v. Kirloskar Brothers Ltd., AIR 1981 Bom 299; Singhal Transport v. Jesaram
Jamumal, AIR 1968 Raj 89; Lacey’s Footwear (Wholesale) Ltd. v. Bowler Insurance Ltd., [1997] 2 Lloyd’s Rep
369 (Court of Appeal, United Kingdom); Parker v. South Eastern Railway Co., (1877) 2 CPD 416 (Court of
Appeal, United Kingdom).
87
United India Insurance Co. Ltd. v. Manubhai Dharmasinhbhai Gajera and Ors., (2008) 10 SCC 404, ¶70.
88
Modern Insulators v. Oriental Insurance Co. Ltd., (2000) 2 SCC 734, ¶9; RICHARD LAWSON, EXCLUSION
CLAUSES AND UNFAIR CONTRACT TERMS 1 (Sweet & Maxwell, 2010).
89
Modern Insulators v. Oriental Insurance Co. Ltd., (2000) 2 SCC 734, ¶9
The law mandates that the notice of the exclusion clause must be
communicated through a medium, which legally binds and obligates the other party to take
cognisance. It must be extended through a contractual document so that it is obvious to a
reasonable person that certain intentions are tried to be communicated 90 and the parties are
restrained from making subsequent exclusions.91 Any other kind of document not intended to
have contractual effect, for instance, a receipt of payment, cannot incorporate an exclusion
clause unless specific reference to the clause is made at the time of handing over of the
receipt or such other document:92 “the Court must be satisfied that the particular document
relied on as containing notice of the excluding or limiting term is in truth an integral part of
the contract.”93 This ensures the true presence of consensus ad idem, which is required to a
higher degree owing to the probable hardship that such clauses pose on the other party in the
contract.94
The test of whether reasonable notice was given to the other party is governed
by the acts of the party incorporating the clause,95 and thus, the burden of proof to establish
the applicability of the exclusion clause rests on the party which is claiming the benefit under
such clause.96 The law requires the incorporating party to merely show the reasonable steps
taken to bring the fact in the knowledge of the other party, 97 and it is independent of the other
party’s discovery of such a fact.98 As detailed above, once the parties have signed the
90
Nunan v. Southern Rly., [1923] 2 KB 703.
91
Olley v. Marlborough Court Ltd., [1949] 1 KB 532 (Court of Appeal, United Kingdom); See Thornton v.
Shoe Lane Parking Ltd., [1971] 1 QB 163 (Court of Appeal, United Kingdom).
92
Chapelton v. Barry Urban DC, [1940] 1 KB 532 (Court of Appeal, United Kingdom); Hollingworth v.
Southern Ferries Ltd., [1977] 2 Lloyd’s Rep. 70 (Queen’s Bench Division, United Kingdom); See Bahamas Oil
Refining Co. v. Kristiansands Tankrederie A/S, [1978] 1 Lloyd’s Rep 211 (Queen’s Bench Division); M/s Road
Transport Corporation v. Kirloskar Brothers Ltd., AIR 1981 Bom 299, ¶34; The Special Secretary to
Government of Rajasthan and Ors. v. Vedakantara Venkataramana Seshaiyer and Ors., AIR 1984 AP 5, ¶¶28 &
42; R.S. Deboo v. Dr MV Hindlekar and Ors., AIR 1995 Bom 68, ¶20.
93
White v. Blackmore, [1972] 3 All ER 158, per Lord Denning, M.R (Court of Appeal, United Kingdom).
94
See A.B.C. Laminart (P) Ltd. and Anr. v. A.P. Agencies, Salem, (1989) 2 SCC 163, ¶21; See Canada
Steamship Lines Ltd. v R., [1952] All ER 305 (Privy Council, United Kingdom).
95
See McCutcheon v. David MacBrayne, [1964] 1 WLR 125 (House of Lords, United Kingdom) (here, the
appellant, through his brother-in-law, had contracted with the respondent to ship his car. Unfortunately, the
respondent’s vessel sank and the appellant sued the respondent for damages. It was contended by the respondent
that in its previous dealings with the appellant, they used to sign a ‘risk-note’, which included an exclusion
clause. The absence of such a risk note in the present case, the respondent contended, should not allow the
appellant to claim damages. However, the House of Lords did not agree with these contentions and ruled that in
the absence of any risk-note, the appellant could not be said to be in knowledge of the exclusion clause.
Moreover, the fact that there was no consistent manner of dealings among the parties as they used to sign a risk-
notes only on some occasions, it was held that previous conduct could not be used as an evidence of knowledge
of the exclusion clause); Hollier v. Rambler Motors (AMC) Ltd., [1972] 2 QB 71 (Court of Appeal, United
Kingdom).
96
New India Assurance Company Limited v. Rajeshwar Sharma and Ors., (2019) 2 SCC 671, ¶9; Peacock
Plywood (P) Ltd. v Oriental Insurance Co. Ltd., (2006) 12 SCC 673, ¶73; National Insurance Co. Ltd. v Ishar
Das Madan Lal, (2007) 4 SCC 105, ¶8; See National Insurance Company Limited. v. Savitri Devi and Others,
(2013) 11 SCC 554, ¶4; Mukund Dewangan v. Oriental Insurance Company Limited, (2017) 4 SCC 663, ¶42;
A.W. BAKER WELFORD, THE LAW RELATING TO ACCIDENTAL INSURANCE 126 (1923) cited in New India
Assurance Company Limited v. Rajeshwar Sharma, (2019) 2 SCC 671, ¶14.
97
Burnett v. Westminster Bank Ltd., [1966] 1 QB 742 (Queen’s Bench Division, United Kingdom).
98
Birch v. Thomas, [1972] 1 WLR 294 (Court of Appeal, United Kingdom).
contract, it is immaterial for the opposite party to argue that it was unaware of the exclusion
clause.99
In addressing the possible abuse in contracting, the courts have gone a step
forward, particularly when the exclusion clauses are onerous in nature. It is a common
practice to incorporate such unduly beneficial terms in fine print 100 and here, the test becomes
‘rigorous’ allowing a significant role in the nature of the exclusion.101 The Andhra Pradesh
High Court has noted that:
The greater the rigour of the exclusion of liability, the more the need to bring
such clauses to the plaintiff’s knowledge, or to do all that could possibly be
done in that direction. In any event, the said effort on the part of the defendant
should have been made at or before the time the plaintiff entered into the
contract.102
Though the Indian courts are silent on constituents of ‘rigorousness’, the

English courts seem to denote something more than a mere signature on the contract. It has
been held that when the terms of a contract are onerous, even a signature might not be enough
to fulfil the requirements of notice. Adequate steps must be taken to bring to the knowledge
of the other party the effects of the application of such clauses by making the term
conspicuous,103 in addition to taking any other special efforts.104 This may include
specifically communicating the existence and explaining its operational domain in a manner
best suitable for the other party. Therefore, in the words of Treitel, “the question whether
adequate notice has been given turns principally on two factors: the steps taken to give notice
and the nature of the exempting conditions.”105
B. REMEDIES THROUGH ‘INTERPRETATIVE MECHANISMS’
The general rule for interpretation of a contract is that the contract must be
read in its entirety in accordance with the intention of the parties derived from its intended
language and nothing can be read by implication. 106 Similarly, the words of exclusion must
be read in the context of the contract as a whole 107 and with due regard for its purpose,108
otherwise “the very existence of the exclusion of the jurisdiction clause in the agreement
99
Bharti Knitting Company v. DHL Worldwide Express Courier Division of Airfreight Ltd., (1996) 4 SCC 704;
L’Estrange v. F. Graucob, Limited, [1934] 2 KB 394 (Court of Appeal, United Kingdom).
100
(August, 2006).
101
J Spurling Ltd. v. Bradshaw, [1956] 1 WLR 461 (Court of Appeal, United Kingdom): (“I quite agree that the
more unreasonable a clause is, the greater the notice which must be given of it" per Lord Denning).
102
The Special Secretary to Government of Rajasthan and Ors. v. Vedakantara Venkataramana Seshaiyer and
Ors., AIR 1984 AP 5, ¶42; See also Interfoto Picture Library Ltd. v. Stiletto Visual Programmes Ltd., [1989]
QB 433 (Queen’s Bench, United Kingdom).
103
Crooks v. Allen, (1870) 5 QBD 38 (Queen’s Bench Division, United Kingdom).
104
Ocean Chemical Transport Inc. v. Exnor Craggs Ltd., [2000] 1 Lloyd’s Rep 446 (Court of Appeal, United
Kingdom).
105
TREITEL, supra note 38, 218.
106
BEATSON, supra note 1, at 183, 184; D.D.A. v. Jitender Pal Bhardwaj, (2010) 1 SCC 146; Darlington Futures
Ltd. v. Delco Australia Pty Ltd., (1986) 161 CLR 500, 510.
107
Beaumort-Thomas v. Blue Star Line Ltd., [1939] 3 All ER 127 cited in SAHARAY, supra note 6, at 37.
108
Impact Funding Solutions Limited v. AIG Europe Insurance Ltd., [2016] UKSC 57 (Supreme Court, United
Kingdom) cited in New India Assurance Company Limited v. Rajeshwar Sharma, (2019) 2 SCC 671, ¶15.
would be rendered meaningless were it not given its natural and plain meaning.”109
Nevertheless, the nature of exclusion clauses mandates that they should be expressed ex
abundanti cautela110 by using clear, explicit, specific, and unambiguous terms 111 to allow the
courts to give it a natural meaning.
In 2016, the UK Supreme Court extensively discussed the manner of

interpretation of exclusion clauses in Impact Funding Solutions Limited v. AIG Europe
Insurance Ltd.,112 stating:
The fact that a provision in a contract is expressed as an exception does not

