Consumer Protection Act, 1986 – ss. 2(1)(g), 2(1)(r), 3 & 14 – Consumer Protection Regulations, 2005 – Consumer Protection Act, 2019 – ss. 2(46), 2(47), 47, 49 & 59 – Insurance Regulatory and Development Authority (Protection of Policy Holders Interests) Regulations, 2002 – Insurance Claim – Repudiation of – Exclusion Clause – Appellant secured a Standard Fire and Special Perils policy from the respondent on 28.07.2012 – Policy was effective from 28.07.2012 to 27.07.2013 and it was meant to cover a shop situated in the basement of the building – However, the exclusion clause of the contract specified that it did not cover the basement – Shop met with a fire accident for which the appellant raised a claim – Claim was repudiated by the respondent, taking umbrage under the exclusion clause – On challenge, State Consumer held that there was no adequate disclosure and the insurer was deficient in service and indulged in unfair trade practice – National Commission overturned the order passed by the State Commission by placing reliance upon the exclusion clause – Whether an exclusion clause destroying the very contract knowingly entered, can be permitted to be used by a party who introduced it, becomes a beneficiary and then to avoid its liability–Held: An exclusion clause has to be understood on the touch-stone of the doctrine of reading down in the light of the underlining object and intendment of the contract – It can never be understood to mean to be in conflict with the main purpose for which the contract is entered – It is the foremost duty of the insurer to give effect to a due disclosure and notice in its true letter and spirit – Once, the State Commission or the National Commission, as the case may be, comes to the conclusion that the term of a contract is unfair, particularly by adopting an unfair trade practice, the aggrieved party has to be extended the resultant relief – Once it is proved that there is a deficiency in service and that respondent knowingly entered into a contract, notwithstanding the exclusion clause, the consequence would flow out of it – As per the common law principle of acquiescence and estoppel, respondent cannot be allowed to take advantage of its own wrong. Contract Act, 1872 – ss. 2, 10, 17, 18 & 19 – Adhesion contracts/Standard Form of Contract – Insurance Contract – These contracts are prepared by the insurer having a standard format upon which a consumer is made to sign – The insurer who, being the dominant party dictates its own terms, leaving it upon the consumer, either to take it or leave it - Such contracts are obviously one sided, grossly in favour of the insurer due to the weak bargaining power of the consumer.
Doctrine of Blue Pencil – Discussed.
Partly allowing the appeal, the Court
HELD: 1.1 Adhesion contracts are otherwise called Standard-Form Contracts. Contracts of Insurance are one such category of contracts. These contracts are prepared by the insurer having a standard format upon which a consumer is made to sign. He has very little option or choice to negotiate the terms of the contract, except to sign on the dotted lines. The insurer who, being the dominant party dictates its own terms, leaving it upon the consumer, either to take it or leave it. Such contracts are obviously one sided, grossly in favour of the insurer due to the weak bargaining power of the consumer. The concept of freedom of contract loses some significance in a contract of insurance. Such contracts demand a very high degree of prudence, good faith, disclosure and notice on the part of the insurer, being different facets of the doctrine of fairness. Though, a contract of insurance is a voluntary act on the part of the consumer, the obvious intendment is to cover any contingency that might happen in future. A premium is paid obviously for that purpose, as there is a legitimate expectation of reimbursement when an act of God happens. Therefore, an insurer is expected to keep that objective in mind, and that too from the point of view of the consumer, to cover the risk, as against a plausible repudiation. [Paras 9 & 10][1040-E-H]
1.2 An exclusion clause in a contract of insurance has to be interpreted differently. Not only the onus but also the burden lies with the insurer when reliance is made on such a clause. This is for the reason that insurance contracts are special contracts premised on the notion of good faith. It is not a leverage or a safeguard for the insurer, but is meant to be pressed into service on a contingency, being a contract of speculation. An insurance contract by its very nature mandates disclosure of all material facts by both parties. An exclusion clause has to be understood on the touch-stone of the doctrine of reading down in the light of the underlining object and intendment of the contract. It can never be understood to mean to be in conflict with the main purpose for which the contract is entered. A party, who relies upon it, shall not be the one who committed an act of fraud, coercion or mis-representation, particularly when the contract along with the exclusion clause is introduced by it. Such a clause has to be understood on the prism of the main contract. The main contract once signed would eclipse the offending exclusion clause when it would otherwise be impossible to execute it. A clause or a term is a limb, which has got no existence outside, as such, it exists and vanishes along with the contract, having no independent life of its own. It has got no ability to destroy its own creator, i.e. the main contract. When it is destructive to the main contract, right at its inception, it has to be severed, being a conscious exclusion, though brought either inadvertently or consciously by the party who introduced it. [Paras 11 & 12][1041-A-E]
