Report No. 199
Common Law: Unfairness in Regard to Specific Performance of Contract Terms
In this Chapter, we shall refer to common law principles relating to specific performance of contracts in the context of Unfair Terms.
s(a) Common-law: 'Unfairness' in 'Specific Performance' of contracts:
Under common-law, if a term is unfair, the Court may exercise discretion not to enforce the terms or the contract but the Court cannot declare the terms or contract as void.
The question is as to what we mean by the word 'fairness' in Contracts which requires to be protected by Courts in suits for specific performance.
Under common-law, 'fairness' was always a necessary condition for specific performance of contracts. Lord Hardwicke stated in Buston vs. Lista (3 Atk 386):
"Nothing is more established in this Court than that every agreement of this kind ought to be certain, fair, and just in all its parts. If any of those ingredients are wanting in the case, this Court will not decree specific performance."
In Lord Walpole vs. Lord Orford (3 Ves 420), Lord Loughborough (afterwards Lord Rosslyn) stated:
"I lay it down as a general proposition to which I know no limitation, that all agreements, in order to be executed in this Court, must be certain and defined: Secondly, they must be equal and fair; for this Court, unless they are fair, will not execute them; and thirdly, they must be proved in such manner as the law requires".
We shall next refer to the common law principles as to 'fairness' in contracts
(b) Common law: Fry on "procedural" and "substantive" unfairness and "hardship" in contracts relevant to specific performance:
Fry, in his celebrated commentary on 'Specific Performance' (6th Ed., 1921) (Indian reprint 1997) deals exclusively (see para 387) with 'Want of Fairness in the Contract' in Chapter V of his work. He says that there are many instances in which, "though there is nothing that actually amounts to fraud, there is nevertheless a want of that equality and fairness in the contract which, as we have seen, are essential in order that the Court may exercise its extraordinary jurisdiction in specific performance. In cases of fraud, the Court will not only not perform the contract, but will rescind it; but there are many cases in which the Court in the exercise of the jurisdiction in specific performance will stand still, and interfere neither for this one purpose nor the other. (Willan vs. Willan) (16 ves 83).
But under the modern concept of 'unfairness' of a contract or a term, the Court can declare the contract or term not only as unenforceable but also as invalid or void. However, that was not so under the common law which only gave discretion to the Court not to enforce 'unfair' terms or contracts.
Unfairness, according to Fry, (see para 388) may be either in the terms of the contract itself, (which today we call 'Substantive' unfairness), or it may be in matters extrinsic and the circumstances under which it was made (which to day we call 'procedural' unfairness): with regard to the latter, parol evidence is of course admissible.
A principle which has been in vogue over centuries is that the (see para 309 of Fry) 'fairness' of the contract, like all other qualities, must be judged of as at the time the contract was entered into, or at least when the contract becomes absolute, and not by subsequent events, for the fact that events, uncertain at the time of the contract, may afterwards happen in a manner contrary to the expectation of one or both of the parties, is no reason for holding the contract to have been unfair. This aspect also has been and requires to be considered in the present debate.
But, states Fry (see para 393) in order to bring a contract within this principle, the uncertainty as to the subject matter of the contract must, at the time of the contract, have been a real one to both parties, either from the nature of things or from the state of knowledge of both parties. Further (see para 393) the principle will not apply where, though the terms of the contract may express an uncertainty, that uncertainty was not understood by the parties to comprise the event which actually happened.
Again, in contracts to sell at a price (see Fry para 396) to be fixed by a third person, the Court would no doubt consider the unfairness of the valuer's conduct as a bar to the right to specific performance.
In judging the fairness (i.e. procedural fairness) of a contract (says Fry in para 399), the Court will look not merely at the terms of the contract itself, but at all the surrounding circumstances such as intimidation and duress of the defendant, the mental incapacity of the parties, though falling short of insanity, their age or poverty and the manner in which the contract was executed. The circumstance that the parties were acting without a solicitor, that the property was reversionary or that the price was not the full value are relevant. Thereafter, he says: (see para 400)
"whenever there are evidences of distress in the party against whom performance is sought, or he is an illiterate person, or whenever there are circumstances of surprise, or want of advice, or anything which seems to impart that there was not a full, entire and intelligent consent to the contract, the Court is extremely cautious in carrying it into effect. Still, it is not the doctrine of the Court that a man cannot contract without his solicitor at his elbow, or that a man in insolvent circumstances, or in prison, is disabled from selling his estate; and if a contract made under such circumstances will bear the careful examination of the Court and the full light of day, it will be specifically enforced."
It is not necessary to prove 'intentional' unfairness or dishonesty it is sufficient if unfairness is proved (see para 401 of Fry).
Unfairness arising out of misstatement of facts is considered as part of misrepresentation (para 402 of Fry); and cases relating to silence or suppression of fact by one party are considered as part of fraud; but yet, it seems possible that there may be cases where silence is not fraudulent but yet creates such a case of hardship as prevents Court's assistance. Courts may also not enforce an agreement (see para 404) which may be injurious to third parties. Likewise, the Court will not (see para 407 of Fry) generally exercise its power to enforce an agreement, where to do so would necessitate breach of trust or of a prior contract with a third person or would compel a person to do what he is not lawfully competent to do, even though at the time of contract, the act might have been lawful.
On 'hardship' (which is part of section 20 of the Indian Specific Relief Act, 1930), Fry devoted a full chapter (Chapter VI) in his celebrated work. Hardship may or may not be related to unfair terms. While it is the principle that 'hardship' is to be generally judged as at the time of the contract, he says (para 425) that in considering the hardship which may flow from the execution of a contract, the Court will consider whether it is the result obviously flowing from the terms of the contract, so that it must have been present at the time of the contract in the minds of the contracting parties or whether it arises from something collateral and so far concealed and latent, as that it might not have been thus present in their minds. It is obvious, he says, that a far higher degree of hardship must be present in the former, than in the latter class of cases, for it to operate on the discretion of the Court.
The above are the general principles under common law in regard to specific performance of contracts.