necessarily mean that it should be approached with a pre-disposition to
construe it narrowly. Like any other provision in a contract, words of
exception or exemption must be read in the context of the contract as a whole
and with due regard for its purpose. As a matter of general principle, it is well
established that if one party, otherwise liable, wishes to exclude or limit his
liability to the other party, he must do so in clear words; and that the contract
should be given the meaning it would convey to a reasonable person having all
the background knowledge which is reasonably available to the person or class
of persons to whom the document is addressed… words of exception may be
simply a way of delineating the scope of the primary obligation. 113
This conveys that when the exclusion clause is clear and unambiguous to an
ordinary reasonable person, is drafted in clear words or has the effect of exclusion by
necessary implication or a fair reading,114 then it shall be accorded plain and simple
meaning.115 However, when the clause remains ambiguous about peculiar situations, it will
allow the courts to invoke interpretative mechanisms to ensure reasonableness in the contract.
For instance, consider a situation where a contract of vehicle servicing contains an exclusion
clause stating that ‘the service company shall not be liable for any damage to the car’. While
the car was at the company’s premises, the car was destroyed due to fire owing to company’s
negligence. In this situation, even if the exclusion clause seems comprehensive, it could be
argued that the exclusion clause is ambiguous as it does not clarify whether the clause applies
to damage incurred while performing repair works or it even extends to any other kind of
damage owing to company’s negligence. In such cases, the courts can invoke interpretative
mechanisms to ensure reasonableness in the contract. The Indian courts have done this in two
109
Swatik Gas Private Limited v. Indian Oil Corporation Limited, (2013) 9 SCC 32, ¶37, per Justice Lokur.
110
BLACK’S LAW DICTIONARY 641 (12th ed., 2009): out of abundant caution; to be on the safe side.
111
Gillepsi Bros & Co. Ltd. v. Roy Bowles Transport Ltd., [1973] 1 All ER 193 (Court of Appeal, United
Kingdom); Gross v. Sweet, 49 NY (2d) 102 (1979) (Court of Appeals of the State of New York); Impact
Funding Solutions Limited v. AIG Europe Insurance Ltd, [2016] UKSC 57 (Supreme Court, United Kingdom);
A.W. BAKER WELFORD, THE LAW RELATING TO ACCIDENTAL INSURANCE 126 (Butterworths, 1923); A.B.C.
Laminar (P) Ltd. v. A.P. Agencies, (1989) 2 SCC 163, ¶21; Union of India v. Alok Kumar, (2010) 5 SCC 349,
¶43; New Moga Transport Co. v. United India Insurance Co. Ltd., (2004) 4 SCC 677, ¶19.
112
Impact Funding Solutions Limited v. AIG Europe Insurance Ltd, [2016] UKSC 57 (Supreme Court, United
Kingdom).
113
Impact Funding Solutions Limited v. AIG Europe Insurance Ltd, [2016] UKSC 57 (Supreme Court, United
Kingdom).
114
Gillespie Bros. & Co. Ltd. v. Bowles (Roy) Transport Ltd., [1973] 1 All ER 193 (England and Wales Court
of Appeal); Ailsa Craig Fishing Co. v. Malvern Fishing Co. Ltd., [1983] 1 All ER 101 (House of Lords, United
Kingdom).
115
See D.D.A. v, Jitender Pal Bhardwaj, (2010) 1 SCC 146, ¶9.
ways: (1) by employing the rule of contra proferentem through strict interpretation of the
contract; and (2) by reading down the clause in light of the main object of the contract and
intent of the parties. These two are explained below.
1. RULE OF CONTRA PROFERENTEM
In cases where the exclusion clause remains ambiguous, the courts have
applied the rule of verba fortius accipiuntur contra proferentem. 116 This rule mandates the
application of that interpretation which is in favour of the party other than the one who
drafted the contract,117 which is generally done by construing the exclusion narrowly. 118 For
instance, when an insurer contracts with the insured on its standard terms, then “in case of
real doubt, the policy ought to be construed most strongly against the insurers; [because] they
frame the policy and insert the exceptions”.119 According to Anson, the reason for the
evolution of this rule lies in the want to check the misuse of higher bargaining power among
the parties to a contract:
The disparity between the bargaining power of consumers and large

enterprises (both private and public) means that terms have often been
imposed upon consumers which are unfair in their application and which
exempt the enterprise putting forward the document, either wholly or in part,
from its just liability under the contract. 120
Another reason for the emergence of this rule, in the words of Atiyah, is the
want of reciprocity in a contract.
Questions of construction and interpretation are liable to be approached by

courts with a strong bias in favour of the idea that a contract should ensure
some substantial reciprocity in contract. 121
It must be clarified that this rule shall be applicable only to interpret

ambiguous clauses and remove doubts, not to germinate any ambiguity or read new terms
116
Sushilaben Indravadan Gandhi and Anr. v. New India Assurance Company Limited and Ors., 2020 SCC
OnLine SC 367, ¶29; Industrial Promotion and Investment Corporation of Orissa Limited v. New India
Assurace Company Limited and Anr., (2016) 15 SCC 315, ¶10; Frans Maas (UK) Ltd. v. Samsung Electronics
(UK) Ltd., [2004] EWHC 1502 (Comm) (England and Wales High Court); See Transocean Drilling UK Ltd. v.
Providence Resources Plc., [2016] EWCA Civ 372 (England and Wales Appeals Court); See Edwin Peel,
Contra Proferentem Revisited, 133 L. Q. REV. 7 (2017); Smt. Pushpa Agarwal v. Insurance Ombudsman UP and
Ors., 2012 (6) ADJ 287, 2012 Indlaw ALL 4658, ¶25 cited in National Insurance Company Limited v. Fehmida
and Ors., (2018) 126 ALR 433, 2017 SCC OnLine All 2323, ¶24.
117
New India Assurance Company Limited v. Rajeshwa Sharma and Others, (2019) 2 SCC 671, ¶9; V.
Madhumohan v. Chairman and MD, Fertilisers and Chemicals, Travancore Ltd., Udyogamandal, 2015 (4) SLR
157, 2014 Indlaw AP 1131, ¶29; See Superintendence Company of India Pvt. Ltd. v. Krishan Murgai, (1981) 2
SCC 246, ¶63; See Mills v. Dunham, LR, [1891] 1 Ch. 576 (Chancery Divison, England); National Insurance
Co. Ltd. v. Ishar Das Madan Lal, (2007) 4 SCC 105, ¶8; Hollins v. Davy, [1963] 1 All ER 370 (Queens Bench,
England); United India Insurance Co. Ltd. v. Pushpalaya Printers, (2004) 3 SCC 694, ¶6; General Assurancce
Society Ltd. v. ChanduMull Jain and Anr., (1966) 3 SCR 500, ¶11.
118
Canara Bank v. United Indian Insurance Company Limited and Others, (2020) 3 SCC 455, ¶22.
119
New India Assurance Company Limited v. Rajeshwar Sharma and Others, (2019) 2 SCC 671.
120
ANSON, supra note 1, 193.
121
into the contract.122 The Supreme Court of India quoted the view taken by the High Court of
Justice for England and Wales that a court must be sensitive to the purpose of the exclusion
clause and should not automatically apply a contra proferentem approach when the terms are
clear and unambiguous.123 Only those cases involving genuine ambiguity in the meaning of
the clause call for the application of contra proferentem and the courts must refrain from
superficially reading ambiguity in the contract.124 For instance, in the above illustration, if the
exclusion clause had stated that ‘the service company shall not be liable for any damage to
the car, including any damage owing to company’s negligence’, it would have clarified that
the exclusion even extends to any damage owing to company’s negligence. Arguing that the
exclusion clause fails to specifically mention ‘fire’ as a cause of damage and thus it does not
exclude liability for damage due to a fire accident, would be to argue for an artificial
ambiguity. In the words of the Supreme Court of India, “in the absence of any ambiguity, [a
party] is not entitled to invoke the principle underlined in the rule of contra proferentem for
interpreting the clauses of the policy”, thereby affirming that “presence of ambiguity in the
language of the policy” is a “sine qua non for invocation of the contra proferentem rule”.125
Moreover, the UK courts have refrained from applying this rule when parties
are placed with similar bargaining power, for instance:
In commercial contracts negotiated between businessmen capable of looking

after their own interests and of deciding how risks … can be most
economically borne … it is wrong to place a strained construction upon words
in an exclusion clause which are clear and fairly susceptible of one
meaning.126
In India, a similar rule has been adopted by the Supreme Court in Export
Credit Guarantee Corporation of India Limited v. Garg Sons International, which involved
an insurance contract. 127 In this case, the insured was contractually obligated to submit
declarations regarding overdue payments to the insurer within a given timeline, in the
absence of which the insurer was exonerated of any liability under the contract. When the
insured failed to comply with the requirements of the contract, the Court observed that:
[t]he 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
122
Cornish v. Accident Insurance Co. Ltd., (1889) 23 QBD 453 (Queens Bench, England) cited in New India
Assurance Company Limited v. Rajeshwar Sharma and Others, (2019) 2 SCC 671, ¶13.
123
Crowden and Crowden v. QBE Insurance (Europe) Ltd., [2017] EWHC 2597 (Comm) (England and Wales
High Court), ¶65 cited in New India Assurance Company Limited v. Rajeshwar Sharma, (2019) 2 SCC 671,
¶16; D.D.A. v. Jitender Pal Bhardwaj, (2010) 1 SCC 146, ¶9.
124
Crowden and Crowden v. QBE Insurance (Europe) Ltd., [2017] EWHC 2597 (Comm) (England and Wales
High Court), ¶65 cited in New India Assurance Company Limited. v. Rajeshwar Sharma, (2019) 2 SCC 671,
¶16.
125
United Indian Insurance Company Limited v. Orient Treasures Private Limited, (2016) 3 SCC 49, ¶38.
126
Photo Production Ltd. v. Securicor Transport Ltd., [1980] AC 826 (Court of Appeals, England).
127
Export Credit Guarantee Corporation of India Limited v. Garg Sons International, (2014) 1 SCC 686.
contract, for the reason that a clause in a commercial contract is bilateral and
has mutually been agreed upon.128
Therefore, if the parties have mutually agreed to the negotiated terms of their
contract, especially in a commercial contract where it can be presumed that the parties have
equal bargaining power, then the courts shall refrain from applying the rule of contra
proferentem.
How do courts apply the rule of contra proferentem? Generally, exclusion

