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

The Life Insurance Corporation (LIC) sold a cheap term policy, Table 58, only to people employed by the Government or reputed firms. The Supreme Court held that insurance terms carry a public element. A clause shutting out the self-employed and the unorganised sector is arbitrary under Article 14. Courts may strike an unfair clause in a contract made between unequal parties.

Quick Revision

Read the full judgment: Indian Kanoon (unofficial copy)

Parties

L.I.C. of India and another — appellants; the Life Insurance Corporation, which issued the Table 58 policy and appealed against the part of the order that struck down its condition.

Consumer Education & Research Centre and others — respondents; Respondent No. 1 acted through its Executive Trustee, Prof. Manubhai Shah. Respondents Nos. 2 to 4 sought convertible term insurance plans in December 1978. They filed the writ petition and a cross appeal.

Respondents Nos. 6 and 7 — agents of the appellants who presented proposals to the LIC under Table 58 on behalf of individual respondents and promised to cover 9 crore uninsured households.

Mr D.N. Dalal — sought a policy under Table 58 with Prof. Manubhai Shah on 25 August 1980.

Mr Harish Salve, Senior Advocate — appeared for the appellants, with Mr Rajiv Mehta, Mr Kailash Vasdev and Ms Meenakshi Grover.

Mr Rajiv Dhawan, Senior Advocate — appeared for the respondents, with Mr Arvind Kr. Sharma and Mr P.H. Parekh.

Procedural History

1. 25 August 1980. Prof. Manubhai Shah and Mr D.N. Dalal sought policies under Table 58 (Ramaswamy, J.).
2. In September 1980 the agents presented proposals under Table 58 on behalf of individual respondents. LIC turned them down (Ramaswamy, J.).
3. 14 September 1980. The respondents sent a notice through counsel (Ramaswamy, J.).
4. They then filed Special Civil Application No. 2614 of 1980 in the Gujarat High Court. It challenged the conditions and the denial of policies under Table 58 as arbitrary and discriminatory. It relied on Articles 14, 19(1)(g) and the right to life in Article 21 (Ramaswamy, J.).
5. 31 January 1994. A Division Bench of the Gujarat High Court held that the conditions for first class lives and the other criteria in Table 58 were neither unjust nor arbitrary. It struck down as subversive of equality only the condition limiting proposals to persons in Government, Quasi-Government or reputed commercial firms who could give leave details (Ramaswamy, J.).
6. LIC appealed against the part that was struck down. The respondents filed a cross appeal against the findings that went against them (Ramaswamy, J.).
7. The judgment is Civil Appeal No. 7711 of 1994. Leave was granted and delay condoned. The judgment was delivered by K. Ramaswamy, J. (Ramaswamy, J.).
8. The heading of the text lists Ramaswamy and Hansaria, JJ. as the bench. The Present line names Justice K. Ramaswamy and Justice N. Venkatachala (Ramaswamy, J.).
9. 10 May 1995. The Court dismissed both appeals (Ramaswamy, J.).

Facts

1. On 25 August 1980 Prof. Manubhai Shah, Executive Trustee of Respondent No. 1, and Mr D.N. Dalal sought policies under Table 58 (Ramaswamy, J.).
2. In December 1978 Respondents Nos. 2 to 4 sought similar convertible term insurance plans for different amounts (Ramaswamy, J.).
3. In September 1980 Respondents Nos. 6 and 7 presented proposals to LIC under Table 58 on behalf of individual respondents. They promised to cover 9 crore other uninsured households. LIC turned them down (Ramaswamy, J.).
4. The respondents sent a notice on 14 September 1980 and then filed the writ petition (Ramaswamy, J.).
5. The original clause in Table 58 applied the rates to male lives considered first class by the Corporation. Persons over 45 years and those in hazardous occupations, including the Armed Forces, were not eligible (Ramaswamy, J.).
6. The original clause said proposals would be entertained only from persons in Government, quasi-government or the service of reputed commercial firms. The medical examination would follow approval of the proposal at the Divisional Office, at the proposer's cost (Ramaswamy, J.).
7. The minimum sum assured was Rs 5,000. The policy was for a term of 5, 6 and 7 years only (Ramaswamy, J.).
8. During the litigation, under public pressure, LIC amended the clause. It deleted the word female from the disabled persons, raised the age from 45 to 50 years, added a five-year term for ages 46 to 50, and asked for details of leave taken in the preceding three years (Ramaswamy, J.).
9. LIC gave comparative premium figures. At age 20, the term policy cost Rs 4.80, 4.70 and 4.65 per thousand for 5, 6 and 7 years. Endowment with profit (Table 14) cost Rs 217.15, 179.40 and 152.65. Endowment without profit (Table 11) cost Rs 188.90, 152.00 and 126.00 (Ramaswamy, J.).
10. The term policy premium per thousand rose with age. It was 4.95 at 25, 5.50 at 30, 6.50 at 35, 8.70 at 40, 12.45 at 45 and 18.45 at 50 for the first term shown (Ramaswamy, J.).
11. A further table compared convertible whole life, whole life and term premia per Rs 1,000. At age 15 the convertible life premium was Rs 10.80 and the whole life premium Rs 10.75. At age 20 they were Rs 11.65 and Rs 11.65, with term premia of 4.80, 4.70 and 4.65. At 25 they were Rs 13.05 and Rs 12.95, and at 35 Rs 18.25 and Rs 17.95. For Rs 50,000 at age 35, the premia were Rs 912.5 and 897.5 for the life policies, and Rs 325, 327.5 and 332.5 for the term policy (Ramaswamy, J.).
12. The term policy is for a short term of 5 to 7 years. There is no return at the end if the insured survives. If the insured dies, the family gets the assured sum as social security (Ramaswamy, J.).
13. Material before the Court showed that term insurance was the most popular policy in the United States of America in 1985 to 1989 and covered a large number of lives (Ramaswamy, J.).
14. The Sezhiyan Committee reported in 1980. It found individual life insurance too costly for a large part of the population, and that only about 10 per cent of insurable male lives were covered. LIC had concentrated on upper strata and employed sections. Its obligatory linking of insurance to savings denied cover to the vast section without regular income and with low savings potential. It also found that life insurance can still be a viable savings medium if LIC improves its yield and controls its expenses (Ramaswamy, J.).
15. The Committee recommended a level premium term insurance plan, in item 13.18 of its report, which the Committee of Actuaries had also recommended. Table 58 followed that recommendation (Ramaswamy, J.).

