Abstract
The classical doctrine of freedom of contract assumes that parties possess sufficient autonomy, information, and bargaining strength to negotiate mutually acceptable terms. This assumption becomes difficult to sustain in government and Public Sector Undertaking (PSU) contracts, where the State or a public undertaking may possess superior economic resources, institutional authority, market power, or control over essential services. This paper examines the legal consequences of such inequality under Indian contract law, with particular emphasis on standard form and adhesion contracts. It adopts a doctrinal research methodology based on the Indian Contract Act, 1872, constitutional provisions, judicial decisions, books, and scholarly articles. The study analyses Sections 13, 14, 15, 16 and 23 of the Contract Act alongside Articles 14, 19, 21, 298 and 299 of the Constitution. The case-law analysis, including Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly, Ramana Dayaram Shetty v. International Airport Authority of India, LIC of India v. Consumer Education & Research Centre and M/s Gas Authority of India Ltd. v. M/s Indian Petrochemicals Corporation Ltd., demonstrates that formal consent does not necessarily establish substantive contractual fairness. The paper finds that standardisation remains necessary for administrative and commercial efficiency, but State and PSU contracts must operate within constitutional requirements of fairness, reasonableness, transparency and non-arbitrariness. Judicial intervention should therefore remain exceptional but effective where contractual power is used to impose unconscionable or oppressive terms.
Keywords: inequality of bargaining power; government contracts; PSUs; standard form contracts; adhesion contracts; free consent; Article 14; unconscionability.
1. Introduction
The Indian Contract Act, 1872 provides the principal statutory framework for contractual relationships in India. At its foundation is the idea that parties are capable of entering agreements voluntarily and that legally enforceable contracts should generally be respected. The doctrine of freedom of contract is therefore associated with individual autonomy, certainty and economic efficiency. However, contractual freedom is meaningful only when consent is supported by a genuine ability to make choices and protect one’s interests. In contemporary commercial and administrative relationships, parties frequently do not negotiate from equal positions. Government departments, statutory bodies and PSUs may possess superior financial capacity, institutional authority, technical expertise, access to information and, in some sectors, market or regulatory dominance. A private contractor, employee, consumer or smaller enterprise may consequently have little practical ability to negotiate the terms presented to it. The original study identifies standard-form and adhesion contracts as important manifestations of this imbalance. The weaker party may technically accept the contract, but the absence of meaningful alternatives can make that consent formal rather than substantive.
Government contracting also has a distinctive constitutional dimension. When the State enters the market or enters into a contract, it does not cease to be subject to constitutional standards. Article 14 requires State action to be fair, reasonable and non-arbitrary, while Articles 19 and 21 protect freedoms, livelihood and dignity. Articles 298 and 299 recognise the State’s contractual powers and prescribe constitutional requirements for government contracts. The resulting legal problem is therefore not simply whether a contract was signed, but whether the contractual power was exercised within the limits of statutory and constitutional fairness.
This paper examines the relationship between unequal bargaining power and government or PSU contracts under Indian law. It asks three principal questions: (i) how inequality of bargaining power affects the concept of free consent; (ii) when standard-form contractual terms imposed by the State or a PSU may become legally objectionable; and (iii) how Indian courts balance contractual autonomy and administrative efficiency against fairness, public policy and constitutional obligations. The central proposition is that contractual efficiency and freedom should be preserved, but not at the cost of allowing public power to produce unconscionable or arbitrary contractual outcomes.
2. Research Objectives
• To examine the concept of inequality of bargaining power in the context of government and PSU contracts.
• To analyse the relevance of free consent, undue influence and public policy under the Indian Contract Act, 1872.
• To study constitutional limitations applicable to contractual conduct by the State and its instrumentalities.
• To examine judicial treatment of standard-form and adhesion contracts through leading Indian decisions.
• To compare the Indian approach with selected UK and US principles and identify safeguards for fairer government contracting.
