In an important judgment relating to insurance contracts, the Bench headed by Hon’ble Mr Justice M.M. Sundresh highlighted the importance of fairness, disclosure, freedom to contract and level playing fields in the negotiation of contracts. The exploitation by a service provider in Adhesion Contracts[1], of customers, is addressed and dealt with in the judgment by referring to recent and historical judgments as well. The question mainly addressed was “Whether an exclusion clause destroying the very contract knowingly entered, can be permitted to be used by a party who introduced it, by later becoming a beneficiary and then avoiding its liability?”
Case: Texco Marketing Pvt. Ltd. v. TATA AIG General Insurance Company Ltd. & Ors.
Forum: Supreme Court of India, New Delhi- India
Bench: M.M. Sundresh J.
Parties
Appellant: M/s Texco Marketing Pvt. Ltd.
Respondent: TATA AIG General Insurance Company Ltd. & Ors.
Case No.: C.A. No.-008249-008249 / 2022
Date of Judgement: November 09th, 2022
The National Consumer Disputes Redressal Commission (NCDRC), set up under the Consumer Protection Act of 1986 is a quasi-judicial commission which entertains complaints valued more than two crores and also exercises appellate and revisional jurisdiction from the orders of state commissions or the district fora as the case may be.
Section 23 of the Consumer Protection Act, 1986, provides that any person aggrieved by an order of NCDRC may appeal against such an order to the Supreme Court of India within a period of 30 days.
BACKGROUND
Texco (the Appellant) secured a standard fire & special perils policy from TATA AIG (the Respondent) for a duration of July 28th, 2012 to July 27th, 2013 against a shop situated in the basement of a building. However, the exclusion clause of the contract specified that it did not cover the basement. Later, when a fire occurred at the shop, the claim was repudiated by the respondent, taking umbrage under the exclusion clause. The State Consumer Disputes Redressal Commission held that the insurer was deficient in service and indulged in unfair trade practices. The fact that a similarly placed shop was also covered was not in dispute. The National Commission, however, overturned this decision by placing reliance on the exclusion clause.
LEGAL ISSUES
What are the consequences of an adhesion contract on the parties to the contract?
The Court referred to Black Law’s Dictionary for the purpose of defining an adhesion contract. Accordingly, the dictionary defines it as, “A standard-form contract prepared by one party, to be signed by the party in a weaker position, usually a consumer, who has little choice about the terms.” The Court acknowledged that insurance contracts were adhesion contracts i.e. standard-form contracts upon which the consumer had to sign with very little bargaining and negotiating power. The dominant party, the insurer, dictated his own terms leaving the consumer only with the option to either take it or leave it. The freedom to enter into a contract and the doctrine of fairness were, therefore, affected.
How much of a role does an exclusion clause play in the holistic implementation of the terms of a contract?
The Court was of the opinion that exclusion clauses were to be interpreted as “touchstone of the doctrine of reading down in the light of the underlying object and intendment of the contract.” The Court referred to the judgment in Glynn v. Margetson & Co.[2] wherein it was held that entire provisions could be rejected if they defeated what was the main purpose of the contract. To substantiate the court’s point on the troubles faced by consumers owing to exclusion clauses, it also referred to Lord Denning’s judgment in George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd.[3], and quoted his exact words, “None of you nowadays will remember the trouble we had - when I was called to the Bar - with exemption clauses. They were printed in small print on the back of tickets and order forms and invoices. They were contained in catalogues or timetables. They were held to be binding on any person who took them without objection. No one ever did object. He never read them or knew what was in them. No matter how unreasonable they were, he was bound. All this was done in the name of ‘freedom of contract’.”
What is the importance of the duty of disclosure, good faith and notice in insurance contracts?
The Court also acknowledged that the duty of disclosure, good faith and notice was to be applied with more rigour in insurance contracts, the application of which was more warranted in exclusion clauses. Moreover, Clause 3(ii) of the Insurance Regulatory and Development Authority (Protection of Policyholders Interests, Regulation 2002) Act required the insurer to disclose all material information to the customer to enable him to make the best decision in his interest. The Court also referred to the recent judgment of Manmohan Nanda v. United Insurance[4], wherein it was held that “Law demands a higher standard of good faith in matters of insurance contracts which is expressed in the legal maxim uberrimae fidei.”
What is the role of the Doctrine of Blue Pencil in the interpretation of contracts?
The Court invoked the Doctrine of Blue Pencil wherein a clause being repugnant to the main contract, and thus destroying it without even a need for adjudication, would have to be eschewed by the Court. The Court referred to the judgment in Beed District Central Coop. Bank Ltd. v. State Of Maharashtra [5] wherein it was stated that “This doctrine holds that if courts can render an unreasonable restraint reasonable by scratching out the offensive portions of the covenant, they should do so and then enforce the remainder.” The Court was of the opinion that a clause that was detrimental to the execution of the contract ought to be effaced.
SUPREME COURT'S FINAL RULING
The Court ruled that the terms of the Contract were unfair, especially the exclusion clause and the respondent had indulged in unfair trade practices. The decision of the National Commission, therefore, was not sustainable because the exclusion clause went against the very object of the contract, making it non-executable from its inception. The order passed by the National Commission was set aside.
Find the judgment here: https://main.sci.gov.in/supremecourt/2018/21218/21218_2018_5_1505_39573_Judgement_09-Nov-2022.pdf
[1] An adhesion contract, also known as a “boilerplate” contract or a “standard form” contract, is an agreement between parties whereby one party (the one with a higher bargaining power) sets out all or most of the terms of the contract. [2] (1893) A.C. 351 [3] [1983] 2 AC 803 [4] Supreme Court of India; CIVIL APPEAL NO.8386/2015 [5] 2006 BOMCR SC 6 542
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