CONSUMER AND CONTRACT LAWS

N.Sumanth

INTRODUCTION

Principals of contract law which have evolved from the common law, initially applied to
commercial transactions. When the classical rules of the law of contract were developed in the 19th
century, the modern phenomenon of the consumer society and consumerism did not exist. This
being so, it is sometimes unfair to apply these rules to contract between the consumer and trader.
Usually, the trader has a better bargaining power. As the common law principles of contract are
dominated by freedom of contract, the only way the consumer can be protected is by means of
legally imposed obligations such as statutory controls on exemption clauses in contracts for the
supply of goods and services. The whole ambit of consumer laws evolved with an objective to
protect consumer. These laws make an attempt to ensure that the consumer is not at a worse off
position in relation to the trader.

LAW OF CONTRACT

A contract is an agreement. In a contract one person offers to do something and another person
accepts that offer. There must an agreement between the parties about what each person must do
under the contract. In other words, there must an offer by one person and an acceptance by the
other. For example, if a person offers a reward to anyone to find something and another person
claims the reward after finding the thing, this is a contract. Both parties should have the same
understanding of what the contract means i.e., there must be a meeting of the minds. If one of the
parties doesn’t properly explain what is in a contract, for example, misrepresenting what is in a
contract, or not explaining the details properly to a person who is illiterate, then the contract will
not be valid. Contracts are promises that the law will be enforced. The law provides remedies if a
promise is breached or recognizes the performance of a promise as a duty. Contracts arise when a
duty does or may come into existence, because of a promise made by one of the parties. To be
legally binding as a contract, a promise must be exchanged for adequate consideration. Adequate
consideration is a benefit or detriment which a party receives which reasonably and fairly induces
them to make the promise/contract. For example, promises that are purely gifts are not considered
enforceable because the personal satisfaction the grantor of the promise may receive from the act of
giving is normally not considered adequate consideration. Certain promises that are not considered
contracts may, in limited circumstances, be enforced if one party has relied to his detriment on the
assurances of the other party1. A contract2 is an oral or written agreement with four fundamental
characteristics:

1
Doctrine of Promissory Estoppel
2
"contract" in the Canadian Encyclopedic Digest is described as: "an agreement free from vitiating factors such as
mistake or misrepresentation and constituted by the unconditional acceptance of an outstanding offer involving a
reasonably precise set of terms between two or more contractually competent parties who intend to create mutual and
1. Intention
To be enforceable, a person must intend his or her promise to be contractually binding. Evidence of
intention is present in the words and actions of a person.

2. Capacity
Only people of suitable age, intelligence, and ability can enter an enforceable contract. This
element is particularly important in transactions conducted by persons less than prescribed age.

3. Agreement
An agreement requires both an offer and acceptance of that offer. An offer must communicate the
material terms of the agreement: price, quantity, quality, and subject matter. At common law,
advertising is usually classified as only an invitation to consumers to make an offer. Acceptance is
the communication of agreement with all of the essential terms of an offer. A response to an offer
that materially alters the terms is not acceptance. Rather, it is considered a counter-offer. Once an
offer has been accepted, for the most part, the contract cannot be altered or cancelled without
mutual agreement.

4. Consideration
The law of contracts enforces exchanges, not gifts. Consideration is what the parties agree to
exchange. There must be consideration given by both contracting parties. Almost anything that
provides the other party with a benefit can be good consideration, including a performance of a
task, or even a promise not to do something. Consumer transactions usually satisfy these
requirements.

Associated with the law of contract are some of the following concepts. A term of the contract is a
promise made by the manufacturer or seller about the character or quality of an article. It can be
either written or oral. However, not everything said by the seller will be a term of the contract; only
if the salesperson made a specific promise or statement of fact (rather than opinion), and it
influenced the purchaser’s decision to purchase the good, will the statement be a term, and thus part
of the contract. A statement made by the vendor may be characterized as a term of the contract or
as a mere representation — which is not a term of the contract. How the statement is characterized
will determine what remedies may be available to the purchaser.