clauses are drafted to cover as many liabilities as possible and therefore, strict interpretation
is employed to restrict the scope of a vaguely worded clause. 129 For instance, a clause
excluding liabilities for implied conditions and warranties will not exclude liabilities from
expressly written conditions and warranties.130 Similarly, a clause excluding liability for
breach of a warranty shall not exclude liabilities arising from breach of a condition. 131
Moreover, it is believed that commercial contracts are drafted by taking due legal advice and
thus, when a party instead of using appropriate language uses loose language to draft the
clause, it cannot be read in its favour. 132 However, as a word of caution, it must be
remembered that “any clause in a contract had to be construed in the context in which it was
found, meaning both the immediate context of the other terms and the wider context of the
transaction as a whole.”133 For instance, in Dalmare SpA v. Union Maritime Ltd., Clause 11
of the agreement stated that “[t]he Vessel shall be delivered and taken over as she was at the
time of inspection …”. It was contended on behalf of Dalmare SpA, the seller, that the said
clause excluded the warranty as to the quality. Support was sought from Clause 55 which
stated that “where a right, duty or liability would arise under a contract of sale of goods by
implication of law, it may be (subject to the Unfair Contract Terms Act, 1977) be negative or
varied by express agreement […]”. However, the England and Wales High Court (Comm.)
did not agree with the arguments and decided in favour of Union Maritime Ltd., the buyers. It
128
Id., ¶11 (Emphasis added).
129
Hollier v. Rambler Motors, [1972] 1 All ER 399 (Queens Bench, England).
130
Andrew Bros Ltd. v. Singer & Co. Ltd., [1934] 1 KB 17 (Kings Bench, England).
131
Baldry v. Marshall, [1925] 1 KB 260 (Kings Bench, England); Wallis, Son & Wells v. Pratt & Haynes,
[1911] AC 394 (Court of Appeals, England); See KG Bominflot Bunkergesellschaft fur Mineraloele mbH & Co.
v. Petroplus Marketing AG, [2011] 1 Lloyd’s Rep 442 (England and Wales High Court) (the exclusion clause
provided that “There are no guarantees, warranties or representations, express or implied, or [sic, of]
merchantability, fitness or suitability of the oil for any particular purpose or otherwise which extend beyond the
description of the oil set forth in this agreement”. The England and Wales Court of Appeal (Civil Division)
referred to the decision of the House of Lords in Wallis, Sons & Wells v Pratt & Haynes, wherein it was
categorically stated that ‘within the four corners of this statute applicable to this contract, we see this plain
distinction between ‘condition’ and ‘warranty’’, and held that when Sale of Goods Act, 1979 (UK), §14(2)
specifically envisages certain implied conditions, they cannot be said to be excluded by the said clause.
Similarly see Blue Anchor Line Ltd. v. Alfred C Toepfer International GmbH (The Union Amsterdam), [1982] 2
Lloyd’s Rep 432 (Queens Bench, England) at 436 cited in CARTER, supra note 1, at 63; But see Air Transworld
Ltd. v. Bombardier Inc., [2012] EWHC 243 (Comm) (here the same court upheld the exclusion of implied
conditions when the exclusion clause was modified to have a wider coverage “all other warranties, obligations,
representations or liabilities, express or implied, arising by law, in contract, civil liability or in tort, or otherwise
… or liability on part of the seller to anyone of any nature whatsoever”).
132
Caledonia Ltd. v. Orbit Value Co. Europe, [1994] 1 WLR 221 (Court of Appeal, England); See Shell
Chemicals UK Ltd. v. P&O Roadtanks Ltd., [1995] 1 Lloyd’s Rep 297 (Court of Appeal, England).
133
K. LEWISON, THE INTERPRETATION OF CONTRACTS, ¶12-03 (Sweet & Maxwell, 2011); Whitecap Leisure Ltd.
v. John H. Rundle Ltd., [2008] 2 Lloyd’s Rep 2016 (England and Wales High Court) and Stoczni Gdynia SA v.
Gearbulk Holdings Ltd., [2009] 1 Lloyd’s Rep 461 (Court of Appeals, England) cited in Air Transworld Ltd. v.
Bombardier Inc., [2012] EWHC 243 (Comm) (England and Wales High Court).
was held that merely using the phrase ‘as is’ shall not have the effect of excluding the implied
terms of the contract and the law. 134
The courts have generally used the rule of strict interpretation in order to grant
relief in cases of negligence when the exclusion clause is ambiguous. For instance, in Canada
Steamship Lines Ltd. v. The King,135 the exclusion clause stated that “the lessee should not
have any claim against the lessor for damage to goods”. When the goods were damaged
owing to the negligence of the lessor’s employees, adoping a strict interpretation the Privy
Council held that the lessor shall be liable for negligence as the exclusion is only regarding
damage to the goods and not for negligence. The Calcutta High Court used the reasoning of
this Privy Council decision and allowed the benefit of an exclusion clause to the carrier when
the clause expressly excluded the liability for negligence. 136 Therefore, unless expressed in
clear terms, the courts presume that it is inherently improbable that the innocent party would
have agreed to the exclusion of the contract-breaker’s negligence. 137
Analysing this dynamic use of ‘interpretative mechanism’, Atiyah termed the

process of construction as the “most important procedure by which the courts tend to nullify
or modify the effect of exemption clauses […] judicial ingenuity was able to cut down the
effects of drastic exemption clauses by strained interpretations”.138
2. MAIN OBJECT AND INTENT TEST
Until the late twentieth century, the doctrine of fundamental breach was
prevalent in the common law and it provided that a party cannot exclude the liability for
breaching the fundamental terms of the contract because such terms form of the core of the
contract,139 and their breach amounts to non-performance.140 The reason was simple: benefits
can be availed only “when he is carrying out his contract, not when he is deviating from it or
is guilty of a breach which goes to the root of it”.141 An exclusion clause could not deprive a
party entirely of other’s contractual undertakings 142 and this understanding was universal
among cases arising out of breach of fundamental term and those involving a fundamental
134
Dalmare SpA v. Union Maritime Ltd., [2013] 2 All ER 870 (England and Wales High Court).
135
Canada Steamship Lines Ltd. v. The King, [1952] AC 292 (Court of Appeal, England); See Smith v. South
Wales Switchgear Co. Ltd., [1978] 1 WLR 165 (House of Lords, England).
136
Indian Airlines Corporation v. Smt Madhuri Chowdhuri and Ors., AIR 1965 Cal 252, ¶57-58.
137
Gillespie v. Bowles (Roy) Transport Ltd., [1973] QB 400 (Queens Bench, England) cited in ANSON, supra
note 1, at 195; ATIYAH, supra note 7, at 293 (“Nobody in his senses would agree to a contract which permitted
the other party to commit negligence with impunity”); See Owners and Parties Interested in the Vessel M.V.
‘Fortune Express’ and Anr. v. Maavar (HK) Ltd. and Ors., (2004) SCC OnLine Cal 493; See Kandimallan
Bharathi Devi v. The General Insurance Corporation of India, AIR 1988 AP 361; See also M.A. SUJAN,
INTERPRETATION OF CONTRACT 80 (2000).
138
139
Smeaton Hanscomb & Co. Ltd. v. Sassoon I Setty, Son & Co., [1953] 1 WLR 1468 (Queens Bench Division,
England).
140
141
J Spurling Ltd. v. Bradshaw, [1956] 1 WLR 461 9 (Court of Appeal, England); See Alexander v. Railway
Executive, [1951] 2 KB 882 9 (Kings Bench Division, England); See National Insurance Co. Ltd. v. Swaran
Singh, (2004) 3 SCC 297 cited in Mukund Dewangan v. Oriental Insurance Company Limited, (2017) 14 SCC
663, ¶42; Karsales v. Wallis, (1956) 2 All ER 866 (Court of Appeals, England).
142
Mendelssohn v. Normand, [1969] 2 All ER 1215 (Queens Bench Division, England); Tor Line AB v.
Alltrans Group of Canada, [1984] 1 All ER 103 (House of Lords, England); See Heyman v Darwins, [1942] AC
356 (Court of Appeals, England).
breach on an aggregated level. 143 In Karsales (Harrow) Ltd. v. Wallis, Lord Denning had
stated that:
[I]t is now settled that exemption clauses of this kind, no matter how widely
they are expressed, only avail the party when he is carrying out his contract in
its essential respects … They do not avail him when he is guilty of a breach
which goes to the root of the contract. 144
Many decisions of the English Court of Appeal seemed to indicate that as a

‘substantive rule’, exclusions clauses cannot exempt the liabilities arising out of fundamental
breach of contract. 145 However, the understanding took a slight modification in later years
and it was realized that the doctrine of fundamental breach operates irrespective of the
intention of the parties and limits the freedom of contract. 146 It was argued that but for the
freedom of contract, the contract law envisages no other social considerations to be
followed.147 Questions were raised voicing the absence of jurisdiction with the courts to
address the issues regarding the harshness of the exclusion clause or the abuse of bargaining
power.
This debate was directly addressed, in UGS Finance Ltd. v. National

