Report No. 199

Chapter II

The Present State of Law in India and Need for Improvement:

At present, contracts could be declared void or voidable in a court of law only if it falls under one or other of the provisions of the Indian Contract Act, 1872 which make such terms void or voidable. There is, as of today, no general statutory provision in the Indian Contract Act, 1872 or the Sale of Goods Act, 1930 whereby the courts can give relief to the consumer/weaker party by holding such terms in contracts as void on the ground of their being unreasonable, or unconscionable or unfair.

'Unconscionable' Contract Under Section 16 of the Indian Contract Act, 1872:

One of the relevant provisions of the Indian Contract Act, 1872 which refers to the inequality of bargaining power between parties and of unfair advantage of one party over the other, is contained in section 16 dealing with 'undue influence'. The situation is a mix up of procedural and substantive unfairness and subsection (3) only raises a presumption. We shall presently refer to that section.

Section 16 has three subsections. The first and second subsections deal with procedural unfairness and reads as follows:

"Section 16 'Undue influence' defined: (1) A contract is said to be induced by 'undue influence' where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and use that position to obtain an unfair advantage over the other.

(2) In particular and without prejudice to the generality of the foregoing ..., a person is deemed to be in a position to dominate the will of another -

(a) when he holds a real or apparent authority over the other or where he stands in a fiduciary relation to the other; or

(b) where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness or mental or bodily distress."

(ii) Sub-section (3) of section 16:

The other relevant provision is sub-section (3) of section 16 which refers to the aspect of burden of proof in 'unconscionable transactions' induced by 'undue influence'. Sub section (3) of section 16 and illustration (c) are reproduced as under:-

"16(3) Where a person who is in a position to dominate the will of another, enters into a contract with him, and the transaction appears, on the face of it or on the evidence adduced, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall be upon the person in a position to dominate the will of the other.

Nothing in sub section shall affect the provisions of section 111 of the Indian Evidence Act, 1872."

"Illustration (c): A being in debt to B, the money lender of his village, contracts a fresh loan on terms which appear to be unconscionable. It lies on B to prove that the contract was not induced by undue influence."

Thus, it will be seen that even sub-section (3) of section 16, deals with unconscionability which is an aspect of 'substantive' unfairness but links it up with 'procedural' unfairness of domination of will. Sub-section (3) of section 16, it must be noted, does not enable the Court, to strike down the unconscionable terms, but only enables raising a presumption.

What does the term "unconscionable" mean? We may look at the Legal Glossary (Government of India 2001 P.351). It defines the word "unconscionable" as 'irreconcilable with what is right or reasonable'. Unconscionability, in relation to contracts, has generally been recognized to include absence of a meaningful choice on the part of one of the parties to avoid the contractual terms which unreasonably favour one party against the other party. Whether a meaningful choice is present in a particular case can only be determined by consideration of all the circumstances surrounding the transaction.

Regarding this aspect of burden of proof, reference may be made to the 103rd Report of the Law Commission on Unfair Terms in Contract (1984), where the Commission pointed out that sub-section (3) of section 16 has been interpreted by the Privy Council (Poosathurai v. Kannappa Chettair (1919) ILR 43 Mad 546 (PC)) as meaning that both the elements of dominant position and the unconscionable nature of the contract will have to be established, before the contract can be said to be brought about by undue influence.

This decision, though old, has not been departed from. However, the Law Commission of India in the 13th Report on Contract Act, 1872 (at p 21) stated that there are some cases in which, on principles of equity, relief has been given against hard and unconscionable bargains even though there is no question of undue influence. In an early Madras case, in U. Kesavulu Naidu v. Arithulai Ammal (1912) ILR 36 Mad 533 it was, in fact, held that unless undue influence was specifically proved, no relief should be granted on the ground of unconscionable nature of a contract. Can such a situation be allowed to continue?