Introduction
The unfair contract terms problem in Indian law has a curious design flaw: the party most likely to be trapped in an exploitative standard-form contract is often not the party the law protects. Consumer protection legislation is concerned with the individual consumer who purchases goods or services for personal use. Large corporations have the resources to negotiate contracts and litigate when terms prove disadvantageous. The micro, small, and medium enterprise that sells exclusively to one powerful buyer, accepts the buyer’s standard form contract without any real ability to negotiate, and discovers only when a dispute arises that the agreement contains indemnification clauses, unilateral variation rights, and liquidated damages provisions that bear no relationship to the actual risk of the transaction, falls into neither of these categories. It is a commercial party, fully subject to the caveat emptor logic of commercial contract law, yet it possesses none of the market power that would allow that logic to produce fair outcomes.
This article examines the absence of an unfair contract terms doctrine in Indian B2B contract law, assesses the adequacy of Section 23 of the Indian Contract Act 1872 as a residual protection mechanism, analyses comparable reforms in the United Kingdom, Australia, and the European Union, and makes the case for targeted legislative intervention to protect small business parties from the worst excesses of standard-form commercial contracting.
Legal Framework
The Indian Contract Act 1872 contains no general doctrine of unfair contract terms in commercial agreements. The statute’s approach to protecting contracting parties from oppressive terms is limited and indirect. Section 23 provides that the consideration or object of an agreement is unlawful if it is opposed to public policy, and courts have occasionally used this provision to strike down egregiously one-sided commercial terms on the ground that enforcing them would be contrary to public policy. However, the Section 23 public policy ground is a blunt instrument: it requires the term to be so extreme that enforcement would offend the public interest, not merely that the term is commercially unfair or represents an imposition of superior bargaining power.
Section 16, dealing with undue influence, is theoretically available where a party in a position to dominate the will of another uses that position to obtain an unfair advantage. However, the doctrine of undue influence under Indian contract law has been interpreted conservatively. The Supreme Court in Central Inland Water Transport Corporation v. Brojo Nath Ganguly (1986) made a remarkable and still underutilised observation that unconscionable terms in standard-form contracts with weaker parties could be struck down on public policy grounds. The court drew on the concept of inequality of bargaining power but declined to articulate a general doctrine, and the decision has been confined largely to employment contracts with public sector entities rather than extended to the commercial sphere.
The Consumer Protection Act 2019 provides the most developed statutory framework for unfair contract terms in India, but its application is expressly limited to consumer transactions. Section 2(7) defines a consumer as a person who buys goods or hires services for consideration, not for commercial resale or for any commercial purpose. An MSME that purchases raw materials to manufacture goods is not a consumer. A small retailer that buys inventory from a large manufacturer under the manufacturer’s standard terms is not a consumer. The statutory protection for unfair terms, including the power of the Central Consumer Protection Authority to declare terms unfair and the right of consumer courts to decline to enforce unfair terms, is simply unavailable to these parties.
The Competition Act 2002, administered by the Competition Commission of India, provides some protection where an entity in a dominant position imposes unfair conditions on trading partners. Section 4(2)(a) prohibits a dominant enterprise from imposing unfair or discriminatory conditions in purchase or sale of goods or services. However, this provision requires that the imposing party be in a dominant position as defined by the Act, typically meaning a very high market share, and the CCI’s enforcement has focused primarily on price-related abuses rather than contract term imposition.
Judicial Developments
The Central Inland Water Transport Corporation case (1986) remains the high-water mark of judicial willingness to address unconscionable commercial terms in India. Justice P.N. Bhagwati’s majority judgment articulated a constitutional dimension to unconscionable contracting: where the state or a public sector undertaking is a party, the constitutional guarantee of equality under Article 14 constrains the terms it may impose on weaker contracting parties. However, Justice Bhagwati explicitly noted that the majority view did not extend this protection to purely private commercial contracts, a limitation that has substantially reduced the decision’s practical impact.