Mortgage Bank of Greece,148 by the UK Court of Appeal, which stated that it is not a rule of
law but a rule of construction,149 based on the intention of the contracting parties that an
exclusion clause does not apply to a situation of fundamental breach. 150 This view was later
unanimously accepted by the House of Lords in Suisse Atlantique Societe d’Armament
Maritime S.A. v. N.V. Rottersamsche Kolen Centrale (‘Swiss Atlantique’),152 and Photo
Production Ltd. v. Securicor Ltd. (‘Photo Production’).153 In the words of Lord Reid,
If this new rule of law is to be adopted, how far does it go? In its simplest
form it would be that a party is not permitted to contract out of common law
143
Karsales (Harrow) Ltd. v. Wallis, [1956] 2 All ER 866 (per Parker, LJ) (England and Wales High Court) (‘In
my judgment, however extensive the exception clause may be, it has no application if there has been a breach of
a fundamental term.’); Yeoman Credit Ltd v. Apps [1962] 2 QB 508 (per Holroyd, LJ) (Queens Bench,
England) (“Such a … breach going to the root of the contract, as disentitles a party to take refuge behind an
exception clause intended to give protection only in regard to those breaches which are not inconsistent with,
and not destructive of the whole essence of the contract.”); See Charterhouse Credit Co. Ltd. v. Tolly, [1962] 2
QB 683 (Queens Bench, England); See S.J. Leacock, Fundamental Breach of Contract and Exemption Clauses
in the Commonwealth Caribbean, 4(2) ANGLO AM. L. REV. 181 (1975).
144
Karsales (Harrow) Ltd. v. Wallis, [1956] 2 All ER 866 (England and Wales High Court).
145
See Charterhouse Credit Co. Ltd. v. Tolly, [1962] 2 QB 683 (Queens Bench, England); Brian Coote, The
Second Rise and Fall of Fundamental Breach, NEW ZEALAND LEGAL RESEARCH FOUNDATION SEMINAR PAPERS
6 (1980); (1980) AUCKLAND L. FACULTY SEMINAR SERIES, Paper 1, 3.
146
147
Suisse Atlantique Societe d’Armament Maritime SA v. NV Rotterdamasche Kalen Centrale, (1967) 1 AC
361 (Court of Appeals, England); Law Commission of India, Report on Unfair Terms in Contract, Report
No.103, 6, 7 (May, 1984).
148
UGS Finance Ltd. v. National Mortgage Bank of Greece, [1964] 1 Lloyd’s Rep 446 (Court of Appeals,
England);.
149
Also See Photo Production Ltd. v. Securicor Transport Ltd., [1980] AC 827 (Court of Appeals, England);
Darlington Futures Ltd. v. Delco Australia Pty. Ltd., (1986) 161 CLR 500, 510 (Supreme Court of Australia)
150
SAHARAY, supra note 6, at 38.
152
Suisse Atlantique Societe d’Armament Maritime S.A. v. N.V. Rottersamsche Kolen Centrale, [1967] 1 AC
361 (Court of Appeals, England)
153
Photo Production Ltd. v. Securicor Ltd., [1980] AC 827 (Court of Appeals, England).
liability for a fundamental breach … I do not suppose that anyone has

intended that this rule should go quite so far as that; but I would find it
difficult to say just where the line would have to be drawn. In my view, no
such rule of law ought to be adopted. 154
The journey from Suisse Atlantique to Photo Production is worth noting. After
the decision in Suisse Atlantique, multiple decisions of the Court of Appeal kept on furthering
the pre-Suisse Atlantique position and held that exclusion of liability for fundamental breach
of contract is not allowed as a substantive rule of law.155 These decisions then came to be
overruled by the House of Lords in Photo Production, which held that there is no substantive
rule of law against excluding the liability for fundamental breach of contract and that the
courts must adopt the rule of construction while dealing with exclusion clauses.156
This rule has been widely accepted now, including an indirect adoption in
India. Though there isn’t any conclusive decision by the Indian courts on this aspect,
Ramaseshan has, in light of the decision in Suisse Atlantique, discussed the contrasting trends
followed by the Indian courts. 157 It has been argued that on one hand, certain courts have
invoked the doctrine of fundamental obligation to nullify the exclusion; however, on the
other, some courts have followed the classical approach of giving precedence to terms of the
contract, presumed to be entered with uncompromised freedom. However, in Skandia
Insurance Co. Ltd. v. Kokilaben Chandavadan and Ors. (‘Skandia’),158 where the validity of
exclusion of liability for fundamental breach of contract was not the central issue, the
Supreme Court had cited Carter’s Breach of Contract159 with approval, which stated that
though the doctrine of fundamental breach of the contract has been rejected by the House of
Lords, nevertheless, “wide exclusion clauses will be read down to the extent to which they
are inconsistent with the main purpose, or object of the contract”.
As we understand from the above cases, the courts only go with a

presumption of construction that an exclusion clause is not intending to exclude the liability
of fundamental breach, 160 which could be rebutted by an express and clear exclusion clause
manifesting an intention of the contracting parties to the opposite. 161 If the main object and
154
Suisse Atlantique Societe d’Armament Maritime S.A. v. N.V. Rottersamsche Kolen Centrale, [1967] 1 AC
361 (per Lord Reid) (Court of Appeals, England).
155
See Harbutt’s “Plasticine” v. Wayne Tank & Pump Co., [1970] 1 QB 447 (Queens Bench Division, England)
and Wathes v. Austins (Menswear,) [1976] 1 Lloyd’s Rep 14 (Court of Appeals, England), which relied on
Charterhouse Credit Co. Ltd. v. Tolly, [1962] 2 QB 683 (Queens Bench Division, England), a pre-Suisse
Atlantique decision of the Court of Appeal.
156
See George Mitchell (Chesterhall) Ltd. v. Finney Lock Seeds, [1983] 2 AC 803.
157
V. Ramaseshan, Fundamental Obligation and the Indian Law of Contract, 10(2) J. INDIA L. INST. 331 (1968).
158
Skandia Insurance Co. Ltd. v. Kokilaben Chandavadan and Ors., (1987) 2 SCC 654.
159
J.W. CARTER, CARTER’S BREACH OF CONTRACT (Law Book Co, 1984). See CARTER, supra note 1, at 451;
National Insurance Co. Ltd. v. Swaran Singh and Ors., (2004) 3 SCC 297, ¶¶54, 110; Mukund Dewangan v.
Oriental Insurance Co. Ltd., (2017) 14 SCC 663, ¶¶40-42.
160
Gibaud v. Great Eastern Railway Co., [1921] All ER Rep 35 (Kings Bench Division, England); Photo
Production Ltd. v. Securicor Ltd., [1980] AC 827 (Court of Appeals, England).
161
Kandimallan Bharti Devi and Ors. v. The General Insurance, AIR 1988 AP 361; See Photo Production Ltd. v.
Securicor Transport Ltd., [1980] AC 827, 851 (Court of Appeals, England) (‘It is, …, wrong to place a strained
construction upon words in an exclusion clause which are clear and fairly susceptible of one meaning only even
after due allowance has been made for the presumption in favour of the implied primary and secondary
obligations’).
the intent of the parties speaks otherwise, the courts may limit or even reject162 the operation
of the clause and bring it in sync with the main object and intent. 163 For instance, generally in
a contract for carriage of goods, the courts have refrained from giving benefits of any
exclusion clause because a carrier who deviates from an agreed route without any reasonable
cause is deemed to have acted beyond the main object and intent or the four corners of the
contract.164 Similarly, in cases pertaining to insurance contracts, the courts have held that “the
exclusion clause or the defence of an insurer so as to avoid liability has [to be] read down to
the extent to which it is consistent to the main purpose of the contract”.165
The determination of fundamental breach and thereby, the application of strict

interpretation is also based on the consequences of the contract. If the performance or
consequence of a contract is “totally different from what the contract contemplates”,166 courts
could be seen as applying the strict interpretation. According to Treitel, the phrase ‘totally
different’ has to be contextually interpreted and thus, “the rule can apply even where the
breach does not make the performance totally different from that promised: it is sometimes
enough if the breach causes ‘serious’ 167 prejudice to the injured party”.168 Therefore, applying
the rule of serious prejudice, the Queen’s Bench had held that the supply of a defective,
unusable and unroadworthy motorcar would not excuse the supplier of his liabilities, even
though the exclusion clause mentioned that “any implied warranties and conditions are also
hereby expressly excluded”.169
In cases pertaining to insurance contracts, when the breach of conditions are

