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Report No. 199

Section 208. Unconscionable Contracts Term:

"If a contract or term thereof is unconscionable at the time the contract is made, a Court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or may so limit the application of any unconscionable term, as to avoid any unconscionable result."

The Supreme Court referred to the comments given under that section, where it is stated "Like the obligation of good faith and fair dealing (S.205), the policy against unconscionable contracts or terms applies to a wide variety of types of conduct. The determination that a term is or is not unconscionable is made in the light of its setting, purpose and effect.

Relevant factors include weaknesses in the contracting process like those involved in more specific rules as to contractual capacity, fraud and other invalidating clauses; the policy also overlaps with rules which render particular bargains or terms unenforceable on grounds of public policy. Policing against unconscionable contracts or terms has sometimes been accomplished by adverse construction of language, by manipulation of the rules of offer and acceptance or by determinations that the clause is contrary to public policy or to the dominant purpose of the contract.

The Supreme Court also referred to the comment under Uniform Commercial Code Section 2-302 which makes nice distinctions. It says:

"A bargain is not unconscionable merely because the parties to it are unequal in bargaining position, nor even because the inequality results in an allocation of risks to the weaker party. But gross inequality of bargaining power, together with terms unreasonably favourable to the stronger party, may confirm indications that the transaction involved elements of deception or compulsion, or may show that the weaker party had no meaningful choice, no real alternative, or did not in fact assent or appear to assent to the unfair terms"

The Court also referred to the Reporter's note to section 208, where it is asserted that a contract of adhesion is not unconscionable per-se and that all unconscionable contracts are not contracts of adhesion. Nonetheless, the more standardized the agreement and the less a party may bargain meaningfully, the more susceptible, the contract or a term will be to a claim of unconscionability.

(2) Distributive justice: The Court explained the concept of 'distributive justice' when it relied on its previous decision in the case of Lingappa Ponchanna Appelwar v. State of Maharashtra, (1985) 1 SCC 499 In that case, while upholding the constitutionality of Maharashtra Restoration of Lands to Scheduled Tribes Act, 1974 the Apex court said:

"The present legislation is a typical illustration of the concept of distributive justice, as modern jurisprudence knows it. Legislators, judges and administrators are now familiar with the concept of distributive justice. Our Constitution permits and even directs the State to administer what may be termed 'distributive justice'. The concept of distributive justice in the sphere of law making connotes, inter-alia, the removal of economic inequalities and rectifying the injustice resulting from dealings or transactions between unequals in society. Law should be used as an instrument of distributive justice to achieve a fair division of wealth among the members of society based upon the principle:

'From each according to his capacity, to each according to his needs'. Distributive justice comprehends more than achieving lessening of inequalities by differential taxation, giving debt relief or distribution of property owned by one to many who have none by imposing ceiling on holdings, both agricultural and urban, or by direct regulation of contractual transactions by forbidding certain transactions and perhaps, by requiring others. It also means that those who have been deprived of their properties by unconscionable bargains should be restored their property. All such 2 (1985) 1 SCC, 499 laws may take the form of forced redistribution of wealth as a means of achieving a fair division of material resources among the members of society or there may be legislative control of unfair agreements."

(emphasis supplied)

(3) Inequality of bargaining power: The Court explained the concept of 'unreasonableness and inequality of bargaining power' with the help of several English decisions (Gillespie Brothers and Co Ltd v. Roy Bowles Transport Ltd (1973) Q.B.400; Llyods Bank Ltd. v. Bundy (1974) 3 ALL. ER 757; Schroeder Music Publishing Co Ltd. v. Macaulay (1974) 3 ALL ER 616 etc.). After discussing various judgments of English courts, and the law in U.K., USA and Germany, the court observed that there might be myriad situations which result in unfair and unreasonable bargains between parties possessing wholly disproportionate and unequal bargaining power. These cases can neither be enumerated nor fully illustrated.

The court must judge each case on its own facts and circumstances. The above principle would apply, the court reiterated, "where the in-equality of bargaining power is the result of the great disparity in the economic strength of the contracting parties or where the inequality is the result of circumstances, whether of the creation of the parties or not, or where the weaker party is in a position in which he could obtain goods or services or means of livelihood only upon the terms imposed by the stronger party or go without them or where a man had no choice, or rather no meaningful choice, but to give his assent to a contract or to sign on the dotted line in prescribed or standard form or to accept a set of rules as part of the contract, however, unfair, unreasonable and unconscionable a clause in that contract or form or rules might be.

The court, however, reiterated that this principle would not apply where the bargaining power of the contracting parties is equal or almost equal. The contracts of this type to which the principle formulated above applied were not just contracts which were tainted with illegality, but were so unfair and unreasonable that they shock the conscience of the Court. According to the court, this principle may not apply where both parties are businessman and the contract is a commercial transaction.

A question also arose here as to under which head would an unconscionable bargain fall under the Contract law? If it fell under the head of undue influence, it would be voidable, but if it fell under the head of being opposed to public policy, it would be void. The Court answered that such contracts would rarely be induced by undue influence, even though at times they were between parties one of whom held a real or apparent authority over the other. Very often in vast majority of cases such contracts were entered into by the weaker party under pressure of circumstances, generally economic, resulting in inequality of bargaining power.

Such contracts did not fall within the four corners of the definition of 'undue influence' given in section 16 (1) of the Indian Contract Act, and ought not to be held voidable, because it would compel each person with whom the party with superior bargaining power had contracted, to go to the court to have the contract adjudged voidable. This would only result in multiplicity of litigation which no court should encourage. Such a contract or such a clause in the contract ought, therefore to be adjudged void as being opposed to public policy under section 23.

In the above case, Justice Madon considered the development of law and held that an instrumentality of the State cannot impose unconstitutional conditions in service rules vis-à-vis its employer to terminate the services of a permanent employee without reasons merely on a three months notice and found the clause to be unconscionable, unfair unreasonable and against public policy and public interest and thus violative of article 14.

Unfair (Procedural and Substantive) Terms in Contract Back

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