1. Implied Term
An implied term is part of a contract even though it was not explicitly mentioned in the contract.

2. Condition
A condition is a term that is so essential to the agreement that its breach is considered to be a
substantial failure to perform the contract. A breach of a condition is said to go to the root of the
contract. In other words, had B known that A would not honour this term of the contract; B would
not have entered into it in the first place. Breach of condition may entitle the buyer to damages.

reciprocal rights and duties that may be the subject of judicial sanction if they are expressed in any required form, are
free from the taint of illegality or immorality and are not subsequently discharged by law, by agreement, by breach or
by sufficient supervening circumstances."
3. Warranty
A warranty is a term of the contract that is not so essential. A warranty must be performed, but a
breach of it is not considered to go to the root of the contract. This meaning of warranty should not
be confused with other uses of the word such as in one-year maintenance warranty. Damages are
the remedy for breach of a warranty.

CONSUMER PROTECTION ACT-AN INTRODUCTION

A consumer is a user of goods and services. Any person paying for goods and services, which he
uses, is entitled to expect that the goods and services are of a nature and quality promised to him by
the seller.

The earlier principle of "Caveat Emptor" or "let the buyer beware" which was prevalent has given
way to the principle of "Consumer is King". The origins of this principle lie in the fact that in
today's mass production economy3 where there is little contact between the producer and consumer,
often sellers make exaggerated claims and advertisements, which they do not intend to fulfill. This
leaves the consumer in a difficult position with very few avenues for redressal. The onset on intense
competition also made producers aware of the benefits of customer satisfaction and hence by and
large, the principle of " consumer is king" is now accepted. The need to recognise and enforce the
rights of consumers is being understood and several laws have been made for this purpose. In India,
we have the Indian Contract Act, the Sale of Goods Act, the Dangerous Drugs Act, the Agricultural
Produce (Grading and Marketing) Act, the Indian Standards Institution (Certification Marks) Act,
the Prevention of Food Adulteration Act, the Standards of Weights and Measures Act, the Trade
and Merchandise Marks Act, etc which to some extent protect consumer interests. However, these
laws required the consumer to initiate action by way of a civil suit which involved lengthy legal
process proving to be too expensive and time consuming for lay consumers. Therefore, the need for
a more simpler and quicker access to redressal to consumer grievances was felt and accordingly, it
lead to the legislation of the Consumer Protection Act, 1986.

Objects of the Consumer Protection Act, 1986

The preamble to the Act states that the Act is legislated to provide for better protection of the
interests of consumers and for that purpose to make provision for the establishment of consumer
councils and other authorities for the settlement of consumer's disputes and for matters connected
therewith.

The basic rights of consumers as per the Consumer Protection Act (CPA) are
1. the right to be protected against marketing of goods and services which are hazardous to life
and property
2. the right to be informed about the quality, quantity, potency, purity, standard and price of
goods, or services so as to protect the consumer against unfair trade practices
3. the right to be assured, wherever possible, access to variety of goods and services at
competitive prices.

3
See David Oughton & John Lowry, “Textbook on Consumer Law”, 1997, p:83
 4. the right to be heard and be assured that consumers' interests will receive due consideration
at appropriate forums
5. the right to seek redressal against unfair trade practices or restrictive trade practices or
unscrupulous exploitation of consumers.
6. the right to consumer education

Definitions of Important Terms

Some of the more important definitions in the Act are as follows:

Complainant means :-

1. A consumer; or
2. Any voluntary consumer association registered under the Companies Act,1956 or under
any other law for the time being in force; or
3. The Central Government or any State Government, who or which makes a complaint; or
4. One or more consumers where there are numerous consumers having the same interest
Complaint means any allegation in writing made by a complainant that :-

1. an unfair trade practice or a restricted trade practice has been adopted by any
trader
2. the goods bought by him or agreed to be bought by him suffer from one more
defects
3. the services hired or availed of or agreed to be hired or availed of by him suffer
from deficiency in any respect
4. the trader has charged for the goods mentioned in the complaint a price excess of
the price fixed by or under any law for the time being in force or displayed on
the goods or any package containing such goods.
5. goods which will be hazardous to life and safety when used, are being offered
for sale to the public in contravention of the provisions of any law for the time
being in force, requiring traders to display information in regard to the contents,
manner and effect of use of such goods ;with a view to obtaining any relief
provided by law under the CPA.

