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Report No. 199

The Central Inland Water Transport Corporation Limited Case (AIR 1986 SC 1571)

The unfairness of contractual terms by 'authorities' which fall within the meaning of the word 'State' in article 12 of the Constitution of India figured in several service matters before the Supreme Court. The irrationality or arbitrariness of clauses in such contracts was considered in the context of article 14. The apex court for the first time in 1986 in Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly (AIR 1986 SC 1571) made an attempt to broaden the applicability of unconscionability outside the boundaries laid down by section 16 of the Indian Contract Act. We have referred to this briefly in the earlier chapters. Here, we propose to go into the facts of the case also.

The appellant in this case was a Government company. Since another company was carrying on the same business as the Central Inland Water Transport Corporation (CIWTC), a scheme of arrangement was entered into between the said Corporation and that company, with the approval of the High Court. Under the scheme, an officer of the company could accept the job in the corporation or in the alternative, leave the job and receive a meagre amount by way of compensation. Rule 9 (i) of the relevant Rules of the Corporation provided that the services of officers could be terminated by giving three months notice. The petitioner's service was terminated in this manner.

He challenged this rule as arbitrary under article 14 of the Constitution and alleged that a term in a contract of employment of this kind entered into by a private employer, which was unfair, unreasonable and unconscionable was bad in law. This rule formed part of the contract of employment and its validity fell to be tested by the principles of the law of contracts. The Court read the principles of unconscionable bargain outside the four corners of section 16 of the Indian Contract Act and held that such a contract was void under section 23 of that Act. The Court emphasized on the requirement of 'reasonableness' in the terms of the contract by discussing three principles namely- 'unconscionability', 'distributive justice and unreasonableness' and 'inequality of bargaining power' and considered the issue under three headings:

(1) Unconscionability: To explain the meaning of 'unconscionability', the apex Court relied upon the "Restatement of the Law (Second)" as promulgated and adopted by the American Law Institute (Volume II) (dealing with the law of contracts, in Section 208 at page 107)., as follows:

Unfair (Procedural and Substantive) Terms in Contract Back

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