Duty of Disclosure, Good Faith and Notice
1.3 The principles governing disclosure, good faith and notice are founded on the common law principle of fairness. These principles are meant to be applied with more rigour in standard form contracts such as insurance contracts. Such an application is warranted much more when we deal with an exclusion clause. A very high standard of good faith, disclosure and due compliance of notice is required on the part of the insurer, keeping in view the unique nature of an insurance contract. An act of good faith on the part of the insurer starts from the time of its intention to execute the contract. A disclosure should be a norm and what constitutes a material fact requires a liberal interpretation. It is only when an insurer is not intending to act on an exclusion clause, the aforesaid principles may not require a strict compliance. The three elements are interconnected and overlapping. It is the foremost duty of the insurer to give effect to a due disclosure and notice in its true letter and spirit. When an exclusion clause is introduced making the contract unenforceable on the date on which it is executed, much to the knowledge of the insurer, nondisclosure and a failure to furnish a copy of the said contract by following the procedure required by statute, would make the said clause redundant and non-existent. [Paras 14 & 15][1044-A-E] Doctrine of Blue Pencil
1.4 In such a situation, the doctrine of “blue pencil” which strikes off the offending clause being void ab initio, has to be pressed into service. The said clause being repugnant to the main contract, and thus destroying it without even a need for adjudication, certainly has to be eschewed by the Court. The very existence of such a clause having found to be totally illegal and detrimental to the execution of the main contract along with its objective, requires an effacement in the form of declaration of its non-existence, warranting a decision by the Court accordingly. [Para 22][1049-D-E]
2. The consumer under the Consumer Protection Act, 1986 is at an elevated place than the plaintiff in a suit. A dispute before the Consumer Commission is to be seen primarily from the point of view of the consumer as against the civil suit. It is only to avoid any possible bottleneck in granting the relief. The jurisdiction of the Commission has been clearly demarcated, being in addition to any other laws in force as stipulated under Section 3 of the 1986 Act. The Act being a self-contained one, requires to be strengthened by the procedural laws, as the intention now is to facilitate a relief and not to curtail it. The aforesaid view of ours is fortified by Regulation 26 of the Consumer Protection Regulations, 2005 which cautions the Commission to avoid the cumbersome procedure contemplated under the Code of Civil Procedure. Clearly, the object is to make the Commission as consumer friendly as possible. Having noted the provision governing unfair trade practice, it is rather crystal clear that it takes in its sweep all forms of unfair trade practice. One cannot give a restrictive or narrow interpretation to this provision which starts from an invitation, preceded by an offer, followed by an acceptance, conduct, and execution of the contract. Court’s finding against one of the parties qua the existence of unfair trade practice has to be transformed into an adequate relief in favour of the other, particularly in light of Section 14 of the 1986 Act. One has to keep in mind the legislative intendment behind the Act. Once again, we reiterate the definition clause which gives adequate ammunition to the Court to declare any form of unfair trade practice as illegal while granting the appropriate relief. [Paras 28 & 29][1055-F-H; 1056-A-C]
3. The definition clause under sub-section (46) of Section 2 of the Consumer Protection Act, 2019 gives a very broad meaning of unfair contract. As in the other provisions, it does not restrict itself to the few illustrative circumstances mentioned under subclause (i) to (vi). Ultimately, it is for the State Commission or the National Commission to declare a contract as unfair contract. Though, these two provisions are merely defining the terms, they actually empower the Commission to go into the issue qua the unfair nature of the terms of a contract and also the trade practice. Once, the State Commission or the National Commission, as the case may be, comes to the conclusion that the term of a contract is unfair, particularly by adopting an unfair trade practice, the aggrieved party has to be extended the resultant relief. The above said view is further strengthened by Sections 47 and 49 of the 2019 Act. [Paras 30 & 31][1057-H; 1058-A-C]