Issues Raised

1. Is a writ petition under Article 226 maintainable against the terms of a life insurance policy, when no contract has yet been concluded with the respondents?
2. Is LIC's condition limiting Table 58 to persons in Government, quasi-Government or reputed commercial firms a valid classification under Article 14?
3. Is that condition just, fair and reasonable, given Articles 14, 19, 21 and the Directive Principles?
4. Can the offending clause be severed by an order of the court, leaving the rest of the policy conditions in force?
5. What relief should follow, and can LIC revise the premium?

Arguments Contended

For the appellants (LIC), argued by Mr Harish Salve:

• A policy holder gets rights only when the insurer accepts the proposal. The respondents' proposals were rejected for not meeting Table 58 conditions. They cannot enforce any right under Article 226, or use the judicial process to create rights, unless a binding contract emerges.
• No rights flow to a party to a proposal to challenge the policy, its terms or the plan. A writ petition under Article 226 is not maintainable to enforce constitutional obligations.
• Life insurance policies are framed on actuarial considerations and the needs of each policy. The High Court was not justified in interfering with matters based on economic criteria and commercial contracts after finding in LIC's favour on the other points.
• Actuaries consider the present health and build of the life to be insured, personal and family history, occupation and any likely change in occupation. The conditions were imposed to forecast mortality within a narrow margin of error.
• The tables were framed to cover the risk of all classes of people. There are several policies, such as endowment, annuity and whole life, each divided into plans. All policy holders under Table 58 are treated as a class, by the minimum and maximum age. The conditions disclose that they were framed to give effect to Table 58. The restrictions are reasonable, and there is no invidious discrimination.
• A policy holder can convert a term policy into an endowment or whole life policy. The judgment records LIC's point about denying a convertible risk policy to female lives before expiry of two years of the term policy. It also records that all eligible persons can convert before two years. There is no need for fresh medical report on conversion. The premium on the term policy is marginal.
• Since the policy is a commercial contract, the High Court has no power to declare its terms invalid and unconstitutional.
• The classification of salaried lives from Government, semi-government or reputed commercial institutions bears a reasonable nexus to the object and rests on intelligible differentia. No mandamus can declare it unconstitutional.
• General Assurance Society Ltd. v. Chandumull Jain, 1966 (3) SCR 500, supplies the tests for construing insurance contracts.

For the respondents, argued by Mr Rajiv Dhawan:

• He relied on Article 25 of the Declaration of Human Rights, Article 7 of the International Covenant on Economic and Social Rights, and Part III and the Directive Principles. This Court has read the word life in Article 21 broadly to give socio-economic justice.
• The Table 58 policy is cheaper. LIC must frame its scheme so that it fits the egalitarian social order the Constitution seeks. LIC's reading empties the content of human rights in Part IV.
• Females were first excluded from insurance. Public pressure made them eligible, and age was extended from 45 to 50 years.
• LIC's policies must conform to the rights in Parts III and IV. It has no power to impose unconstitutional conditions in a contract.
• No valid classification exists between salaried employees in Government, semi-Government and organised sectors or reputed commercial organisations on one side, and the self-employed or unorganised sectors on the other.
• Term insurance, with a cheaper premium, helps poor and lower middle class people. The Sezhiyan Committee recommended popularising it in urban and rural areas.
• Whole life and endowment policies are not easily accessible to poorer sections. Only the Table 58 term policy is attractive and accessible to them. The conditions, including the one struck down, are unconstitutional.

Court's Reasoning

The judgment has no numbered paragraphs. K. Ramaswamy, J. delivered the judgment of the Court. Steps follow the order of the judgment. Each ends with the judge's name.