3. Methodology
The case-law method is comparative within the Indian framework and is supplemented by the UK and US approaches discussed in the source material. Key decisions are examined for their facts, legal issues, reasoning and outcomes. The results are then organized thematically around bargaining power, adhesion contracts, constitutional review, public interest and judicial restraint. Because the source material is doctrinal, the ‘results’ of this paper represent legal findings from the analysis rather than quantitative research findings.
4. Results
4.1 Sources of Inequality in Government and PSU Contracts
The analysis shows that inequality of bargaining power in State contracts commonly arises from differences in economic strength, institutional authority, information, technical expertise and availability of alternatives. Government tenders and standard-form agreements may contain fixed eligibility requirements and contractual terms with limited scope for negotiation. Smaller contractors and individuals may accept those conditions because participation in the transaction is economically important or because there are few realistic alternatives.
Information asymmetry further reinforces the imbalance. Established contractors may possess greater legal, financial and technical resources to understand tender documents and comply with complex procedures. Smaller or newer participants may face greater barriers. The source material also identifies arbitrariness, favouritism, corruption and structural socio-economic disadvantage as factors capable of aggravating unequal access to public contracts.
4.2 Freedom of Contract, Free Consent and Unfair Advantage
Sections 13 and 14 of the Indian Contract Act, 1872 establish the statutory framework for consent and free consent. Section 15 addresses coercion, while Section 16 addresses undue influence where one party is in a position to dominate the will of another and obtains an unfair advantage. Section 23 provides an additional safeguard where the object or consideration of an agreement is opposed to public policy. The study finds that inequality of bargaining power does not automatically invalidate every contract. The stronger legal question is whether the imbalance has produced circumstances in which consent is not genuinely free or whether the dominant party has used its position to obtain an unfair, oppressive or unconscionable advantage. The source material particularly distinguishes mere inequality from inequality coupled with exploitation. This distinction is important because an interventionist approach that invalidated every standard-form contract would undermine commercial certainty.
4.3 Standard Form and Adhesion Contracts
Standard-form contracts are economically useful because they reduce transaction costs, promote uniformity and allow large-scale administration. Their difficulty arises when standardization removes meaningful choice and transfers excessive risk to the weaker party. Adhesion contracts represent the clearest form of this problem: one party drafts the terms and the other is effectively required to accept or reject the agreement as a whole.
Indian law does not separately codify a general doctrine titled ‘adhesion contract’. Instead, protection emerges through the doctrines of free consent, undue influence, public policy, constitutional review and, in appropriate contexts, consumer protection. The research therefore indicates that Indian law approaches unequal bargaining power through a combination of statutory provisions and judicial principles rather than through one comprehensive legislative test.
4.4 Constitutional Control of Government and PSU Contracts
Articles 14, 19 and 21 form an important constitutional framework for examining State action. Article 14 is particularly significant because arbitrariness is inconsistent with equality before law and equal protection of laws. Article 19(1)(g) protects the freedom to practise a profession or carry on an occupation, trade or business, subject to reasonable restrictions. Article 21 protects life and personal liberty and has been judicially associated with dignity and livelihood. Articles 298 and 299 recognise the State’s power and formal requirements concerning government contracts. However, the contractual power of the State is not equivalent to unrestricted private contractual autonomy. The source material shows that constitutional scrutiny remains relevant where a government department or PSU exercises public power in an arbitrary, unfair or discriminatory manner.