In LIC of India v. Consumer Education and Research Centre (1995), the Supreme Court reiterated that standard-form contracts are fundamentally different from freely negotiated agreements and that courts should scrutinise such contracts more carefully. The court noted that the party who prepared the form had every opportunity to insert self-serving terms and that the other party had no practical ability to alter them. This observation has been relied upon in consumer disputes but has not generated a jurisprudential development extending to commercial contracts between private parties.
More recently, the National Company Law Tribunal and the National Company Law Appellate Tribunal have had occasion to examine standard-form contracts in the context of insolvency proceedings, where one party to a pre-insolvency standard-form contract seeks to enforce its contractual rights against an insolvent counterparty. The courts have occasionally declined to enforce terms that they characterised as punitive or designed to extract value rather than compensate genuine loss, drawing on the IBC’s underlying policy of maximising creditor recovery rather than on any general unfair terms doctrine.
The Competition Commission of India’s decision in Builders Association of India v. Cement Manufacturers Association (2012) and subsequent related proceedings illustrate the limits of competition law as a substitute for an unfair terms doctrine. While the CCI found price coordination among cement manufacturers, it was not able to address the standard-form supply terms that the manufacturers imposed on construction companies because those terms were not shown to result from dominant position abuse in the manner required by Section 4.
Contemporary Issues and Analysis
The practical vulnerability of small businesses to unfair standard-form terms is most visible in four sectors: the automotive supplier sector, the retail chain sector, the e-commerce marketplace sector, and the agricultural produce procurement sector.
In the automotive sector, major original equipment manufacturers use standard-form vendor agreements that impose on suppliers one-sided indemnification obligations, require suppliers to hold excess inventory at their own risk, permit the OEM to unilaterally change specifications or cancel orders without adequate notice, and contain price revision clauses that allow the OEM to demand price reductions regardless of input cost inflation. Suppliers, overwhelmingly MSMEs, accept these terms because their entire revenue may depend on a single OEM customer, and the alternative is to lose the supply relationship entirely.
The e-commerce marketplace sector presents a particularly stark version of this problem. Marketplace operators impose on sellers standard terms governing everything from product listing requirements and return policies to payment settlement timelines and penalty structures for policy violations. These terms are updated unilaterally by the platform with minimal notice, and sellers who object to changes are removed from the platform. The CCI’s investigation into Amazon and Flipkart’s marketplace practices (2022 to 2025) has addressed some of these issues from a competition law perspective, but competition law tools are calibrated to market power rather than to contractual fairness and do not provide a remedy for the individual seller who has been subjected to an unfair penalty.
The agricultural procurement sector illustrates the intersection of unfair terms and informational asymmetry. Large food processing companies that procure directly from farmers or farmer producer organisations use standard-form contracts that impose quality specifications that may be assessed arbitrarily at the point of delivery, contain force majeure clauses that permit the buyer to cancel without payment but not the farmer, and include arbitration clauses that require arbitration in the buyer’s city of choice at the farmer’s cost. The Farm Laws of 2020, before their repeal, had attempted to address some of these issues through a model contract framework, but the political controversy around the laws prevented any assessment of whether the framework would have been effective in practice.
Comparative and International Perspective
The United Kingdom’s Unfair Contract Terms Act 1977 was a landmark piece of legislation that extended unfair terms protection to business-to-business contracts as well as consumer contracts. Under the UCTA, certain terms in business contracts, most significantly exclusion of liability for negligence causing loss or damage, are subject to a reasonableness test. The test requires the court to consider whether the term was fair and reasonable having regard to the circumstances known to or contemplated by the parties when the contract was made. The 1977 Act was supplemented by the Consumer Rights Act 2015, which consolidated consumer protection but left the UCTA’s B2B provisions in place. The UK further established a Small Business Commissioner in 2017, tasked specifically with assisting small businesses in resolving disputes with larger business partners, including disputes about unfair contract terms.
Australia extended its unfair contract terms regime to small business contracts in 2016 through amendments to the Australian Consumer Law and the Australian Securities and Investments Commission Act. The extension applied to standard-form contracts where at least one party was a small business (employing fewer than 20 persons) and the upfront price payable did not exceed specified thresholds. A term is unfair if it would cause a significant imbalance in the parties’ rights and obligations, is not reasonably necessary to protect a legitimate interest, and would cause detriment to the small business if relied upon. The Australian Competition and Consumer Commission has been active in enforcing this regime, taking action against several large companies that imposed unfair terms on small business suppliers. In 2023, Australia further strengthened the regime by making unfair terms in small business contracts automatically void rather than merely challengeable and by increasing the penalties for including such terms.
