L.I.C. of India v Consumer Education & Research Centre (1995)

The ordinary law of contract says a party is free to choose whom it contracts with and on what terms. This case holds that the Life Insurance Corporation — a State instrumentality — is not free in that way. When it offers a standard-form policy to the public, its terms must be just, fair and reasonable, and a court can strike out an unfair clause.

For a contract student it matters for two reasons. It carries forward the principle of Central Inland Water Transport Corporation v Brojo Nath Ganguly (1986): where one side has overwhelming bargaining power and the other can only sign on the dotted line, an unfair term is open to challenge. And it shows the Court severing one offending condition while leaving the rest of the contract terms intact.

LIC offered a convertible term insurance plan under Table 58. It was the cheapest policy available. One of its conditions confined it to salaried people: "Proposals for policies under this scheme will be entertained only from persons in Government or quasi-government or the service of reputed commercial firms".

In 1978–1980 the respondents — the Consumer Education & Research Centre, its trustee and several individuals — sought policies under Table 58. LIC turned their proposals down because they did not satisfy the conditions. They filed a writ petition in the Gujarat High Court attacking the conditions as arbitrary and discriminatory, violating Articles 14, 19(1)(g) and 21.

The High Court upheld most of the conditions (first-class lives, age limits and so on) but struck down the condition confining the policy to employees of Government, quasi-Government bodies and reputed commercial firms. LIC appealed against the part struck down; the respondents cross-appealed against the findings that went against them.

1. Is a writ petition maintainable against LIC to test the terms of an insurance policy, before any contract has been concluded?
2. Can LIC, as a State instrumentality, insert any term of its choice in a standard-form policy, or must its terms be just, fair and reasonable?
3. Was the condition restricting Table 58 to salaried employees of Government, quasi-Government and reputed commercial firms valid?
4. Could that condition be severed from the rest of the policy's terms?

Both the appeal and the cross-appeal were dismissed. The High Court's declaration stood; each party bore its own costs.

Maintainability — contracts with a public element

LIC argued that no rights arise until a proposal is accepted, and that the terms of a commercial contract are not open to writ review. The Court rejected this. Relying on Mahabir Auto Stores, Kumari Shrilekha Vidyarthi and other decisions, it said: "In the sphere of contractual relations the State, its instrumentality, public authorities or those whose acts bear insignia of public element, action to public duty or obligation are enjoined to act in a manner i.e. fair, just and equitable". LIC's offers "bears public character with an imprint of public interest element", and "It is not a pure and simple private law dispute without any insignia of public element. Therefore, we have no hesitation to hold that the writ petition is maintainable to test the validity of the conditions laid in Table 58 term policy and the party need not be relegated to a civil action."

Unfair terms and bargaining power

The Court stated the contract principle directly: "An unfair and untenable or irrational clause in a contract is also unjust [and] amenable to judicial review." It then set out the reason, in terms of standard-form ("dotted line") contracts: "It is, therefore, the settled law that if a contract or a clause in a contract is found unreasonable or unfair or irrational one must look to the relative bargaining power of the contracting parties. In dotted line contracts there would be no occasion for a weaker party to bargain or to assume to have equal bargaining power."

It relied on Central Inland Water Transport Corporation v Brojo Nath Ganguly and on D.T.C. v D.T.C. Mazdoor Congress, noting that the latter held "that the freedom of contract must be founded on equality of bargaining power between contracting parties", and that "The freedom of equal bargaining power is largely an illusion."

The salaried-class condition

LIC defended the condition as a valid classification based on actuarial need. The Court accepted that LIC may scrutinise health and medical history, but held that the leave record of salaried employees is not a fool-proof guide to good health, and that the condition shut out the very people the cheap policy was meant for. "The classification based on employment in government, semi-government and reputed commercial firms has the insidious and inevitable effect of excluding lives in vast rural and urban areas engaged in unorganised or self-employed sectors to have life insurance offending Article 14 of the Constitution and socio-economic justice." Confining the policy to salaried sections "would, therefore, be unreasonable and arbitrary".

Severance and relief

The respondents did not ask for a mandamus compelling LIC to insure them; they sought a declaration only. "The rest of the conditions age etc are valid and do not call for interference. The offending clause extending the benefit only to the salaried class in Government, semi-Government and reputed firms is unconstitutional." And: "The offending part is severable from the rest of the conditions." LIC remained free to require a medical report and to accept or reject each proposal on the proposer's health.

The Court concluded that in issuing a life insurance policy "public element is inherent in prescription of terms and conditions therein", and that LIC may revise premiums but that revision "must not be arbitrary, unjust, excessive and oppressive."

Where a State instrumentality such as LIC offers standard-form contracts to the public, its terms carry a public element and must be just, fair and reasonable; they can be tested under Article 14 in writ proceedings even before any contract is concluded. A court judging an unfair or unreasonable clause must look to the relative bargaining power of the parties, because in dotted-line contracts the weaker party has no real choice. An arbitrary condition — here, confining a cheap term policy to salaried employees of Government, quasi-Government bodies and reputed firms — may be struck down and severed, leaving the valid terms operative.

• Direct question: Discuss the approach of Indian courts to unfair terms in standard form contracts. Begin with Brojo Nath Ganguly, then use LIC v CERC to show the principle applied to terms imposed on the public by a State instrumentality, and to severance of an offending clause.
• Problem question: a public-sector body's standard-form contract contains a condition that excludes a large class of the public without rational basis. Argue unequal bargaining power (dotted-line contract), Article 14, maintainability of a writ, and severance.
• Point worth marks: the relief was a declaration, not a mandamus to contract. Say so — it shows the court striking a term, not writing a contract for the parties.
• Link: pair with Lloyds Bank v Bundy (inequality of bargaining power in English law) and with s. 23 of the Indian Contract Act on terms opposed to public policy, as discussed in Brojo Nath Ganguly.