4.5 Case-Law Findings
| Case | Core Issue | Legal Finding | Significance |
| Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly (1986) | Unfair termination clause in a government corporation’s standard-form service rules. | A clause enabling arbitrary termination was held contrary to Article 14 and Section 23 as opposed to public policy. | Established the importance of unequal bargaining power and unconscionable terms in public-sector contracts. |
| Ramana Dayaram Shetty v. International Airport Authority of India (1979) | Arbitrariness in State contractual decision-making. | State instrumentalities must follow standards of reasonableness and equality while awarding contracts. | Confirms that public law principles can govern State contracting. |
| LIC of India v. Consumer Education & Research Centre (1995) | Fairness of standard-form insurance conditions. | Standard-form contractual conditions affecting individuals must satisfy requirements of fairness and reasonableness. | Demonstrates movement from formal consent toward substantive fairness. |
| M/s Gas Authority of India Ltd. v. M/s Indian Petrochemicals Corporation Ltd. (2023) | Unfair and discriminatory clauses imposed by GAIL in a gas-supply arrangement. | The challenged clauses were held arbitrary, unfair and discriminatory under Article 14 and were quashed. | Illustrates contemporary judicial scrutiny of unequal bargaining power involving a PSU and a dominant public entity. |
5. Discussion
5.1 Theoretical Basis of Unequal Bargaining Power
The doctrine of inequality of bargaining power developed as a response to the limitations of the classical theory of freedom of contract. Classical contract theory tends to assume that parties enter negotiations voluntarily and are able to determine the content of their agreement. In practice, however, economic and institutional relationships frequently involve substantial differences in bargaining strength. A party may possess superior financial resources, information, expertise, market access or control over an essential facility, while the other party may depend upon the transaction for employment, business continuity or access to a necessary service.
Friedrich Kessler’s discussion of contracts of adhesion is particularly relevant to this problem. In a standard-form agreement, the stronger party ordinarily determines the contractual language in advance, while the weaker party is offered limited practical opportunity to negotiate individual terms. The significance of such contracts is not that every standard term is unfair, but that the process of agreement may conceal a substantial imbalance between formal consent and meaningful choice.
The doctrine therefore requires attention to both the circumstances in which the contract was made and the substance of the term challenged. Procedural inequality concerns the absence of meaningful choice, pressure, information asymmetry or inability to negotiate. Substantive unfairness concerns terms that impose excessive, disproportionate or one-sided burdens. Indian judicial reasoning has developed these ideas through public policy, unconscionability and constitutional standards rather than through a single statutory doctrine bearing the title ‘inequality of bargaining power’.
5.2 Government Contracts and the Public Law Dimension
Government contracting differs from an ordinary private transaction because the State performs public functions and remains subject to constitutional discipline even when it enters commercial relationships. The State may act through departments, statutory authorities, public corporations and PSUs. In such relationships, contractual decisions can have consequences beyond the immediate parties, particularly where public resources, essential services, infrastructure or employment are involved.
The public law dimension is especially important under Article 14. The requirement of non-arbitrariness means that a state entity cannot exercise contractual discretion in a manner that is irrational, discriminatory or manifestly unfair. This does not mean that every contractual dispute becomes a constitutional dispute. Rather, judicial scrutiny is particularly relevant where the challenged action involves an exercise of public power or where the State’s contractual conduct conflicts with constitutional standards.
Articles 298 and 299 also demonstrate that government contracting is constitutionally recognised but structured. The authority to contract is accompanied by formal and legal requirements. Consequently, public procurement and PSU contracting must be viewed as an intersection between private contract law and public law. This intersection explains why the courts have sometimes applied a higher standard of fairness to government instrumentalities than would ordinarily apply between two purely private commercial parties.
5.3 Standard-Form Contracts: Efficiency versus Fairness
Standard-form contracts have an important practical justification. Governments and PSUs frequently enter into large numbers of similar transactions, making individual negotiation of every clause costly and administratively inefficient. Uniform contracts can reduce transaction costs, improve predictability and allow organisations to manage complex procurement and service relationships consistently.
The problem arises when efficiency becomes a justification for transferring disproportionate risks to a weaker contracting party. Clauses permitting unilateral termination, unilateral price fixation, excessive penalties, broad exclusion of liability or obligations unrelated to the counterparty’s actual use of services may create substantive imbalance. The legality of such provisions must therefore be assessed in their factual and institutional context.