K. Ramaswamy, J.

1. Noted: The Court says its answers will have far-reaching effect on life insurance business. It examined the questions closely, bearing in mind the larger public interest (Ramaswamy, J.).
2. Noted: LIC assesses risk on five factors: health and build; personal history; family history; occupation and environment; and the likelihood of a change in occupation. The premium depends on whether the policy is term, endowment or whole life. The insurer must forecast mortality within a narrow margin. It may specify eligibility criteria in each plan (Ramaswamy, J.).
3. Noted: The Court sets out the Sezhiyan Committee report. Individual life insurance is costly. LIC concentrated on upper strata, with obligatory linking of insurance to savings. This linking denied life insurance cover to the vast section of people without regular income and with low savings potential. Only about 10 per cent of insurable male lives had cover. Coverage of rural and unorganised sector lives was meagre. The Committee also found that life insurance in India can still be a viable savings medium, as in the U.K., if LIC improves its yield and controls its management expenses (Ramaswamy, J.).
4. Noted: The Committee recommended a level premium term plan. The Court said the term policy, though based on actuarial calculation, was meant to cover not only the elite but the wider public, the self-employed and those in unorganised sectors. It is beneficial to all sections and restricted to lives in a specified area alone (Ramaswamy, J.).
5. Noted: The Court sets out the original clause of Table 58 and the amendments made during the litigation (Ramaswamy, J.).
6. Noted: The Court reproduces LIC's premium tables. It then said the term policy under Table 58 appears to be the cheapest and most accessible policy for many people in rural and urban sectors (Ramaswamy, J.).
7. Noted: Convertible whole life insurance meets the needs of a young person starting a career, with maximum insurance at minimum cost. It can be altered into an endowment insurance without any need to pay premia after the age of 70 and without further medical examination. Convertible term insurance meets the needs of those unable to pay the whole life or endowment premium and hoping to do so soon. Fixed term convertible is allowed, except in the last two years, without further medical examination. The capacity to pay the premium is a relevant factor (Ramaswamy, J.).
8. Noted: The Court compares premia for Rs 1,000 and Rs 50,000. It concludes that the term policy is a demonstrably cheap and efficacious short-term policy that helps those badly in need of it (Ramaswamy, J.).
9. Noted: The question is whether LIC is justified in law in restricting the term policy to salaried persons in Government, quasi-Government or reputed commercial firms (Ramaswamy, J.).
10. Noted: The Preamble assures socio-economic justice. Article 14 gives equality before law. Article 19 gives freedoms including residence. Article 21, expansively read, covers the right to livelihood. Article 38 asks the State to promote welfare through socio-economic justice. Article 39 secures livelihood, health and strength of workers. Article 41 assures social security and Article 47 requires the State to raise the standard of living and public health (Ramaswamy, J.).
11. Noted: Article 25 of the Universal Declaration of Human Rights gives everyone a standard of living adequate for health and well-being, with security in unemployment, sickness, disability, widowhood or old age. Article 7 of the International Covenant on Economic Rights assures just and favourable work conditions. The Covenant on Right to development asks States to provide facilities to make rights real (Ramaswamy, J.).
12. Noted: In D.S. Nakara v. Union of India, a Constitution Bench held that pension ensures freedom from undeserved want. The Constitution's basic framework gives working people a decent standard of living and security from cradle to grave. Every State action should be directed towards a socialist welfare society (Ramaswamy, J.).
13. Noted: Constitutional validity of action is tested against the Directive Principles in the light of the Preamble. In Olga Tellis v. Bombay Municipal Corporation, another Constitution Bench held that the right to life includes the right to livelihood. Without it the right to life would be easily abrogated (Ramaswamy, J.).
14. Noted: In C.E.S.C. Ltd. v. Subhash Chandra Bose, the right to social justice was held to be a fundamental right. It included livelihood, health and strength of workers, human dignity, social protection, and medical care. The Court notes that the majority did not disagree on this aspect (Ramaswamy, J.).
15. Noted: Consumer Education & Research Centre v. Union of India held that the right to health of a worker is an integral facet of the right to life. The right to health and medical aid is a fundamental right under Article 21 read with Articles 39(e), 41, 43 and 48-A (Ramaswamy, J.).
16. Noted: Regional Director, ESI Corporation v. Francis De Costa took the same view on security against sickness and disablement. Murlidhar Dayandeo Kesekar v. Vishwanath Pandu Barde held that the right to economic empowerment of the poor is a fundamental right. It also held socio-economic democracy is sine qua non to political democracy (Ramaswamy, J.).
17. Held: It is well settled that the Preamble, the Fundamental Rights and the Directive Principles give a right to livelihood as meaningful life. Social security and disablement benefits are part of socio-economic justice. An appropriate life insurance policy within a person's means to pay premia is one of the social security measures the Constitution envisages (Ramaswamy, J.).
18. Noted: The question is whether LIC may put any term of its choice into its business principles. LIC may accept a policy only from a healthy first class life after medical examination. It is asked whether limiting the term policy to Government, quasi-government and reputed firm employees is just, fair and reasonable, or a reasonable classification under Articles 14 and 21 (Ramaswamy, J.).
