Report No. 199

Position in U.S.A.: American Restatement (Second Edition) and UCC: Unconscionability:

The notion of unconscionability in contracts is by no means new in U.S.A. As stated in Chapter III, it has taken a new life since it was embodied as a test of enforceability in the Uniform Commercial Code, 1977, (hereinafter called UCC). The general doctrine of unconscionability was developed in that country largely through judicial decisions. We have already referred to the position under the American Law as stated in Restatement of Law (second edition) in Section 208 as referred to by the Supreme Court in Inland Waters case, AIR 1998 SC 151. It stated:

"If a contract or terms 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 doctrine of unconscionability has also been included in the UCC, though it was applicable only to contracts relating to sales of goods. It has been applied by analogy or as a general doctrine to other kinds of contract. Section 2 - 302 of the UCC provides:-

"If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made, the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result".

The comment to this section, extracted below, to the extent relevant describes the purpose of this section, as follows:

"This section is intended to enable the courts to police explicitly against the contracts or clauses which they find to be unconscionable. In the past such policing has 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...."

Since Section 2-302 referred to above is addressed to the Court in as much as the unconscionability must be determined by the court as the matter of law. Under this provision when it is claimed or appears to the court that the contract or any clause thereof may be unconscionable, the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and the effect in order to aid the court in making the determination. The relief granted by the courts could be refusal to enforce the entire contract or the particular clauses found to be unconscionable.

The comment to section 2-302 further states as follows:

"A bargain is not unconscionable merely because the parties to it are unequal in bargaining power, 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".

Thus, though the mere inequality of bargaining power does not suffice and the courts 'recognize that the parties are often required to make their contracts quickly even if their bargaining power may rarely be equal still the court has power to interfere in cases falling within the provisions. It is quite clear that in U.S., there is a statutory bar on unconscionable contracts and the interest of the parties prejudiced by inequality of bargaining power.

The UCC does not define unconscionability but indicates in the comment the basic test, whether in the light of general commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract. The principle is one of oppression and unfair surprise (Campbell Soup Co. v. Wentz) (referred to hereinafter) and not of disturbance of allocation of risks because of superior bargaining power, Prof. M.A. Eisenbergs "The Bargain Principle and its Limits" (1982) 95 Harv. LR. p.741.