The European Union’s Directive 93/13/EEC on unfair terms in consumer contracts is explicitly limited to consumer contracts and does not extend to B2B transactions. However, several EU member states have enacted national legislation extending unfair terms protection to small commercial entities. France, through the Commercial Code, provides protection against manifestly unbalanced clauses in commercial contracts between parties in a relationship of economic dependency, a concept that closely tracks the MSME situation in India. Germany’s Civil Code unfair terms provisions, while technically available in commercial contracts, are applied more stringently between consumers and more flexibly between commercial parties, but the underlying framework allows courts to decline to enforce standard terms that materially disadvantage the weaker commercial party.
Practical and Policy Implications
The case for extending unfair contract terms protection to small business contracts in India rests on four arguments: economic, constitutional, comparative, and developmental.
The economic argument is that unfair terms extraction from MSMEs represents a transfer of economic value from a sector that employs the majority of India’s manufacturing workforce to large corporations, without creating any efficiency gain. Standard-form terms that shift risk entirely to the smaller party do not represent efficient risk allocation; they represent rent extraction that depresses MSME profitability and investment capacity.
The constitutional argument draws on the Central Inland Water Transport Corporation case and the constitutional guarantee of equality to argue that the state should not allow the private law of contract to be used as a vehicle for systematic exploitation of economically weaker parties in commercial relationships that are effectively coercive in the sense that the weaker party cannot meaningfully opt out.
The comparative argument notes that India is an outlier among major economies in having no B2B unfair terms doctrine of any kind, and that this gap creates a disadvantage for Indian MSMEs competing in supply chains with companies from jurisdictions that do have such protections.
The developmental argument is that India’s MSME sector, identified as a priority in the Atmanirbhar Bharat programme and successive Union Budgets, cannot reach its potential if its growth is systematically constrained by contract terms that prevent it from pricing risk appropriately, planning production, or retaining sufficient margin to invest in technology and quality improvement.
Suggestions and Reforms
India should enact an Unfair Commercial Contract Terms Act that extends protection to small business contracts meeting defined criteria. The legislation should build on and learn from the Australian model, which is the most recent and most refined in its technical design.
The Act should define a “small business contract” by reference to the turnover of the weaker party, with a threshold in the range of Rs. 250 crore, consistent with the MSME definition under the MSME Development Act 2006. It should apply to standard-form contracts where one party did not have a genuine opportunity to negotiate the terms that are being challenged.
The fairness test should be a balancing test along the lines of the Australian model: whether the term creates a significant imbalance in the parties’ rights and obligations, whether it is reasonably necessary to protect a legitimate interest of the party relying on it, and whether it would cause detriment to the small business party. The Act should list specific types of terms that are presumed unfair absent justification, including: terms permitting unilateral variation of price or specification without adequate notice; exclusion of liability for the imposing party’s own negligence; liquidated damages provisions that are not a genuine pre-estimate of loss; and unilateral termination rights without cause and without compensation.
Enforcement should be through both private action and regulatory action. The MSME Development Board or a newly established Small Business Commissioner should have standing to bring proceedings on behalf of affected small businesses, reducing the cost and risk of individual litigation.
Conclusion
India’s contract law leaves its most commercially vulnerable actors without meaningful protection against exploitative standard-form terms. The Consumer Protection Act protects consumers but not small businesses. Competition law addresses market power abuse but not individual contract terms. The Indian Contract Act’s public policy safety valve is too narrow and too unpredictable to provide a reliable protection mechanism. The international consensus among advanced economies, including the UK, Australia, and several EU member states, is that some form of B2B unfair terms protection is both economically justified and legally feasible without undermining commercial certainty for arms-length transactions between parties of roughly equivalent bargaining power. India should join that consensus and provide its MSME sector with the legal tools it needs to participate in commercial relationships on terms that are not simply dictated to it.