Consumer means any person who4 :-

1. buys any goods for a consideration which has been paid or promised or partly paid and partly
promised, or under any system of deferred payment (eg hire purchase or installment sales) and
includes any other user of such goods when such use is made with the approval of the buyer, but
does not include a person who obtains such goods for resale or for any commercial purpose ; or

2. hires or avails of any services for a consideration which has been paid or promised, or partly paid
and partly promised, or under any system of deferred payment and includes any beneficiary of such
services when such services are availed of with the approval of the first mentioned person. For the
purposes of this definition "commercial purpose" does not include use by a consumer of goods
bought and used by him exclusively for the purpose of earning his livelihood by means of self-
employment.

4
Section 2(1) d of Consumer Protection Act,1986
Goods means goods as defined in the Sale of Goods Act, 1930. Under that act, goods means every
kind of movable property other than actionable claims and money and includes stocks and shares,
growing crops, grass and things attached to or forming part of the land which are agreed to be
severed before sale or under the contract of sale. Service is defined to mean service of any
description which is made available to potential users and includes the provision of facilities in
connection with banking, financing, insurance, transport, processing, supply of electrical or other
energy, board or lodging or both, housing construction, entertainment, amusement or the purveying
of news or other information but does not include the rendering of any service free of charge or
under a contract of personal service.

Consumer dispute means dispute where the person against whom a complaint has been made,
denies or disputes the allegation contained in the complaint. Restrictive Trade Practice means any
trade practice which requires a consumer to buy, hire, or avail of any good or as the case may be,
services as a condition precedent for buying, hiring or availing of any other goods or services.

Unfair Trade Practice means unfair trade practice as defined under the Monopolies and Restrictive
Trade Practices Act. The MRPT act has defined certain practices to be unfair trade practices. Defect
means any fault, imperfection or shortcoming in the quality, quantity, potency, purity or standard
which is required to be maintained by or under any law for the time being in force or under any
contract, express or implied, or as is claimed by the trade in any manner whatsoever in relation to
any goods.

Deficiency means any fault, imperfection or shortcoming or inadequacy in the quality, nature and
manner of performance which is required to be maintained by or under any law for the time being
in force or has been undertaken to be performed by a person in pursuance of a contract or otherwise
in relation to any service.

Sections 3, 10, 16 and 20 provides for constitution of District Forum, State Commission and
National Commission which conduct proceedings as per the procedure prescribed in Section 13;
finality is attached to the order of the Forums under Section 24. The orders are enforceable at law
by operation of Section 25 and the penalties for contravention get sanctions under Section 27. The
hierarchy of appeals provide under Section 19 et al does indicate that the proceedings before the
authorities under the Act are legal proceedings and the authorities are judicial authorities5.

The above regime of Consumer Legislation, the most prominent, has brought about or rather
recognized the changes to Contract law facilitating it for consumers.

5
See Fair Air Engineers Private Limited v. N. K. Modi 1997 AIR(SC) 533
 CONTRACT AND CONSUMER LAW
The law of contract has developed as a result of increased complexity of commercial transactions.
Until the 17th century, dispute between parties in the exchange of goods or services could be
addressed only under tort law. However, as commerce increased and the range of products and
services expanded, the need for specific law dealing with contracts became apparent, and the case
law of contracts began to develop. The law of contract can be viewed as harsh and individualistic;
however, not always addressing those issues seen as significant to the public good. As a result,
governments have developed statute law to address matters such as consumer purchases, residential
rental agreements, and ownership of copyright, patents, or trademarks. The statute law has been
developed in the public interest, in order to afford protection for individuals against potentially
more powerful business interests.