19. Noted: LIC's contention is that a policy is a contract that binds on acceptance. Until then the proposer has no right. The terms cannot be declared ultra vires (beyond power) before a concluded contract. Refusal to contract infringes no right, and no writ lies to enforce rights in embryo (rights not yet come into being) (Ramaswamy, J.).
20. Noted: Life insurance business under Section 2(11) of the Insurance Act, 1938 is the business of effecting insurance contracts on human life. The contract is a bilateral agreement on human life on payment of premia (Ramaswamy, J.).
21. Held: The insurer is free to evolve a policy based on business principles before floating it to the public. But insurance is a social security measure. It should be consistent with the constitutional conscience of socio-economic justice (Ramaswamy, J.).
22. Noted: In M/s Erusian Equipment & Chemicals Ltd. v. State of West Bengal, the Court held that no one has a right to enter into a contract with the State, but each is entitled to equal treatment. If the State enters a contract, it must do so fairly and without discrimination. Excluding a member of the public prevents him from lawful contractual relations. Arbitrary conditions are barred. Blacklisting without an opportunity was an unfair procedure offending Article 14 (Ramaswamy, J.).
23. Noted: The Court lists Constitution Bench decisions on the State as a contracting party (Ramaswamy, J.):
    • Saghir Ahmad v. State of U.P.: the State may carry on trade like a private trader.
    • A. Sanjeevi Naidu v. State of Madras: acts of authorised officers are acts of the State itself.
    • Ramana Dayaram Shetty v. International Airport Authority of India: in a welfare State the Government cannot act as a private person. Its power to award contracts must follow rational, relevant and non-discriminatory norms.
    • Kasturi Lal Lakshmi Reddy v. State of J & K: every government activity has a public element. It must be informed by reason and guided by public interest.
    • M.C. Mehta v. Union of India: it is dangerous to exonerate corporations from constitutional conscience, which stops them flourishing as an imperium in imperio (a state within a state). The law must grow as social engineering with a changing society and cannot remain static. Cardozo is quoted: the great tides and currents which engulf the rest of men do not pass the Judges idle by.
24. Held: Every action of a public authority, or person acting in public interest, gives rise to a public element and should be guided by public interest. If the exercise of power is arbitrary, unjust and unfair, the authority cannot say its action is in private law. Its actions must rest on rational and relevant principles. Every administrative decision must be hedged by reasons (Ramaswamy, J.).
25. Noted: The Court quotes Wade, Administrative Law, 5th Ed., on the two families of remedies, private law and public law, and the 1977 English application for judicial review that made them interchangeable. Damages may be awarded if claimed at the outset (Ramaswamy, J.).
26. Noted: The distinction between private law and public law remedy was settled in LIC v. Escorts Ltd. by a Constitution Bench. The Court examines State action in the public law domain and refrains in the private law field. The line cannot be drawn with precision and is decided case by case (Ramaswamy, J.).
27. Noted: Dwarkadas Marfatia & Sons v. Board of Trustees of the Port of Bombay held that a public authority must act with constitutional conscience even in contractual relations. Whatever its activity, it must meet the test of Article 14, and judicial review strikes arbitrary action (Ramaswamy, J.).
28. Noted: Mahabir Auto Stores v. Indian Oil Corporation held that Article 14 applies when the State enters a contract. Even the decision to enter or not enter a contract is subject to review for relevance, reasonableness, fair play, natural justice and non-discrimination. There can be malice in law. A monopoly or semi-monopoly must meet the test of Article 14 (Ramaswamy, J.).
29. Held: The Court rejects the contention of an instrumentality of the State that its action is in the private law field and immune from Article 14. The dichotomy depends on the factual matrix and has become too thin and practically obliterated (Ramaswamy, J.).
30. Held: In contractual relations, the State, its instrumentalities and bodies whose acts bear a public element must act fairly, justly and equitably. They must consider all relevant options and avoid irrelevant or irrational factors. Duty to act fairly is part of the fair procedure under Articles 14 and 21 (Ramaswamy, J.).
31. Noted: Kumari Shrilekha Vidyarthi v. State of U.P. (item 22 of that judgment) said private parties pursue personal interest but public authorities act for public good. Review of contract disputes may be more limited. But a challenge on Article 14 grounds is not defeated because the dispute is contractual (Ramaswamy, J.).
32. Noted: Food Corporation of India v. M/s Kamdhenu Cattle Feed Industries said a reasonable or legitimate expectation may not by itself be a distinct enforceable right. But failing to consider it can make a decision arbitrary, and every legitimate expectation is a relevant factor needing due consideration. Sterling Computers Ltd. v. M & N Publications Ltd. held that even commercial contracts with a public element need relevant considerations. Union of India v. M/s Graphic Industries Co. held that public authorities must act fairly even in contract, and Article 226 is available if they do not (Ramaswamy, J.).
33. Held: General Assurance Society Ltd. v. Chandumull Jain, relied on by LIC, is not relevant. Its tests for construing insurance contracts do not decide LIC's constitutional conscience in fixing Table 58 terms or their justness (Ramaswamy, J.).