on part of the insured – the party against whom the exclusion clause is drafted, the courts
have limited the space available to the insurance companies to exclude their liability, again
by referring to the main object/purpose of the contract. For instance, in a decision handed by
a full bench of the Karnataka High Court in May 2020, it was observed that
162
New Indian Assurance Company Limited, by its Divisional Manager, Bijapur v. Yallavva W/o Yamanappa
Dharanakeri and Anr., 2020 Indlaw Kar 3902, ¶118.
163
Motis Exports Ltd. v. Dampskibsselskabet AF 1912 Akt, [2000] 1 Lloyd’s Rep 211; See United India
Insurance Company Ltd., Dharmapuri v. A. Govindan, (2000) 1 Mad LJ 721.
164
Stag Line Ltd. v. Foscolo, Mango & Co. Ltd., [1932] AC 328 (Court of Appeals, England); Sze Hai Tong
Bank Ltd. v. Rambler Cycle Co. Ltd., [1959] AC 576 (Court of Appeals, England); (Similarly, in cases of
bailment, if the bailee stores the goods at a place other than the agree one, the he is deemed to have acted
beyond the four corners of the contract); See Suisse Atlantique Societe d’Armament Maritime S.A. v. NV.
Rottersamsche Kolen Centrale, [1967] 1 AC 361 (Court of Appeals, England); See also Gibaud v. Great Eastern
Railway Co., [1921] All ER Rep 35 (Kings Bench Division, England) (here, the plaintiff has left his bicycle at
the railway station and received a ticket which exempted the defendant from liability. The defendant failed to
put the bicycle in the clock room and it was stolen from the booking hall. On a plea for damages, the Court ruled
in favour of the defendant on account of the exclusion clause. The defendant was exempted from the liability as
its act was within the four-corners of the contract. If the contract has obligated it to park the bicycle in the clock-
room, then its act of leaving the bicycle in the booking hall would be outside the four-corners of the contract and
thus, making it liable); Law Commission of India, Report on Unfair Terms in Contract, Reprot No.103, 6, 7
(1984).
165
New Indian Assuance Company Limited, by its Divisional Manager, Bijapur v. Yallavva W/o Yamanappa
Dharanakeri and Anr., 2020 Indlaw Kar 3902, ¶117.
166
Suisse Atlantique Societe d’Armament Maritime S.A. v. NV Rottersamsche Kolen Centrale, [1967] 1 AC
361 (Court of Appeals, England).
167
See Photo Production v. Securicor Transport, [1980] 1 All ER 556 (House of Lords, England).
168
TREITEL, supra note 38, 233.
169
Yeoman Credit Ltd. v. Apps, [1962] 2 QB 508 (Queens Bench, England); Farnsworth Finance Facilities Ltd.
v. Attryde, [1970] 1 WLR 1053 (Court of Appeals); CARTER, supra note 1, 448-551.
[e]ven after proving breach of a policy condition regarding a valid license by

the driver or his qualification to drive during the relevant period on the part of
the insured, the insurer would not be allowed to avoid his liability towards the
insured unless the said breach or breaches is/are so ‘fundamental’ as found to
have contributed to the cause of the accident. This is having regard to the ‘rule
of main purpose’.170
According to the law as it stands today, it could be concluded that if an

exclusion clause is drafted in clear and unambiguous language, the courts can do nothing but
enforce them because there is no rule of law that disallows a party from excluding its liability
to any extent. The first step towards changing this line of thought, at least in the context of
consumer contracts, has been the recent enactment of Consumer Protection Act, 2019, which
came into force on July 2020, wherein there is a specific statutory inclusion of ‘unfair
contract’. However, unlike the UK, India still lacks a general statutory supervision over
unreasonable exclusion clauses and thus, the parties are virtually entitled to exclude their
liability for fundamental breach as well. The limited jurisdiction vested with the courts is to
employ the rule of strict interpretation in order to interpret an ambiguous clause in favour of
the party against whom the exclusion clause is drafted or limit the clause in accordance to the
main object and intent of the contract. In the words of Carter:
Notwithstanding the general ability of contracting parties to agree to exclusion

clauses which operate to define obligations there exists a rule, usually referred
to as the ‘main purpose rule’, which may limit the application of wide
exclusion clauses defining a promisor’s contractual obligations.171
C. REMEDIES FOR NON-CONFORMITY WITH THE ‘STATUTORY REQUIREMENTS’
The above discussion portrays a situation wherein the parties are empowered
to exclude their liabilities to any extent. However, such freedom is restricted and parties
cannot act in a manner to exclude the application of any law which is applicable to the facts
of a particular dispute. For instance, in Guru Govekar v. Filomena F. Lobo,172 the petitioner
had given his vehicle for repairs and while test driving, the mechanic had caused an accident.
When an insurance claim was filed, the insurance company denied payment based on an
exclusion clause exempting it from the liability arising out of an accident during the period
when the vehicle was used for hire or testing. The Court rejected such contention and ordered
that the insurer would be liable to pay the compensation by virtue of §94 and §95 of the
Motor Vehicles Act, 1939, which mandates that an insurance policy must insure against
bodily injuries caused to third party out of the use of the vehicle in a public place. 173
170
New Indian Assuance Company Limited, by its Divisional Manager, Bijapur v. Yallavva W/o Yamanappa
Dharanakeri and Anr., 2020 Indlaw Kar 3902, ¶117. Followed in Branch Manager, United India Insurance
Company Limited, Shimoga v. Belakerappa S/o Kariyappa and Ors., 2020 Indlaw Kar 4503.
171
J.W. CARTER, CARTER’S BREACH OF CONTRACT ¶251 (Law Book Co., 1984) cited in Skandia Insurance Co.
Ltd. v. Kokilaben Chandravadan and Others, (1987) 2 SCC 654, ¶14; Glynn v. Margetson & Co., 1893 AC 351.
172
Guru Govekar v. Filomena F. Lobo, (1988) 3 SCC 1; See Monk v. Warbey, (1935) 1 KB 75; Vijayanagaram
Narasimha Rao v. Ghanashyam Das Tapadia, (1986) 2 ACJ 850; Shantibai v. Principal, Govindram Sakseria
Technological Institute, Indore, 1972 ACJ 354.
173
Guru Govekar v. Filomena F. Lobo, (1988) 3 SCC 1, ¶12.
Further, the courts have also employed contextual interpretation to give force
to the true purpose of the law. For instance, in Skandia,174 the insured gave the custody of the
vehicle to his license-holding driver, who handed control of the vehicle to the cleaner who
did not possess a license to drive the vehicle. The insurance policy specifically stated that the
owner of the motor vehicle shall be absolutely liable for the events resulting from the driving
of motor vehicle by an unlicensed driver. The Court studied §96 of the Motor Vehicles Act,
1939 which bars the insurer from excluding its liability except for the grounds mentioned
therein, the relevant of which, §96(2)(b)(ii), allows the insurer to absolve its liability when a
breach is committed of the condition excluding driving by any person who is not fully
licensed. The court provided a context to the provision and noted that it has been inserted to
protect the members of the community travelling in vehicles or using the roads from the risk
attendant upon the user of motor vehicles on the roads. It was held that ‘breach’ under this
provision shall be construed as a breach committed by the insured. 175 If the insured has
ensured that an unlicensed person does not drive the vehicle, the insurer can be held liable. 176
Based on this interpretation, the Court limited the operating domain of the exclusion clause,
which absolved the liability of the insurer absolutely, in line with the main purpose of the
contract to harmonize the freedom of contract with the purpose of the law. 177 In vain, the
correctness of the Skandia judgment was challenged before a three judge-bench of the Court
in Sohan Lal Passi v. P. Sesh Reddy.178 The crux of the reasoning could be best summarized
in the word of the Supreme Court: “the motive and philosophy of a provision should be
probed, keeping in mind the goals to be achieved by enacting the same [...]”.179 Any
argument based on the exclusion clause should flow from the true contextual intent of the
particular legislation involved, otherwise, no benefits could be derived from such
exclusion.180 If the court finds that the exclusion clause and the main purpose of the
legislation involved are so divergent and harmonization is an impossibility, then as we have
174
Skandia Insurance Co. Ltd. v. Kokilaben Chandravadan and Others, (1987) 2 SCC 654.
175
New India Assurance Co. v. Mandar Madhav Tambe and Ors., (1996) 2 SCC 328 (a later judgment, when the
insured himself was holding an expired learner’s license, the insurer was allowed to enjoy the benefits of the
exclusion clause as the breach was committed by the insured himself).
176
See Kashiram Yadav v. Oriental Fire and General Insurance Co., (1989) 4 SCC 128; United India Insurance
Co. v. Gian Chand and Ors., (1997) 7 SCC 558 (here, the Court exonerated the insurer of liability arising out of
an accident by an unlicensed driver on the fact that the insurer himself allowed an unlicensed driver with due
knowledge about this fact to driver the vehicle); See also Sohan Lal Passi v. P. Sesh Reddy, (1996) 5 SCC 21.
177
Before the decision in Skandia Insurance Co. Ltd. v. Kokilaben Chandravadan and Others, (1987) 2 SCC
654, divergent decisions were given by the High Courts. The Andhra Pradesh High Court (Kilari Mammi v.
Barium Chemicals, AIR 1979 AP 75) and Patna High Court (Dwarka Prasad Jhunjhunwala v. Sushila Devi AIR
1983 Pat 246) gave their decisions in line with the reasoning of the Supreme Court in the Skandia Judgment.
However, the Assam High Court (Sardar Nand Singh v. Abhyabala Debi, AIR 1955 Ass 157), the Madhya
Pradesh High Court (Shanker Rao v. Babulal Fouzdar, AIR 1980 MP 154) and the Orissa High Court (Orissa
State Commercial Transport Corporation, Cuttack v. Dhumali Bewa AIR 1982 Ori 70) had ruled otherwise.
178
Sohan Lal Passi v. P. Sesh Reddy, (1996) 5 SCC 21, ¶13; Later, Skandia Insurance Co. Ltd. v. Kokilaben
Chandravadan and Others, (1987) 2 SCC 654, was cited with approval in B.V. Nagaraju v. Oriental Insurance
Co. Ltd., (1996) 4 SCC 647.
179
Mukund Dewangan v. Oriental Insurance Company Limited, (2017) 14 SCC 663, ¶40.
180
See United India Insurance Co. Ltd. v. Lehru and Ors., (2003) 3 SCC 338, ¶20 (here, a driver produced a
fake license for a job under the insured. On accident, the insurer denied payment. The Supreme Court held that
if the license looks genuine and the driver knows the skills of driving, the owner is not expected to find out
whether the license has in fact been issued by a competent authority or not. If any accident happens during the
course of employment, the insurance company cannot excuse its liability).
seen, the courts could limit the operation of the exclusion clause in light of the main purpose
of the legislation.181
The UK Consumer Rights Act, 2015 has envisioned a similar principle but in a
rigid form. For instance, §31 lists down multiple provisions of the Act and states that “(1) A
term of a contract to supply goods is not binding on the consumer to the extent that it would
exclude or restrict the trader’s liability arising under any of these provisions – […]”.182
Therefore, certain statutory terms have to be made immune from exclusion and thus,
restricting the freedom of the parties in order to protect the interests of the consumers. 183
Based on the above discussion, the paper moots a novel mechanism to deal
with the question of whether ‘fundamental breach’ of the contract could be excluded or not.
In the previous part, it was found that an unambiguously and clearly drafted exclusion clause
could validly exclude any liability arising out of fundamental breach of the contract owing to
the statutory recognition of the doctrine of freedom of contract. However, an alternative way
to look at such exclusion clauses is to ask whether they could be harmonised with the
statutory provisions and the intent of the legislature. It is argued that the answer is in the
negative. §37 of the Indian Contract Act, 1872 obliges the parties to a contract to honour their
promises:
The parties to a contract must either perform, or offer to perform, their