The appropriate legal approach is not to prohibit standard-form agreements but to ensure that standardisation does not become a mechanism for arbitrary exercise of power. Transparency, disclosure, reasonable tender conditions, review mechanisms and proportionate remedies can reduce the risk of exploitation while preserving the administrative benefits of standardisation.
5.4 Case Study: GAIL and Indian Petrochemicals Corporation
The decision in M/s Gas Authority of India Ltd. v. M/s Indian Petrochemicals Corporation Ltd. is particularly significant for the present research because it directly concerns contractual dealings involving a government undertaking and an imbalance in bargaining power. The underlying dispute concerned clauses in a gas supply arrangement that required IPCL to make certain payments and permitted price fixation in circumstances challenged as unfair and discriminatory.
The factual circumstances were important. IPCL had made substantial investments in its plant and pipeline infrastructure and was dealing with GAIL in a context where the availability of natural gas and the relevant infrastructure created significant dependence. The Court examined the challenged clauses not merely as ordinary commercial terms but in light of the position occupied by GAIL as a public undertaking.
The judgment illustrates the interaction between contract and constitutional review. The Court’s scrutiny of arbitrariness and discrimination demonstrates that a public undertaking cannot rely solely upon the existence of a signed agreement to immunise its contractual conduct from judicial review. At the same time, the limitation of retrospective monetary relief reflects the Court’s concern with equitable consequences and commercial certainty.
The case is therefore important because it demonstrates the modern Indian approach: judicial intervention is possible where a public entity uses superior bargaining or institutional power to impose arbitrary or discriminatory conditions, but the remedy remains sensitive to delay, reliance and the broader circumstances of the transaction.
5.5 Comparative Perspective: United Kingdom and United States
The United Kingdom and United States approaches provide useful comparative context. In the United Kingdom, the traditional judicial development of inequality of bargaining power can be associated with Lloyds Bank Ltd. v. Bundy, while statutory protections such as the Unfair Contract Terms Act 1977 and Consumer Rights Act 2015 provide additional controls over unfair terms. The UK model therefore combines judicial principles with legislative regulation.
In the United States, unconscionability is expressly recognised in commercial law through section 2-302 of the Uniform Commercial Code. The doctrine commonly distinguishes procedural unconscionability, concerning the circumstances and absence of meaningful choice, from substantive unconscionability, concerning excessively harsh or one-sided terms. The American approach therefore provides a more explicit conceptual framework for examining unequal bargaining conditions.
Indian law adopts a more dispersed approach. Rather than relying upon one comprehensive statutory provision, Indian courts draw upon free consent, undue influence, public policy, constitutional equality and sector-specific legislation. The comparative material suggests that the Indian framework could benefit from clearer conceptual guidance while preserving flexibility for courts to consider the circumstances of each case.
5.6 Policy Recommendations
First, government departments and PSUs should undertake a fairness review of standard contractual clauses, particularly those granting unilateral powers. Such review should consider whether a clause is necessary, proportionate and connected with a legitimate contractual objective.
Second, tender documents should clearly disclose material obligations and financial risks. Better disclosure can reduce information asymmetry and allow prospective bidders to price risks more accurately.
Third, contractual mechanisms for review, representation and dispute resolution should be accessible to smaller contractors. A weaker party should not be forced into prolonged litigation merely to challenge a plainly disproportionate contractual condition.
Fourth, judicial review should remain principled and limited. Courts should distinguish ordinary commercial hardship from genuine arbitrariness or unconscionability. This preserves the certainty required for public procurement while ensuring that constitutional safeguards remain effective.
Finally, greater contractual transparency can improve both fairness and efficiency. Clearer drafting, reasoned tender decisions, proportionality in penalties and transparent price-adjustment mechanisms can reduce disputes before they reach courts.