The Nature of Contract Law

When parties intend to enter legal agreements, and meet certain criteria in the process of defining
the nature of such agreements, contracts are formed. A contract is a process of negotiation of
private rights and obligations between parties to a contract. These agreements may be written or
verbal, or may be completed through actions of the parties involved. Individuals form contracts
when they undertake common consumer transactions, whether as buyers or sellers, lessors or
renters. The purpose of the law of contracts is to protect the reasonable expectations of the parties
involved in an agreement, through application of contract law, and to provide an avenue for dispute
settlement according to the rule of law. Under common law, only parties to a contract are entitled to
contractual rights. This being so, the underlying assumption under common law is that contract is
entered between two negotiating parties with equal bargaining strength. As commercial transactions
increased in volume and complexity, the need to recognize a legal relationship in the exchange of
goods and services became more apparent. In the latter 17th century, judges began to hear
increasing numbers of cases regarding commercial transactions, resulting in the genesis of contract
law. The next step was the evolution of Consumer contract law.

There was a reluctance on part of the judges to apply the conventional contract law to consumer
transactions. This can be inferred from the following observation of Lord Wilberforce:

“English law, having committed itself to a rather technical and

schematic doctrine of contract, in its application takes a practical
approach, often at the cost of forcing the facts uneasily to fit into the
marked slots of offer, acceptance and consideration.”

Elements of a Contract
A contract is an intention to create legal relations between parties, and must include certain
elements in order to meet the criteria of a contract. Along with the intention of parties to create a
legal relationship, a contract must include:
· offer
· acceptance
· consideration.
Absence of Privity
While the law of contract is founded within the common law, statute law has been developed in
order to clarify and to protect the interests of consumers against potentially more powerful
commercial interests. Statutes associated with consumer protection are designed to provide a
remedy to the consumer, which is not provided via the common law. One feature of statute law in
consumer protection legislation is the absence of privity, allowing a consumer to hold a retailer
accountable for a product, even if a third party supplier manufactured the product. At the provincial
level, consumer protection legislation addresses issues related to the actual goods exchanged, while
federal legislation addresses issues of pricing and advertising of goods and services.

Invitation to Treat-Offer
Contracts are generally formed when two parties exchange promises and have reached agreement.
This exchange has to have been formed on the basis of an 'offer' by one party and an 'acceptance' by
another with the 'intent' to form a bilateral contract which is legally binding. The intent is generally
regarded as being objective, with the court looking at what is said and done rather than trying to
piece together what went on in the minds of the people involved6. However, advertisements do not
require any communicated acceptance: A poster asking for the apprehension of a criminal and upon
that apprehension a reward is given is referred to, as a unilateral contract. This is because no one
actually has to look for the criminal, no promise is made to do so, no one is legally bound to do so,
it is said 'to be an offer to the whole world'. One party with no need for any other negotiations
makes the reward or offer. The 'acceptance' of this type of contract is in the actual performance, or
specified conduct, which is required to receive the reward, looking for, finding, and then delivering
to the offeror7. In Errington v Errington8 a father who gave a house to his daughter and son in law,
on the condition that they keep up the mortgage payments, was held to be a unilateral contract, and
the mortgage payments were considered to be the performance, even though the father died, the
offer of the house could not be revoked as the performance, the payments had already started.

When this 'acceptance' takes place is some what unclear, but in Daulia v Four Millbank Nominees
Ltd9 Goff LJ stated: ' There must be an implied obligation on the part of the offeror not to prevent
the condition becoming satisfied, which obligation it seems to me must arise as soon as the offeree
starts to perform'. This statement suggests that it would be unjust for the offeror to withdraw the
offer once the offeree has started the performance. Advertisements such as those found in
magazines, newspapers and shop displays are generally considered to be 'invitations to treat', i.e.,
an invitation to make an offer to the advertisers or seller10. In Partrtridge v Crittenden11, the
defendant was arrested and charged with offering for sale live wild birds contrary to the Protection
of Birds Act 1954, via an advertisement in a monthly periodical. It was held that this was not an
offer but an invitation to treat, an offer to enter into negotiations. Lord Parker CJ, stated: 'There was
a business sense in treating such advertisements as' invitations to treat' because if they were treated
as 'offers' the advertiser might find himself contractually obliged to sell more goods than he in fact