34. Held: The actions of the State, an instrumentality or a public authority whose actions bear a public element are open to judicial review. The High Court is not shackled by technical rules. In contract disputes it will be circumspect and decide on the facts of each case. The distinction between public law and private law remedy is now narrowed down. (Ramaswamy, J.).
35. Held: LIC's actions bear a public character, with a public interest element in its offers inviting the public to buy life insurance. It is not a pure private law dispute. The Court held the writ petition is maintainable to test the validity of the conditions laid in Table 58 term policy. The party need not be sent to a civil action (Ramaswamy, J.).
36. Noted: LIC argued that the clause is a valid classification of salaried lives to identify health conditions. It said no mandamus can issue where the classification has a reasonable nexus and intelligible differentia, and that the High Court was wrong (Ramaswamy, J.).
37. Held: LIC may issue a policy for a particular group or class. But a class does not by itself meet the demand of equality, fairness and justness. Classification is only a subsidiary rule to give practical content to equality. Over-emphasis on it may erode equality. Menaka Gandhi freed Article 14 from that approach (Ramaswamy, J.).
38. Held: Classification by employment in Government, semi-government and reputed commercial firms excludes lives in vast rural and urban areas in unorganised or self-employed sectors. This offends Article 14 and socio-economic justice (Ramaswamy, J.).
39. Held: LIC may forecast mortality and scrutinise medical history. But leave records of salaried employees are not a foolproof proof of health. LIC took a soft and easy course. Those employees would generally already hold whole life or endowment policies. Extending Table 58 to them again may not succeed much (Ramaswamy, J.).
40. Held: The policy is voluntary, so people in other private sectors, the unorganised sector and the self-employed can take it. Extending the policy to others who can pay the premium would give social security more widely, in rural areas and unorganised and self-employed sectors. The Sezhiyan Committee recommended this. Confining Table 58 to already covered salaried people is unreasonable, arbitrary, unjust, irrational and unfair (Ramaswamy, J.).
41. Noted: An unfair and untenable or irrational clause in a contract is also unjust amenable to judicial review. At common law a party was relieved from such a contract. Lord Denning in Gillespie Brothers & Co. Ltd. v. Roy Bowles Transport Ltd., construing an indemnity clause, said that letting a party enforce an unreasonable clause would be unconscionable. He spoke of the vigilance of the common law, which allows freedom of contract but watches that it is not abused (Ramaswamy, J.).
42. Noted: Lloyds Bank Ltd. v. Bundy: Lord Denning on inequality of bargaining power. A person with grievously impaired bargaining power may agree to a very unfair bargain. Independent advice may help, and its absence may be fatal (Ramaswamy, J.).
43. Noted: A. Schroeder Music Publishing Co. Ltd. v. Macaulay: the House of Lords considered the case. Lord Diplock outlined the theory that an unreasonable or unfair bargain can relieve a party when bargaining power is unequal. A song writer was freed from onerous terms on the theory of restraint of trade opposed to public policy. Standard terms between parties of equal power bind. They do not bind where the stronger party says take it or leave it (Ramaswamy, J.).
44. Noted: Levison and Anr. v. Steam Carpet Co. Ltd. applied the unreasonable-clause rule to standard form contracts with unequal bargaining power. Photo Production Ltd. v. Securicor Transport Ltd., under the Unfair Contract Terms Act, 1977, upheld a commercial bargain between equals. Lords Wilberforce, Diplock and Scarman are cited. Lord Scarman said that between parties well able to look after themselves, the courts construe the contract according to its tenor. The German Civil Code, s.138(2), releases a party without equal bargaining power (Ramaswamy, J.).
45. Noted: Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly held that an instrumentality of the State cannot impose unconstitutional conditions on its employee. The Court quotes the principle at length: courts will not enforce, and will strike down, an unfair and unreasonable contract or clause between parties unequal in bargaining power. The illustrations given apply the principle (Ramaswamy, J.):
    • Where the inequality comes from a great disparity in economic strength.
    • Where the inequality comes from circumstances, whether created by the parties or not.
    • Where a party can get goods, services or a means of livelihood only on the stronger party's terms, or go without.
    • Where a man has no meaningful choice but to sign on the dotted line in a standard form.
    The principle may not apply where both parties are businessmen in a commercial contract. Each case turns on its own facts.
46. Noted: The rule giving power to end a permanent employee's service on one month's notice was held unconstitutional. D.T.C. v. D.T.C. Mazdoor Congress upheld the ratio by majority and held Regulation 9 unconstitutional. K. Ramaswamy, J. there, citing Chitty on Contract, 25th Edn., and Anson's Law of Contract, held that freedom of contract must rest on equality of bargaining power. In standard form contracts the weaker party's consensus ad idem (agreement on the same thing in the same sense) may be totally absent (Ramaswamy, J.).
47. Noted: In the USA, standard form contracts are called Contracts of Adhesion (standard form contracts imposed by the stronger party). The Court summarises Todd D. Rakoff, 95 Harvard Law Review 1174, at pages 1191, 1193, 1215 and 1249. Gross inequality of bargaining power is not a prerequisite for a contract of adhesion. Keeping a presumption that such forms are enforceable threatens to keep producing undesirable results. A public law model of form terms is hard to justify. The Court also mentions the doctrines of unequal bargaining power and unconscionability in the Restatement (Second) of Contracts, s. 211 (Ramaswamy, J.).