respective promises, unless such performance is dispensed with or excused
under the provisions of this Act, or any other law.
The intent of the legislature is clear: parties are obligated and have a duty to
perform the contract.184 In case a party fails to honour the promises, it is a breach of contract.
Notwithstanding the fact that the Act allows a party to make arrangements regarding
prospective liabilities, claiming a complete exemption from consequences arising out of
fundamental breach of contract would render the obligation under §37 nugatory, and thus, in
effect, be equivalent to the exclusion of §37. It would have an effect of vacating the sanctity
of a contract and nullifying the effect of entire ‘damages’ jurisprudence. Therefore,
construing the Indian Contract Act in a harmonious fashion, a clause excluding liability for
fundamental breach must be understood as contravening §37 and thus, the courts should
determine the appropriateness of such exclusion clauses in light of the main purpose of the
statutory law. However, it is clarified that this argument is restricted to the situations
181
Skandia Insurance Co. Ltd. v. Kokilaben Chandravadan, (1987) 2 SCC 654, ¶14; Glynn v. Margetson & Co.,
1893 AC 351 (Court of Appeals, England).
182
The UK Consumer Rights Act, 2015, §31 Clause (2) further provides that:
(2) That also means that a term of a contract to supply goods is not binding on the consumer to the extent that it
would –
(a) Exclude or restrict a right or remedy in respect of a liability under a provision listed in
subsection (1),
(b) Make such a right or remedy or its enforcement subject to a restrictive or onerous
condition,
(c) Allow a trader to put a person at a disadvantage as a result of pursuing such a right or
remedy, or
(d) Exclude or restrict rules of evidence or procedure.
183
See also The Consumer Rights Act, 2015 (UK), §47 & 57.
184
POLLOCK & MULLA, INDIAN CONTRACT ACT, 1872 738 (2014) citing Magnum Films v. Golcha Properties
Pvt. Ltd., AIR 1984 Del 162.
involving fundamental breach of contract wherein a party fails to perform the core promise of
the contract. It does not, in any manner, intends to argue against the inclusion of exclusion
clauses for any other breach, as such clauses are supported by the idea of freedom of contract.
D. REMEDIES AGAINST ‘UNCONSCIONABLE TERMS’
In the discussions we had above, the following principle of interpretation of

the exclusion clauses is derived: parties can exclude their liabilities to any extent if the terms
are notified to the other party, and are clear and reflective of their intent, provided that such
exclusion is not contravening the main object of any statutory provision. What happens if the
clause is unconscionable? If an unconscionable clause satisfies the said principle, would it be
enforced by the courts? Atiyah notes that “if the law is to be seriously concerned with
substantive justice, there will be occasions in which it will be necessary to override the actual
terms of a contract”.185
The Indian Contract Act does not contain any provision dealing with
unconscionability per se. Nevertheless, the courts have traced the remedy under §16, which
defines undue influence, read with §19A, which makes the contract vitiated by undue
influence voidable at the option of the affected party, and have allowed arguments claiming
that there was undue influence which resulted in the insertion of the impugned
unconscionable clause. To claim a remedy under the said provision, the alleged undue
influence must have the effect of overpowering the volition of the affected party,186 exerted
with an intention to obtain an unfair advantage.187
In the pre-UCTA era, the UK courts have also granted relief to the party
affected by undue influence owing to an unequal distribution of bargaining power and set
aside the contract. 188 However, it has been repeatedly clarified by the Indian courts that
unless unequal bargaining power is the result of undue influence, no plea can be made to set
aside the unconscionable transaction. 189 The Supreme Court of India has noted that if the
185
186
Lingo Bhimrao Naik v. Dattatraya Shripad Jamadagani, AIR 1938 Bom 97; Raja Shiba Prasad Singh v.
Tincouri Banerji, AIR 1939 Pat 477; P. Saraswathi Ammal v. Lakshmi Ammal, AIR 1978 Mad 361; Alok
Kumar Aich v. Asoke Kumar Aich, AIR 1982 Cal 599.
187
Poosathurai v. Kappanna Chettiar, AIR 1920 PC 65; Sathi Sattema v. Sathi Subbi Reddy, AIR 1963 AP 72;
Ladli Prasad Jaiswal v. Karnal Distillery Co. Ltd., [1964] 1 SCR 270; Subhas Chandra Das Mushib v. Ganga
Prosad Das Mushib, [1967] 1 SCR 331 (Similarly, Atiyah notes that in order to strike down unconscionable
contracts based on the equitable power of the courts, ‘some very serious unfairness must be shown, some real
use of bargaining power to take advantage of another person’); See Boustang v. Pigott, [1993] NPC 75 (the
privy council held that if it were to set aside an unconscionable contract, the defendant must be guilty of some
moral culpability, impropriety, actual or constructive fraud. Merely proving the existence of unfair terms would
not suffice).
188
Lloyd’s Bank Ltd v. Bundy, [1975] QB 326 (Queens Bench, England); See Schroeder Music Publishing Co.
Ltd. v. Macaulay, [1974] 3 All ER 616 (House of Lords, England); Clifford Davis Management Ltd. v. W.E.A.
Records Ltd., [1975] 1 All ER 237 (Court of Appeals, England).
189
Poosathurai v. Kappanna Chettiar, AIR 1920 PC 65; U. Kesavulu Naidu v. Arithulai Ammal, (1912) ILR 36
Mad 533; See Law Commission of India, Report on The Indian Contract Act, 1872, Report No.13, 21
(September, 1958); Lloyd’s Bank Ltd. v. Bundy, [1975] QB 326; Syed Noor v. Qutubddin, AIR 1956 Hyd 114;
National Westminster Bank Plc. V. Morgan, [1985] 1 All ER 821; CHITTY, supra note 31, at 457.
parties wilfully enter into an unconscionable bargain, law cannot come to their rescue
subsequently.190
An illustration to §16 of Act clarifies this situation beyond doubt:
[…] (d) A applies to a banker for a loan at a time when there is stringency in
the money market. The banker declines to make the loan except at an
unusually high rate of interest. A accepts the loan on these terms. This is a
transaction in the ordinary course of business, and the contract is not induced
by undue influence.191
Thus, under the Indian law, procedural unconscionability attracts the prime
focus and substantive unconscionability is placed on a secondary pedestal. 192
One may also take inspiration from the Canadian legal position, that a
presumption of undue influence or procedural unconscionability be made whenever the
contractual terms are found to be substantively unconscionable. In Harry v. Kreutziger, the
Court of Appeal for British Columbia summarised the standard for proving unconscionability
in the following words:
14. From these authorities, this rule emerges. Where a claim is made that a
bargain is unconscionable, it must be shown for success that there was
inequality in the position of the parties due to the ignorance, need or distress
of the weaker, which would leave him in the power of the stronger, coupled
with proof of substantial unfairness in the bargain. When this has been shown
a presumption of fraud is raised, and the stronger must show, in order to
preserve his bargain, that it was fair and reasonable. 193
In India, however, a universal presumption of undue influence is not

statutorily permitted. §16 of the Act states that such a presumption only arises when one of
the parties holds a real or apparent authority over the other, stands in a fiduciary relation to
the other, or makes a contract with a person whose mental capacity has been affected. 194
Therefore, the invocation of presumption of undue influence is useful only in limited cases
like that of employer-employee transactions, and it fails to provide any remedy in a business
or consumer transaction.
An exception to this understanding is §23 of the Act. It states that a contract