6
See Gibson v Manchester City Council [1979] 1 ALL ER 972.
7
See Errington v Errington [1952] 1 ALL ER 149 and Carlill v Carbolic Smokeball Co [1893] 1
QB 256.
8
Ibid
9
[1978] 2 ALL ER 557
10
See Fisher v Bell [1961] 1 QB 394 and Partrtridge v Crittenden [1968] 1 WLR 1204.
11
(1968) 1 WLR 1204 See Supra n. p:85
owned'12. Offers are verbal or written statements with certain conditions laid down by the offeror
with a willingness to enter into a contract, if and when these conditions are met. In Carlill v
Carbolic Smokeball Co13, The claimant purchased one of the defendants products after seeing an
advertisement saying they would pay 100 pounds to anybody who caught flu after using one of
their smoke balls in the specified manner, the defendants also stated, that to show good faith they
would deposit pounds1,000 in a bank account. The claimant used the product as directed but caught
flu, and she sued the company for the 100 pounds. It was held that this was an offer to the whole
world, rather than an invitation to treat, anyone who complied with the instructions in the
advertisement was entitled to the reward. Lindley LJ commented on the words in the defendant's
advertisement: A distinct promise expressed in language which is perfectly unmistakable'. Lindley
LJ, recognised within the words of the advertisement that a promise was made by the offeror and
the acceptance was made, via the performance, by the offeree therefore establishing the basic
requirements for a contract. In Byrne v Van Tienhoven14 the defendants sent an offer on the 1st of
October, which was received on the 11th October, an acceptance was sent by telegram, but the
defendants had sent a letter of revocation on the 8th of October, which arrived on the 20th of
October. It was held that there had been an acceptance of the offer before the revocation so the
contract was still valid. With unilateral contracts, i.e. 'offers to the whole world', the revocation has
to be made available to all those who had seen the original offer by displaying the revocation in the
same manner15.

In the case of Carlill v Carbolic Smoke ball Co; Bowen LJ stated, obiter, 'It did not follow that the
smoke ball was to be purchased from the defendants directly' In the above statement, it would seem
that the purchase of a bottle was not a necessary part of the acceptance but just the use of it as the
advertisement stated. But is it enough to be aware of the offer even though she did not buy the
product? In Williams v Carwardine16 it was held that as long as the offeree was aware of the reward
any other motive would be irrelevant and the plaintiff would be entitled to the reward17.

Thus it can be seen that through these judicial decisions, there has been a change brought
about in the fundamental concepts of offer and acceptance to favour consumer and protect him
from the trader. This provided him a better bargaining power.

EXEMPTION CLAUSE
An exemption clause can be described as, a clause in a contract or a term in a notice, which appears
to exclude or restrict a liability or a legal duty, which would otherwise arise18. Exemption clauses
break down into three main types; exclusion clauses which exclude liability completely, limitation
clauses which restrict it in some way, such as in the quantum of damages payable, and indemnity
clauses, which pass the risk of legal action on to the other party.