48. Noted: The Court summarises M.A. Eisenberg, The Bargain Principle and Its Limits, quoting Arthur Leff. Procedural unconscionability is unfairness in the bargaining process. Substantive unconscionability is unfairness of terms. The basic test is whether the clauses are so one-sided as to be unconscionable when the contract was made. Unconscionability, a principle that has emerged over thirty years, limits the bargain principle. Its aim is to prevent oppression and unfair surprise. Eisenberg concludes that limits on the bargain principle cost something to administer, but failing to set them costs the justice system more (Ramaswamy, J.).
49. Noted: M.P. Ellinghaus, In Defence of Unconscionability, 78 Yale Law Journal 757, says bargaining positions are relevant. A reasonable or average man test applies to prevent exploitation of the under-privileged. The doctrine is a residual category of shifting content (Ramaswamy, J.).
50. Noted: V. Raghunadha Rao v. State of A.P. (Andhra Pradesh High Court) tested clauses 11, 29, 59, 62(b) and 73 of the A.P. Standard Specifications, a dotted line contract, against Articles 14 and 19(1)(g). It declared the arbitration clause 73, referring disputes to officers who dealt with the contract, arbitrary and ultra vires the Constitution. The clauses were entered into under Article 298 (Ramaswamy, J.).
51. Held: It is settled law that where a contract or clause is unreasonable, unfair or irrational, one must look to the relative bargaining power of the parties. In dotted line contracts (standard form contracts signed on the dotted line) the weaker party cannot bargain. He must accept unfair terms or forgo the service forever (Ramaswamy, J.).
52. Noted: National Textile Workers' Union v. P.R. Ramakrishnan held, by majority, that the Directive Principles should shape corporate philosophy, to promote fraternity and the dignity of the individual. Workmen of Meenakshi Mills Ltd. v. Meenakshi Mills Ltd. held that the management's right to declare lay off under s. 25-N of the Industrial Disputes Act, under Article 19(1)(g), is subject to Articles 38, 39A, 41 and 43. Consumer Education & Research Centre held that an asbestos industry's business right is subject to protecting workers' health (Ramaswamy, J.).
53. Held: Authorities, private persons and industries are bound by the directives in Part IV, Part III and the Preamble. The right to trade is subject to the directives, the Universal Declaration of Human Rights, the European Convention of Social Economic and Cultural right and the Convention on Right to development. Social security is a facet of socio-economic justice and a means to livelihood (Ramaswamy, J.).
54. Noted: A medical report is a condition precedent to acceptance. LIC may take it from its own accredited doctors. On satisfaction on health, LIC may accept or reject the proposal (Ramaswamy, J.).
55. Held: The court's arms are long enough to reach injustice wherever found. It moulds relief to meet the peculiar needs of the country. The Court cites Dwarkanath v. Income Tax Officer, Kanpur; Andi Mukta Trust v. V.R. Rudani; Unni Krishnan v. State of A.P.; and Hochtief Gammon v. State of Orissa (Ramaswamy, J.).
56. Noted: In M.J. Sivani and others v. State of Karnataka (SLP No. 11012/1991, decided 17 April 1995), item 3(2) of a notification on licensing places of public amusement was held inapplicable to video games. The Court held the whole order does not fall unless the invalid part is inextricably tied to the valid part. The court may set aside the invalid part and leave the rest operative (Ramaswamy, J.).
57. Noted: Praga Tools Corpn. v. C.A. Imanual held that mandamus may enforce public duties even against persons who are not public officials. Andi Mukta and Unnikrishnan v. State of A.P. took the same view. In Comptroller & Auditor General of India v. K.S. Jagannathan, mandamus was held to be available to implement directive principles the Government has adopted, such as preferential treatment under the rule of reservation in Articles 14 and 16(1) and (4) (Ramaswamy, J.).
58. Held: The respondents do not seek a direction that LIC enter a contract with them. Their privilege and legitimate expectation to seek acceptance of a policy is their freedom. They seek only a declaration that confining the policy to the salaried class is discriminatory. Denial to larger segments violates their constitutional rights. The Court agreed (Ramaswamy, J.).
59. Held: The rest of the conditions, such as age, are valid. The clause confining the benefit to the salaried class in Government, semi-Government and reputed firms is unconstitutional. Subject to other terms, LIC is free to enforce the Table 58 policy with all eligible lives. The offending part is severable from the rest of the conditions. (Ramaswamy, J.).
60. Held: In issuing a general life insurance policy of any type, public element is inherent in prescription of terms and conditions therein. LIC, or anyone in insurance, owes a public duty to frame terms accessible to all segments of society. The eligibility conditions must conform to the Preamble, fundamental rights and directive principles (Ramaswamy, J.).
61. Held: The Table 58 term policy is declared accessible and beneficial to large segments of Indian society. The premium rates must be reasonable and accessible. The High Court's declaration is not vitiated by any manifest error of law (Ramaswamy, J.).
62. Held: LIC may revise the premium in the light of the law declared, to make the policy viable. The revision must not be arbitrary, unjust, excessive and oppressive. Both appeals are dismissed. The parties bear their own costs (Ramaswamy, J.).

