Report No. 199

Unfair Terms legislation not an obstacle to foreign investment:

Our proposals for introducing unfair or unconscionable terms in India would not isolate the contracting parties nor inhibit foreign investment and trade. Such a concern was raised by number of respondents but was rejected in the Report given by South African Law Commission on 'Unreasonable Stipulations In Contracts And The Rectification of Contracts (1998)' on the ground that when several countries have made laws to curb unreasonable contracts, South Africa would stand at a disadvantage if it did not have such laws. The Report stated:

"The Commission notes the concern in respect of the possibility that foreign investors and contracting parties might be discouraged from concluding contracts in South Africa should the law enable the courts to review contracts in order to determine whether they comply with principles of contractual fairness. The Commission notes that apart from there being local calls for the recognition of fairness in contracts, measures have lately been adopted and existing ones extended in foreign jurisdictions who have recognized the need to regulate unfair contracts.

In view of this factual situation it seems to the Commission that the argument raised by some respondents that the introduction of measures against unfair or unconscionable terms would isolate South African contracting parties and inhibit foreign investment and trade, should be critically evaluated. It seems to the Commission that South Africa would rather become the exception and its law of contract would be deficient in comparison with those countries which recognize and require compliance with the principle of good faith in contracts."

It is in the light of the above criticism in several countries that, we have felt that it is necessary

(1) to segregate the existing provisions of the Indian Contract Act, 1872 and the provisions of the Specific Relief Act, 1963 in so far as they relate to voidable contracts and void contracts, respectively into 'procedural provisions' and 'substantive provisions', and

(2) to add to these

(a) a specific definition of 'procedural unfairness' and provide specific guidelines for judging if there is procedural unfairness, and

(b) a specific definition of 'substantive unfairness' and provide specific guidelines for judging if there is substantive unfairness.

(3) to list remedies which can be granted to relieve parties from procedural and substantive unfairness.

The proposed Bill is a detailed one, which perhaps for the first time in any country is dealing separately with 'procedural' and 'substantive' unfairness. That is why we have named this Report as "Unfair (Procedural and Substantive) Terms in Contracts Report'. The proposed Bill is named "Unfair Terms (Procedural and Substantive) of Contracts Bill, 2006".