12
See Pharmaceutical Society v Boots Chemists [1953] 1 ALL ER 482.
13
(1893) 1 QB 256
14
(1880) 5 CPD 344
15
See Shuey v US (1875) 92 US 73.
16
(1833) 4 B & Ad 621
17
See supra n p:88
18
The Law Commission (1975) adopted an even wider definition, saying they regarded the term as, "a convenient label
for a number of provisions which...deprive or may deprive the person against whom they are invoked either of certain
specific rights...or of rights which the promisee reasonably believed that the promisor had conferred upon him."
Freedom of contract would allow a stronger party to use exemption clauses to force its customers to
give up certain rights that they would otherwise have enjoyed. From an economic point of view
exclusion clauses are simply a means of allocating risk or clarifying the parties obligations.
In L'Estrange v. F. Graucob Ltd19, an exemption clause, in a standard-form contract, successfully
protected a manufacturer of a machine that was not suitable for the purposes for which it was sold,
even though the plaintiff had not read it20.
In Canada Steam Ship v. The King21 the defendant had leased a dock and shed to the plaintiff. The
defendant had agreed to maintain the shed, and during some maintenance work the defendants
agents negligently set fire to it, destroying it and its contents. The defendant attempted to rely on an
exclusion clause denying liability for damage to the shed, and an indemnity clause that appeared to
ensure the lessee indemnified the leasor against all third party claims. The Privy Council, using a
technique called the true construction of contract, was able to find that the defendants had not
proven that the clauses unequivocally covered the situation, and due to the contra proferentem
rule22, found for the plaintiff. The true construction of contract is the term given to the reading of a
clause in a very limited way. In this case it was ruled that because the exclusion clause did not
mention negligence it did not cover it.
The next stage of development was the doctrine of fundamental breach. According to this doctrine,
if the breach in performing the contract is prominent, the exemption clause provided in the contract
would not be available to the supplier. This proves useful in the context of deficiency of service
under the Consumer Protection Act,1986. In the case of Punjab Water Supply Board v. Udaipur
Cements Works23 where the supply of good was not made, it was held that there was a breach of
contract and not deficiency of service. This case when referred back to national Commission by
Supreme Court, National Commission held that there could be deficiency of service even in case of
breach of contract. Thus it can be seen that the principles of contract were interpreted in favour
of the consumer and in consonance with Consumer laws.

CONCLUSION

Indian Contract Act, 1872 which has codified the law regarding contract has contributed to the
development of consumer law. It can also said to have provided consumer protection in a nascent
form. For instance Section 14 defines Free Consent as the one without Fraud, Misrepresentation
etc. This provides with an opportunity to make a claim that contract is invalid. However this option
is available to buyer(consumer) or seller24. Consumer laws have made such an option more
prominent with an express recognition of the same.

Contract law has also aided in the development of Consumer laws. Notable in this context is the

19
[1934] 2 K.B
20
See p: 340
21
[1952] AC 192.
22
If a term of the contract is intended to benefit one party to the contract, it will be construed against the person
seeking to rely on it in the case of any ambiguity. See supra n p:342
23
AIR 1996 SC 537
24
Section 19
case of Delhi Electric Supply Undertaking v. Basanti Devi25. In this case, a claim for insurance
was said to be repudiated due to non payment of premium which was deducted by the employer
from the salary. Under the earlier decision of State of Orissa v. LIC26, such a person, was not a
consumer as the service was done free of charge. In the later decision, recourse was made to the
principle of Agent under Section 182 of the contract Act and held that the employer was an agent of
the employer, his service not free of charge and hence, the person availing of such a service was a
consumer and district forum has the jurisdiction to award compensation or the required remedy
which would vary from case to case.

Section 2(0) encapsulated the relationship of contract and service by the definition of service.
Judicial Decisions have made a distinction between Contract of personal service and contract of
service to achieve the object of the Act27. Notable in this endeavour is the extension of the scope of
Consumer protection Act to include the services of medical professionals28 which, till today is the
field which provides huge number of litigation in consumer forum.

Thus it can be seen that principle of contract were the basis for evolution of Consumer laws and
still continue to contribute for the development of Consumer Laws. With the advent of e-contracts,
it is to be seen if contract law can come to the aid of cyber consumers. To this end, contract law
needs to be revised, lest there should be deficiency in Consumer Protection.

25
(1999) 3 CPJ 15
26
AIR 1996 SC 2519
27
See M/s Cosmopolitan Hospitals v. Vasantha P.Nair 1992 (1) CPJ 389 Also see David Annoussamy, “Medical
Profession and Consumer Protection Act”, Journal of Indian law Institute, vol.41, 1999 p:460
28
See Indian medical Association v. V.P.Shanta (1995) 3 CPJ 412 SC