B.L. Hansaria, J.

The heading lists Hansaria, J. on the bench. The judgment text gives no separate opinion by him. K. Ramaswamy, J. delivered the judgment of the Court.

Authorities

• D.S. Nakara v. Union of India, 1983 (2) SCR 165 at p. 185 (Constitution Bench). Followed: pension ensures freedom from undeserved want; State action must aim at a welfare society (Ramaswamy, J.).
• Olga Tellis v. Bombay Municipal Corporation, 1985 Supp (2) SCR 51 (Constitution Bench). Followed: right to life includes right to livelihood (Ramaswamy, J.).
• C.E.S.C. Ltd. v. Subhash Chandra Bose, (1992) 1 SCC 441 at p. 462, items 30 and 32. Followed: right to social justice and health care are fundamental (Ramaswamy, J.).
• Consumer Education & Research Centre v. Union of India, JT 1995 (1) SC 637. Followed: right to health of a worker is part of Article 21; business rights are subject to worker health (Ramaswamy, J.).
• Regional Director, ESI Corporation v. Francis De Costa, 1993 Supp (4) SCC 100 at p. 105. Followed on security against sickness and disablement (Ramaswamy, J.).
• Murlidhar Dayandeo Kesekar v. Vishwanath Pandu Barde, Civil Appeal No. 952 of 1977, decided 22 February 1995. Followed: economic empowerment of the poor is a fundamental right (Ramaswamy, J.).
• M/s Erusian Equipment & Chemicals Ltd. v. State of West Bengal, 1975 (1) SCC 70 at p. 75, item 17. Followed: the State must contract fairly and without discrimination (Ramaswamy, J.).
• Saghir Ahmad v. State of U.P., 1955 (1) SCR 707 (Constitution Bench). Cited: the State may trade as a private trader (Ramaswamy, J.).
• A. Sanjeevi Naidu v. State of Madras, 1970 (3) SCR 505 (Constitution Bench). Cited: officers' acts are acts of the State (Ramaswamy, J.).
• Ramana Dayaram Shetty v. International Airport Authority of India, 1979 (3) SCR 1014 (Constitution Bench). Followed: Government cannot act as a private person in awarding contracts (Ramaswamy, J.).
• Kasturi Lal Lakshmi Reddy v. State of J & K, 1980 (3) SCR 1338. Followed: government activity has a public element and must follow reason and public interest (Ramaswamy, J.).
• M.C. Mehta v. Union of India, (1987) 1 SCC 395 (Constitution Bench). Followed: corporations need constitutional conscience; law must grow (Ramaswamy, J.).
• Administrative Law by Wade, 5th Ed., pp. 513, 514 and 573. Cited on private law and public law remedies and judicial review (Ramaswamy, J.).
• LIC v. Escorts Ltd., 1985 Supp (3) SCR 909 (Constitution Bench). Followed: State action in the public law domain is examined, in the private law field it is not (Ramaswamy, J.).
• Dwarkadas Marfatia & Sons v. Board of Trustees of the Port of Bombay, 1989 (2) SCR 751. Followed: public authority must have constitutional conscience even in contract (Ramaswamy, J.).
• Mahabir Auto Stores v. Indian Oil Corporation, AIR 1990 SC 1031. Followed: Article 14 applies when the State contracts (Ramaswamy, J.).
• Kumari Shrilekha Vidyarthi v. State of U.P., (1991) 1 SCC 212, item 22. Followed: Article 14 challenge is not defeated because the dispute is contractual (Ramaswamy, J.).
• Food Corporation of India v. M/s Kamdhenu Cattle Feed Industries, (1993) 1 SCC 71 at p. 76, item 8. Cited on legitimate expectation (Ramaswamy, J.).
• Sterling Computers Ltd. v. M & N Publications Ltd., (1993) 1 SCC 445 at p. 464, item 28. Cited: commercial contracts with public element need relevant considerations (Ramaswamy, J.).
• Union of India v. M/s Graphic Industries Co., (1994) 5 SCC 398. Cited: public authorities must act fairly in contract (Ramaswamy, J.).
• Menaka Gandhi (named in the judgment without a citation). Cited as freeing Article 14 from over-emphasis on classification (Ramaswamy, J.).
• General Assurance Society Ltd. v. Chandumull Jain, 1966 (3) SCR 500. Relied on by LIC. Held not relevant to the constitutional question (Ramaswamy, J.).
• Gillespie Brothers & Co. Ltd. v. Roy Bowles Transport Ltd., 1973 (1) QB 400. Cited on the vigilance of the common law against abuse of freedom of contract (Ramaswamy, J.).
• Lloyds Bank Ltd. v. Bundy, 1973 (3) All ER 757. Cited on inequality of bargaining power (Ramaswamy, J.).
• A. Schroeder Music Publishing Co. Ltd. v. Macaulay, 1974 (1) WLR 1308. Cited: unfair terms and unequal bargaining power (Ramaswamy, J.).
• Levison and Anr. v. Steam Carpet Co. Ltd., 1978 (1) QB 69. Cited on unreasonable clauses in standard forms (Ramaswamy, J.).
• Photo Production Ltd. v. Securicor Transport Ltd., 1980 AC 827. Cited: equal commercial parties are held to their bargain (Ramaswamy, J.).
• Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly, 1986 (2) SCR 278 at pp. 369-70. Followed: courts strike unfair clauses in contracts between unequal parties (Ramaswamy, J.).
• D.T.C. v. D.T.C. Mazdoor Congress, 1990 (1) Supp SCR 142. Followed by majority: freedom of contract needs equal bargaining power (Ramaswamy, J.).
• Chitty on Contracts, 25th Edn., Vol. I, and Anson's Law of Contract, pp. 6-7. Approved in D.T.C. (Ramaswamy, J.).
• Todd D. Rakoff, Contracts of Adhesion, (1982-83) 95 Harvard Law Review 1174, at pp. 1191, 1193, 1215 and 1249. Cited on standard form contracts (Ramaswamy, J.).
• M.A. Eisenberg, The Bargain Principle and Its Limits, (1982) 95 Harvard Law Review, quoting Arthur Leff, Unconscionability and the Code, (1967) 115 U. Pa. L. Rev. 485 at p. 494. Cited on unconscionability (Ramaswamy, J.).
• M.P. Ellinghaus, In Defence of Unconscionability, (1968-69) 78 Yale Law Journal 757. Cited on unconscionability (Ramaswamy, J.).
• V. Raghunadha Rao v. State of A.P., 1988 (1) Andhra Law Times 461 (Andhra Pradesh High Court). Cited: arbitration clause 73 declared arbitrary (Ramaswamy, J.).
• National Textile Workers' Union v. P.R. Ramakrishnan, 1983 (1) SCR 922 (Constitution Bench). Cited: directive principles guide corporate philosophy (Ramaswamy, J.).
• Workmen of Meenakshi Mills Ltd. v. Meenakshi Mills Ltd., 1992 (3) SCC 336. Cited: Article 19(1)(g) is subject to the directive principles (Ramaswamy, J.).
• Dwarkanath v. Income Tax Officer, Kanpur, 1965 (3) SCR 536 at p. 540; Andi Mukta Trust v. V.R. Rudani, 1989 (2) SCC 691 at pp. 699-700; Unni Krishnan v. State of A.P. (also cited in the judgment as Unnikrishnan v. State of A.P.), 1993 (1) SCC 645 at pp. 693-97; Hochtief Gammon v. State of Orissa, 1975 (2) SCC 649 at p. 656. Cited: courts mould relief (Ramaswamy, J.).
• M.J. Sivani and others v. State of Karnataka, SLP No. 11012/1991, decided 17 April 1995. Followed: invalid part can be severed (Ramaswamy, J.).
• Praga Tools Corpn. v. C.A. Imanual, 1969 (1) SCC 585 at p. 589. Cited: mandamus can enforce public duties (Ramaswamy, J.).
• Comptroller & Auditor General of India v. K.S. Jagannathan, 1986 (2) SCR 17 at pp. 36-40. Cited: mandamus can implement directive principles the Government adopted (Ramaswamy, J.).