shall be void, inter alia, if the court regards its consideration or object as opposed to public
190
S.K. Jain v. State of Haryana, (2009) 4 SCC 357, ¶8; See Sundarambal Ammal v. Yogavanagurukkal, AIR
1915 Mad 561; Mackintosh v. Wingrove, (1878) 4 Cal 137; Satish Chunder Giri v. Hem Chunder
Mookhopadhya, (1902) 29 Cal 823; See also Karnal Distillery Co. Ltd. v. Ladli Parsad Jaiswal, AIR 1958 Punj
190; See also Raghunath Altia v. Arjuno Altia, AIR 1973 Ori 76.
191
The Indian Contract Act, 1872, §16, Illustration (d).
192
See Law Commission of India, Report on Unfair (Procedural and Substantive) Terms in Contract, Report
No.199, 16-53 (2006).
193
Harry v. Kreutziger, (1978) 9 BCLR 166; 1978 CanLII 393 (BC CA); See alsp Augusto C. Lima, When
Harry Met Kreutziger: A Look Into Unconscionability from the Lenses of Culture, CLEA 2008 Meetings Paper,
April 30, 2008, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1124922 (Last visited on
December 8, 2020).
194
The Indian Contract Act, 1872, §16(2).
policy.195 The earliest recorded Indian case on the aspect of unconscionability under §23 is
Sheik Mahamad Ravuther v. The British India Steam Navigation Co Ltd.,196 decided by the
Madras High Court in 1909. In this case, the defendant company inserted an exclusion clause
to exempt itself from any liability arising out of the negligent conduct of its servants. Though
the majority upheld the exclusion clause, the dissent of Shankaran Nair, J. stating that
exclusion clause is opposed to public policy under §23 and thus, the defendant company is
liable for negligence, is significant. In later cases, the courts have accepted this dissent and
held that unconscionable contracts are against public policy.197 For instance, in Lilly White v.
Mannu Swami, the question before the Madras High Court was whether a dry-cleaner could
insert a clause stating that in case the articles are lost, the customers will be ‘entitled to claim
only 50 percent of the market price or value of the articles.’ 198 Upholding the opinion that
such a clause creates an incentive for the dry-cleaners to misappropriate the articles, the
Court held that “a term which is prima facie opposed both to public policy and the
fundamental principles of the law of contract, cannot be enforced by a court, merely, because
it is printed on the reverse of a bill and there is a tacit acceptance of the term when the bill
was received by the customer”.199 Even the Law Commission of India was assertive that §23
“comprehends the protection and promotion of public welfare. It is a principle of law under
which freedom of contract or private dealings are restricted by the law for the good of the
community”.200
Be that as it may, the Indian courts have shown unusual resistance in invoking
§23 in private business contracts by strictly focusing on the idea of freedom of contract.201
Also, not all exclusion clauses would defy the principles of public policy. 202 Therefore, it can
be safely concluded that the existing remedies under the Contract Act seem insufficient to
deal with the unreasonableness of contractual terms. In the years to come, we will the range
of possible interpretation by the courts on the tests of ‘unfairness’ especially under the new
Consumer Protection Act, 2019.
195
The Indian Contract Act, 1872, §23.
196
Sheik Mahamad Ravuther v. The British India Steam Navigation Co. Ltd., ILR (1909) 32 Mad 95.
197
Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly, 1986 SCR (2) 278; See Lilly White
v. Mannu Swami, AIR 1966 Mad 13; International Oil Company v. Indian Oil Corporation Ltd., Madras AIR
1969 Mad 423.
198
Lilly White v. Mannu Swami, AIR 1966 Mad 13.
199
Id.
200
No.199, 16-53 (August, 2006).
201
S.K. Jain v. State of Haryana, (2009) 4 SCC 357; See Fender v. St. John Mild May, 1938 AC 1 (12) (“The
doctrine should only be invoked in clear cases in which the harm to the public is substantially incontestable, and
does not depend upon the idiosyncratic inferences of a few judicial minds.”); Similar approach was adopted in
the Indian jurisdiction in Gherulal Parakh v. Mahadeodas, AIR 1959 SC 781
(“It (public policy) has been described as an untrustworthy guide, variable equity, unruly
horse, etc. … though it is permissible for the courts to expand public policy and apply them to
different situations, it should be invoked in clear and incontestable cases of harm to the public
…it is advisable in the interest of stability of society not to make any attempt to discover new
heads in these days”).
202
Law Commission of India, Report on Unfair Terms in Contract, Report No.103, 5 (May, 1984)
(“Section 23 of the Contract Act which provides that the consideration or object of an
agreement is lawful, unless the court regards it as immoral, or opposed to public policy, is not
of much use in meeting the present situation (regarding unfair contracts), because courts have
held that the heads of public policy cannot be extended to a new ground in general, which
certain exceptions, and that the term of a contract exempting one party from all liability is not
opposed to public policy”)
IV. THE WAY FORWARD
Provisioning for a statutory security against economic dominance and

circumstantial powerlessness could be both philosophical argument and a constitutional
imperative as well. In People’s Union for Democratic Reforms v. Union of India,203 the
Supreme Court of India was tasked to decide upon whether the right against forced labour
under Article 23 of the Indian Constitution includes the right to minimum wages or not. The
Supreme Court, adopting a transformative approach,204 held that ‘force’ does not merely
mean physical force but includes “any factor which deprives a person of a choice of
alternatives and compels him to adopt one particular course of actions”.205 The Court further
indicated that owing to economic subjugation or circumstantial powerlessness “he [an
individual] would be acting not as a free agent with a choice between alternatives but under
the compulsion of economic circumstances and the labour or service provided by him would
be clearly forced labour […]”.
This presents a classic, though extreme, analysis of how unequal bargaining

power among the parties to a contract of employment shape the contract in favour of the
employer. Such situations continue to exist, mostly through the use of exclusion clauses as
part of standard form contracts, but with varied degrees of dominance depending on the
nature of transactions and socio-economic standing of the parties involved. Ambedkar had
repeatedly stated that “Constitution existed to protect individual liberty by regulating the
unequal relations of power that existed between employers and employees in the market
economy”.206 We argue it is both constitutional imperative and requirement of reforms in
the Indian contract law that the lawmakers should consider incorporating measures that aim
to strike substantive fairness, which shall ensure that any contractual language reflecting
economic dominance or circumstantial powerlessness is open for judicial scrutiny. 207
One interesting step towards this end was taken recently by the Indian
Parliament in the form of the Consumer Protection Act, 2019, which partially came into force
from July 20, 2020.208 It must be analysed in contrast with the UK Consumer Rights Act,
2015. The UK law envisages an entire section of the statute – Part 2 – for dealing with unfair
contracts and then goes on to prescribe a non-exhaustive list of illustrations of unfair terms in
Part 1 of Schedule 2. The first two illustrations specifically deal with exclusion clauses. 209
203
People’s Union for Democratic Reforms v. Union of India, (1982) 3 SCC 235.
204
GAUTAM BHATIA, THE TRANSFORMATIVE CONSTITUTION 169-212 (2019) (The task of constitutional law was
to regulate the shape and form of economic structure of society in order to protect the individual liberty).
205
People’s Union for Democratic Reforms v. Union of India, (1982) 3 SCC 235, ¶14.
206
BHATIA, supra note 204, 196.
207
B. SHIVA RAO, THE FRAMING OF INDIA’S CONSTITUTION, Vol. 2, 100-101 (Universal Law Publishing, 2015)
(‘The useful remedy adopted by democratic countries is to limit the power of Government to impose arbitrary
restraints in political domain and to invoke the ordinary power of the legislature to restrain the more powerful
individual from imposing arbitrary restraints on the less powerful in the economic field.’).
208
Ministry of Consumer Affairs, Food and Public Distribution, S.O.2351(E), (Notified on July 15, 2020).
209
Consumer Rights Act, 2015 (UK), Schedule 2: Consumer contract terms which may be regarded as unfair,
Part 1: “List of terms:
1. A term which has the object or effect of excluding or limiting the trader’s liability in the event
of the death of or personal injury to the consumer resulting from an act or omission of the
trader.
2. A term which has the object or effect of inappropriately excluding or limiting the legal rights
of the consumer in relation to the trader or another party in the event of total or partial non-
performance or inadequate performance by the trader of any of the contractual obligations,
When it comes to the Indian law, the 2019 Act statutorily addresses unfair contracts for the
first time and grants discretionary powers to the judges to deem an exclusionary clause as
unfair.210 It is upon the Indian courts now to interpret the law and lay down its operative
domain. It is hoped they shall earnestly take into account the learnings from other
jurisdictions and develop the law providing for all the challenges discussed above.
Though the Indian law has introduced the idea of statutory protection against
substantive unconscionability and has progressed towards investing statutory power in the
judiciary through the Consumer Protection Act, 2019 to scrutinise consumer contracts, the
inadequacy of addressing unfairness and unconscionability in general principles of contract
law remains. We argue in favour of reforms by adopting any of the following mechanisms.
First, an amendment be made in the Indian Contract Act in accordance to the Law
Commission’s suggestions intending to grant discretion to the courts to deem a contract as
unenforceable based on substantive unconscionability. In its 103rd Report, the Commission
had recommended for the insertion of draft §67A in the Contract Act that would read as
follow:
(1) Where the Court, on the terms of the contract or on the evidence adduced
by the parties, comes to the conclusion that the contract or any part of it is
unconscionable, it may refuse to enforce the contract or the part that it holds to
be unconscionable.
(2) Without prejudice to the generality of the provisions of this Section, a

contract or part of it is deemed to be unconscionable if it exempts any party
thereto from – (a) the liability for wilful breach of the contract, or (b) the
consequence of negligence. 211
This shall invest the court with the power to scrutinise unconscionable clauses
independent of the argument on ‘freedom of contract’ or ‘undue influence’. This provision is
drafted in a similar fashion as has been envisioned under §2-302 of the United States
Uniform Commercial Code:
including the option of offsetting a debt owed to the trader against any claim which the
consumer may have against the trader.”
210
Consumer Protection Act, 2019, §2(46)
“unfair contract” means a contract between a manufacturer or trader or service provider on
one hand, and a consumer on the other, having such terms which cause significant change in
the rights of such consumer, including the following, namely:-
(i) Requiring manifestly excessive security deposits to be given by consumer for the performance
of contractual obligation; or
(ii) Imposing any penalty on the consumer, for the breach of contract thereof which is wholly
disproportionate to the loss occurred due to such breach to the other party or to the contract; or
(iii) Refusing to accept early repayment of debts on payment of applicable penalty; or
(iv) Entitling a party to the contract to terminate such contracts unilaterally, without reasonable
cause; or
(v) Permitting or has the effect of permitting one party to assign the contract to the detriment of
the other party who is a consumer, without his consent; or
(vi) Imposing on the consumer any unreasonable charge, obligation or condition which puts such
consumer to disadvantage.
211
Law Commission of India, Report on Unfair Terms in Contract, Report No.103, 9 (May, 1984).
(1) If the court as a matter of law finds the contract or any clause of the
contract to have been unconscionable at the time it was made the court may
refuse to enforce the contract, or it may enforce the remainder of the contract
without the unconscionable clause, or it may so limit the application of any
unconscionable clause as to avoid any unconscionable result.
(2) When it is claimed or appears to the court that the contract or any clause
thereof may be unconscionable the parties shall be afforded a reasonable
opportunity to present evidence as to its commercial setting, purpose and
effect to aid the court in making the determination. 212
These provisions can be made further dynamic and equitable by inserting