6. Conclusion
Inequality of bargaining power presents a significant challenge to the classical assumption that contractual consent is always the product of free and equal negotiation. In government and PSU contracts, the State or a public undertaking may possess structural advantages that make the weaker party’s contractual choice largely formal. Standard-form and adhesion contracts are not inherently unlawful; indeed, they are necessary for efficient governance and large-scale commercial activity. The legal concern arises when standardisation is combined with dominance and produces unfair, oppressive or arbitrary consequences.
Indian law addresses this problem through a combination of the Indian Contract Act, 1872 and constitutional principles. Sections 13, 14, 15, 16 and 23 provide contractual safeguards, while Articles 14, 19 and 21 place substantive limits on State action. Articles 298 and 299 recognise government contracting power but do not permit that power to be exercised without regard to constitutional standards. The judicial decisions examined in this paper demonstrate that courts can look beyond the existence of formal consent and consider the real bargaining circumstances and effect of contractual terms.
The central conclusion is therefore one of balance. Government and PSUs should retain the ability to use standard-form contracts for efficiency, certainty and public administration, but contractual power must remain subject to fairness, reasonableness, transparency and non-arbitrariness. Judicial review should be targeted rather than routine, intervening where inequality of bargaining power has resulted in genuine unconscionability or constitutional unfairness. Such an approach preserves freedom of contract while ensuring that contractual freedom does not become an instrument for the abuse of public or institutional power.
6.1 Meaning of the Findings
The results demonstrate that Indian contract law increasingly distinguishes formal equality from substantive equality. A contract may contain identical obligations on paper and still operate unequally when one party has substantially greater power, resources or alternatives. This is particularly important in government and PSU contracts because the State or its instrumentalities may combine contractual authority with public power.
The case law indicates that judicial intervention is not based solely on the existence of a standard-form contract. Standardisation is often legitimate and necessary. Intervention becomes more compelling when a contractual clause is arbitrary, oppressive, unconscionable, discriminatory, or imposed in circumstances where the weaker party has no meaningful choice. Thus, the legal test is better understood as a balance between efficiency and fairness rather than a rejection of standard-form contracting itself.
6.2 Relationship with Earlier Legal Scholarship
The study is consistent with the scholarship on contracts of adhesion and unequal bargaining power. Friedrich Kessler’s analysis of adhesion contracts highlights the tension between contractual freedom and standardised terms drafted by a dominant party. The source material also draws on the work of Denning, Ellis and Indian scholars concerning judicial control, unconscionability and public-law review of government contracts.
The comparative discussion shows that the UK and US approaches similarly recognise that formal agreement may require scrutiny where bargaining conditions are seriously unequal. The UK approach combines equitable principles with statutory controls on unfair terms, while the US approach commonly employs unconscionability, including procedural and substantive dimensions. Indian law differs in structure but reaches a related objective through the Contract Act, constitutional review and sector-specific protections.
6.3 Implications for Government and PSUs
For government departments and PSUs, the findings suggest that contractual drafting should be accompanied by a fairness review, especially where the public entity has substantial market power or the counterparty has limited alternatives. Clauses permitting unilateral alteration, arbitrary termination, disproportionate penalties, or unilateral price fixation deserve particular scrutiny. Transparency in tendering and adequate disclosure of material terms can also reduce the information imbalance identified in the study.
For contractors and other weaker parties, the existence of a signed contract should not be assumed to eliminate all legal remedies. Depending on the facts, statutory doctrines of consent and undue influence, public policy under Section 23, constitutional review, and other applicable statutory remedies may be relevant. However, the availability and scope of such remedies depend on the precise contractual relationship and the legal status of the parties.
6.4 Need for Judicial Restraint with Effective Safeguards
The study supports a model of judicial restraint with safeguards. Courts should ordinarily respect commercial autonomy and avoid rewriting contracts merely because one term appears commercially disadvantageous. At the same time, restraint should not prevent effective review where a State entity uses its superior position to impose terms that are manifestly arbitrary, unfair or unconscionable. This approach protects contractual certainty while preserving constitutional and public-law values.