Statutes, treaties and reports also named: Article 25 of the Universal Declaration of Human Rights; Article 7 of the International Covenant on Economic, Social and Cultural Rights; the Covenant on Right to development; the Restatement (Second) of Contracts, ss. 208 and 211; the German Civil Code, s. 138(2); the Unfair Contract Terms Act, 1977; Benjamin Cardozo, The Judicial Process, p. 168; the Sezhiyan Committee Report; and the writings of Leff and Slawson as discussed by Rakoff.

The judgment has no footnotes.

Judgement

1. Both appeals are dismissed (Ramaswamy, J.).
2. The High Court's declaration striking down the Table 58 clause confining proposals to Government, Quasi-Government and reputed commercial firm employees stands (Ramaswamy, J.).
3. The other conditions, such as age, remain valid. Subject to them, LIC may enforce Table 58 with all eligible lives (Ramaswamy, J.).
4. LIC may revise the premium in the light of the law declared. The revision must not be arbitrary, unjust, excessive or oppressive (Ramaswamy, J.).
5. The parties bear their own costs (Ramaswamy, J.).

Legal Principle / Ratio

In issuing a general life insurance policy, the insurer owes a public duty to frame reasonable, just and fair terms accessible to all segments of society. A condition that shuts out large groups, such as the self-employed and unorganised sector, is arbitrary under Article 14. The key holding: public element is inherent in prescription of terms and conditions therein. A writ lies, and an unfair clause can be severed and struck down.

Critical Analysis

Analysis based on the judgment text.

• The Court said an unfair clause is open to judicial review. It also said the unfairness principle may not apply where both parties are businessmen in a commercial contract.
• The Court left the other Table 58 conditions untouched. It said they were valid and did not need interference.
• The Court held the writ maintainable but said it would be circumspect in contract disputes. It said each case turns on its own facts.
• The Court did not direct LIC to enter contracts with the respondents. It gave only a declaration on the clause.

Significance

• The case applies Article 14 to the terms of an insurance policy offered by a public body.
• It brings the unfair-terms doctrine of Brojo Nath Ganguly and English cases into Indian contract law.
• It treats the public law and private law divide in contract as thin.
• It shows the court's power to sever an offending clause and keep the rest.

Exam-Important Points

• Rule first: a public body offering insurance to the public must frame terms consistent with Article 14. A clause excluding large groups is arbitrary.
• Writ petition is maintainable against terms with a public element, even before a concluded contract. Trap: the Court said each case turns on its facts.
• Courts will strike an unfair clause in a contract between parties of unequal bargaining power. The principle may not apply between businessmen in a commercial contract.
• The offending clause is severable. The other conditions stay.
• Relief was a declaration. LIC may still revise premiums, but not arbitrarily or excessively.
• Standard form (dotted line) contracts: the weaker party's consent may be absent. He must accept or go without the service.

Prepared from the full text of the judgment. The judgment has no numbered paragraphs, so passages are cited by judge. The citation shown is as printed in the source copy.