another level of inquiry on the lines of the Canadian law. In Tercon Contractors Ltd. v.
British Columbia (Transportation and Highways), the Supreme Court of Canada laid down a
three-part test that courts must apply while adjudicating on the enforceability of exclusion
clauses:
[121] The present state of the law, in summary, requires a series of enquiries
to be addressed when a plaintiff seeks to escape the effects of an exclusion
clause or other contractual terms to which it had previously agreed.
[122] The first issue, of course, is whether as a matter of interpretation the

exclusion clause even applies to the circumstances established in evidence.
This will depend on the Court’s assessment of the intention of the parties as
expressed in the contract. […] If the exclusion clause applies, the second issue
is whether the exclusion clause was unconscionable at the time the contract
was made, “as might arise from situations of unequal bargaining power
between the parties” …
[123] If the exclusion clause is held to be valid and applicable, the Court may
undertake a third enquiry, namely whether the Court should nevertheless
refuse to enforce the valid exclusion clause because of the existence of an
overriding public policy, proof of which lies on the party seeking to avoid
enforcement of the clause, that overweighs the very strong public interest in
the enforcement of contracts.213
The three-part test, thus, requires a court to first determine the applicability of
the exclusion clause, then reach a finding on unconscionable nature of the clause employing
the test as stated earlier in this paper, and lastly, if the exclusion clause is not found as
unconscionable, then determining whether the clause if barred by the overarching public
policy. The third part – testing the exclusion clause against public policy – is a novel addition
to the US law and Law Commission’s suggestion, and has the power to bring in significant
changes in the current understanding of ‘public policy’ as a vitiating element for private
contracts. Recall that §23 of the Indian Contract Act already deems contracts based on those
objects and consideration that are opposed to public policy as unenforceable. However, the
application of §23 is majorly restricted to government contracts and the courts refrain from
212
The Uniform Commercial Code-Sales (2002), §2-302 (United States).
213
Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), [2010] 1 SCR 69.
invoking it in disputes arising out of private contracts. The inclusion of the third-leg of the
Canadian standard can help courts extend the application of ‘public policy’ 214 arguments to
private contracts as well.
Second, a law in India be enacted on the lines of the Unfair Contract Terms
Act, 1977. The preamble of the UCTA provides us a necessary sense of the scope of the law:
An Act to impose further limits on the extent to which … civil liability for
breach of contract, or for negligence or other breach of duty, can be avoided
by means of contract terms and otherwise. 215
§2(3), the crown jewel of the UCTA, acknowledges that an individual’s

signature or awareness of an exclusion clause does not necessarily indicate her voluntary
acceptance of the clause.216 This indicates that signature on contractual documents would not
debar the courts from still accepting evidence for undue influence, thereby giving preference
to the idea of substantive fairness over the enforceability of any contract merely on the basis
of one’s signature. Three relevant provisions dealing with exclusion clauses provide as
follows:
i. §2 of the Act absolutely restricts the freedom of the parties to exclude liability for
death, personal injury. Further, liability for loss or damage owing to negligence can be
avoided only by giving necessary notice of the same and such notice satisfies the
requirement of reasonableness. 217
ii. §3 of the Act pertains to liability arising out of standard form contracts and restricts
the power of the drafter to exclude its liability for breach unless such exclusion
satisfies the requirements of reasonableness.
iii. §11 elaborates on the ‘reasonableness test’ and provides that ‘the term shall have been
a fair and reasonable one to be included having regard to the circumstances which
were, or ought reasonably to have been, known to or in the contemplation of the
parties when the contract was made.’ In effect, §11 grants statutory sanction to the
requirements of notice and situates discretion with the judiciary to strike a contractual
term for unreasonableness. 218
The Law Commission of India, in its 199th Report, has already annexed a
mutated form of the UCTA, named as the Unfair (Procedural and Substantive) Terms in
Contract Bill, 2006.219 The Bill attempts to implement a law on the lines of Unfair Contract
214
For an elaboration on the phrase ‘public policy’, see Central Inland Water Transport Corporation Limited v.
Brojo Nath Ganguly, (1986) 3 SCC 156, ¶92.
215
The Unfair Contract Terms Act, 1977, Preamble (UK).
216
The Unfair Contract Terms Act, 1977, §2(3) (UK) (‘Where a contract term or notice purports to exclude or
restrict liability for negligence a person’s agreement to or awareness of it is not of itself to be taken as indicating
his voluntary acceptance of any risk’).
217
The Unfair Contract Terms Act, 1977, §2(2).
218
ANSON, supra note 1, 208.
219
No.199, 228-240 (August, 2006).
Terms Act, 1977 intending to invest jurisdiction with the courts to ‘grant certain reliefs to
relieve the parties from the effect of unfairness in contracts.’ 220
V. CONCLUSION
One of the prime features of a modern state is free contracting, the mannerism
of which must be determined by the industry. Indian contract law adopts a similar approach
in allowing the insertion of any exclusion clause if it has been clearly drafted; inserted in the
contract after giving proper notice to the other party; and is not vitiated by procedural
unconscionability. Unfair and unconscionable contract terms test this fundamental idea of
freedom of contract. General principles of Indian contract law are currently inadequate to
handle remedies for substantive unconscionability. Entities with higher bargaining power are
free to incorporate unreasonable exclusions in the contract by merely abiding by certain
procedural requirements while benefitting from the circumstantial powerlessness of the other
party. The law thus creates separate compartments for procedural and substantive fairness,
even when they both are balanced against each other, largely.221 A law cannot function in a
just manner if it merely focuses on procedural fairness and ignores to ensure substantive
fairness. It is not a surprise that courts have also followed this understanding while
developing the ‘ad-hoc’ solutions. In light of the discussion above, and similar to the
Consumer Protection Act 2019, we call for reforms to the Indian Contract Act, 1872
envisaging judicial discretion to rule on unreasonable and unfair terms.
220
Id.
221

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NUJS Law Review 13 NUJS L. Rev.

EXCLUSION CLAUSES UNDER THE INDIAN CONTRACT

An exclusion clause is a beneficial contractual arrangement made by either of

attached to a contractual transaction and thus, enhances economies of scale of a business

Unlike this, the ‘adequate causation’ principle, which was developed in

Barrington and Impact made a commercial agreement as principals for their

II. CHARACTERISING THE GROWTH OF THE EXCLUSION CLAUSES

Such comprehensive acceptance of the exclusion clauses granted a free

Here, one might argue that signing a standard contract is an individual’s

Second is an argument furthered by Prof. Friedrich Kessler, that a person in

Taking this conception of contractual autonomy further, the South African

In order to provide remedies for such situations, the UK Parliament enacted

III. EVOLVING REMEDIES UNDER THE CONTRACT LAW

A. REMEDIES FOR NON-FULFILMENT OF THE ‘NOTICE PROCEDURE’

To be effective and enforceable, the drafter of the exclusion clause must

Though the Indian courts are silent on constituents of ‘rigorousness’, the

B. REMEDIES THROUGH ‘INTERPRETATIVE MECHANISMS’

In 2016, the UK Supreme Court extensively discussed the manner of

The fact that a provision in a contract is expressed as an exception does not

1. RULE OF CONTRA PROFERENTEM

The disparity between the bargaining power of consumers and large

Questions of construction and interpretation are liable to be approached by

It must be clarified that this rule shall be applicable only to interpret

In commercial contracts negotiated between businessmen capable of looking

[t]he clauses of an insurance policy have to be read as they are. Consequently,

How do courts apply the rule of contra proferentem? Generally, exclusion

Analysing this dynamic use of ‘interpretative mechanism’, Atiyah termed the

2. MAIN OBJECT AND INTENT TEST

Many decisions of the English Court of Appeal seemed to indicate that as a

This debate was directly addressed, in UGS Finance Ltd. v. National

liability for a fundamental breach … I do not suppose that anyone has

As we understand from the above cases, the courts only go with a

The determination of fundamental breach and thereby, the application of strict

In cases pertaining to insurance contracts, when the breach of conditions are

[e]ven after proving breach of a policy condition regarding a valid license by

According to the law as it stands today, it could be concluded that if an

Notwithstanding the general ability of contracting parties to agree to exclusion

C. REMEDIES FOR NON-CONFORMITY WITH THE ‘STATUTORY REQUIREMENTS’

The parties to a contract must either perform, or offer to perform, their

D. REMEDIES AGAINST ‘UNCONSCIONABLE TERMS’

In the discussions we had above, the following principle of interpretation of

An illustration to §16 of Act clarifies this situation beyond doubt:

In India, however, a universal presumption of undue influence is not

An exception to this understanding is §23 of the Act. It states that a contract

IV. THE WAY FORWARD

Provisioning for a statutory security against economic dominance and

This presents a classic, though extreme, analysis of how unequal bargaining

(2) Without prejudice to the generality of the provisions of this Section, a

These provisions can be made further dynamic and equitable by inserting

[122] The first issue, of course, is whether as a matter of interpretation the

§2(3), the crown jewel of the UCTA, acknowledges that an individual’s

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