4. Section 47 and 58 of the 2019 Act have been introduced to facilitate the State Commission and the National Commission to exercise jurisdiction over a contract which is unfair. As stated, the power is not only with respect to identifying a contract as unfair or not, but also to grant the consequential relief. Under sub-section (2) of Section 49 and 59 of the 2019 Act, the State Commission and the National Commission, respectively, may declare any terms of the contract being unfair to any consumer to be null and void. The principle governing the doctrine of civil remedy of a contract is well enshrined in this provision. In these provisions, there exists ample power to declare any terms of the contract as unfair by the State Commission and the National Commission. The words “any terms of the contract” would empower the State Commission and the National Commission to exercise unrestricted jurisdiction over any particular term of a contract, if in its opinion, its introduction by the insurer has certain elements of unfairness. The consequence of the declaration of that term as unfair, would make the contract active and executable to the benefit of the consumer. Therefore, this provision takes care of a possible mischief by the insurer as against the consumer. This Court is conscious of the fact that the aforesaid provisions have been introduced under the new 2019 Act. However, the intendment of these provisions could be seen as implied even under the prior Act, i.e. the Consumer Protection Act, 1986. [Paras 32-35][1059-G-H; 1060-A-D]
ANALYSIS
5. Both the forums have held concurrently that respondent No. 1 was conscious of the fact that the contract was entered into for insuring a shop situated in the basement. The aforesaid position is not only a factual one but also accepted by the respondents as no challenge has been laid against the impugned order. Similarly, there was no specific denial on the noncompliance of adequate notice. The National Commission has not given any finding on this aspect, though it was dealt with in extenso by the State Commission. On a reading of Section 21(A) of the Consumer Protection Act, 1986, it is clear that it is not akin to Section 96 of the Code of Civil Procedure, 1908. Even otherwise, the impugned order has not considered all the relevant materials which were duly taken note of by the State Commission. [Para 36][1061-A-C]
6. Once it is proved that there is a deficiency in service and that respondent No. 1 knowingly entered into a contract, notwithstanding the exclusion clause, the consequence would flow out of it. This Court has already discussed the scope and ambit of the provisions under the Indian Contract Act, 1872. Even as per the common law principle of acquiescence and estoppel, respondent No. 1 cannot be allowed to take advantage of its own wrong, if any. It is a conscious waiver of the exclusion clause by respondent No. 1. Under the impugned order, this court has have already taken note of and discussed, the findings of the State Commission, which are indeed approved by the National Commission. These findings are sufficient enough to come to the conclusion that the terms of the contract are unfair, particularly the exclusion clause, and that respondent No. 1 has indulged in unfair trade practice. In such view of the matter, the decision of the National Commission cannot be sustained as the appellant cannot be non-suited only on the ground of mere deficiency in service without taking note of the fact that it is the duty of the Forum to grant the consequential relief by exercising the power under Section 14(d) and 14(f) of the Consumer Protection Act, 1986 which mandates the payment of adequate compensation by way of an award. The said provision makes it consequential in granting adequate compensation once it finds deficiency, the existence of unfair terms in the contract and unfair trade practice on the part of the other party. In other words, a party is entitled for the relief which the law provides. Non-compliance of Clauses
(3) and (4) of the IRDA Regulation, 2002 preceded by unilateral inclusion, and thereafter followed by the execution of the contract, receiving benefits, and repudiation after knowing that it was entered into for a basement, would certainly be an act of unfair trade practice. This view is fortified by the finding that the exclusion clause is an unfair term, going against the very object of the contract, making it otherwise un-executable from its inception. [Para 37-39][1061-D-H; 1062-A-B]
Shivram Chandra Jagarnath Cold Storage v. New India Assurance Co. Ltd. (2022) 4 SCC 539; Manmohan
Nanda v. United Insurance (2022) 4 SCC 582 : 2022
(3) JT 338; Modern Insulators Ltd. v. Oriental Insurance Co. Ltd. (2000) 2 SCC 734 : [2000] 1 SCR 1076; Beed District Central Coop. Bank Ltd. v. State of Maharashtra, (2006) 8 SCC 514 : [2006] 6 Suppl. SCR
895 – relied on.
N. Murugesan v. Union of India (2022) 2 SCC 25 : 2021 (10 ) JT 264; George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd. (1983) Law Reports Q.B. 284); United India Insurance Co. Ltd. v. M.K.J. Corporation (1996) 6 SCC 428 : [1996] 5 Suppl. SCR 20; Bharat Watch Company v. National Insurance Co. Ltd. 2019 (6) SCC 212: [2019] 6 SCR 302; IREO Grace Realtech (P) Ltd. v. Abhishek Khanna, (2021) 3 SCC 241: 2021 (1 ) JT 323 - referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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