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Report No. 199

Chapter VII

Need To Have Procedural and Substantive Divide

Several authors have criticized existing statutes as not having met the challenge of dealing with 'procedural unfairness' and 'substantive unfairness' separately and in not defining these words nor in providing separate guidelines for judging each of them. We have referred to this aspect in Chapter I.

Most statutes do refer in the same sections to substantive and unfairness aspects of the contract, though there is no independent treatment. Courts are, therefore, unable to focus upon these issues in depth or lay down clear-cut principles. That is why in Chapter VIII, we propose to segregate the procedurally unfair provisions in statutes of other countries and in Chapter IX, the substantive unfair provisions in those countries. In Chapter X, we propose to list out the procedural unfair provisions of the Indian Contract Act, 1872 and of the Specific Relief Act, 1930.

In this chapter, we shall deal with the criticism in regard to the absence of separate statutory focus on these two concepts.

(a) The UK and Scottish Law Commission Report 2004, does not refer to this distinction except in one place while dealing with its comments on Clause 14 of he Bill prepared by it. Section 14(1)(b) of the Bill attached to the UK and Scottish Law Commissions Report, 2004 refers to this aspect in the Explanatory Notes, Part 4 (para 42) which deals with clause 14 and Schedule 2 of the 'fair and reasonable test'. Para 42 reads as follows:

"42. Paragraph (b) of clause 14(1) and (2) requires that in determining whether in an individual case, the term or notice was fair and reasonable, both substantive fairness (the circumstances of the term) and procedural fairness (the circumstances existing at that time) be taken into account."

(b) The Tasmania Law Reform Commission explained in its 'Report on Harsh and Unconscionable Contracts' (Report 71) that

"procedural unconscionability relates to bargaining process of the transaction and the particular conduct of the parties, whereas substantive unconscionability focuses on the content of the contract."

(c) The Report of the New Zealand Law Commission while referring to the guidelines drafted by it states that 'the contract be substantively as well as procedurally fair'.

(d) In the Discussion Paper on Unfair Contract Terms, 2004 of Victoria (Australia), prepared by the Standing Committee of Officials of Consumer Affairs, it is stated in the Executive Summary:

"The Courts have tended to require that there must be some aspect of procedural unfairness (a problem surrounding the circumstances leading up to and at the time of making the contract)." and the Paper further states (at para 2.1.1) that "there are two contrasting aspects of unconscionable conduct as related to contracts:

firstly, procedural unfairness which is concerned with the circumstances leading upto and at the time of making of the contract; and secondly, substantive unfairness which is concerned with the unfairness of the terms of the contract themselves which lead to injustice."

The Paper points out that "the common law was more concerned with 'procedural injustice' while section 51AB of the (Commonwealth) Trade Practices Act, 1974 enumerated, apart from the bargaining strength, undue influence or pressure and capacity to understand provisions (which are procedural), the following substantive aspects:

a. Whether the consumer was required to comply with conditions which were not reasonably necessary for the protection of the interests of the supplier; and

b. The amount for which required to comply with conditions which were not reasonably necessary for the protection of the interest of the supplier; and The Paper refers to the following comments by Parkinson (Laws of Australia) in regard to section 51AB of the (Commonwealth) Trade Practices Act, 1974:

"There is a question whether and to what extent section 51AB is concerned with the bargaining process and/or contractual outcomes. The equitable doctrine is confined to procedural unconscionability, that is, unfairness in the bargaining process, but the statute is not limited in that way and may permit relief from contracts which are unfair in their terms, despite the absence of any unfairness in the bargaining process. No policy choice is made plain in the legislation on this point. The section directs the Court's attention to a number of factors, some of which go to the negotiations and others to the outcome of them. The factors in ss 51AB(2)(b) and (e) suggest that the Court may have regard to unfairness in the Contract (substantive) ...."

"(d) whether or not any provisions of the contract impose conditions which are unreasonably difficult to comply with or are not reasonably necessary for the protection of the legitimate interests of any party to the contract; and

(g) where the contract is wholly or partly in writing, the physical form of the contract and the intelligibility of the language in which it is expressed."

It says that the Contracts Review Act, 1980 (NSW) is not limited to 'standard' terms although whether a term was negotiated or not is a consideration for the Court. Sub-sections 9(2)(d) and (g) referred to above, in particular lean towards the substantive. A person's rights under the Act cannot be excluded or restricted in any way.

The Paper refers to the fact that Goldring et al (Quoting Duggan, 'Some Reflections on Consumer Protection and the Law Reform Process' (1991)17 Mon LR at 274), that in the TPA and the Uniform Consumer Credit Code, there was failure to treat procedural and substantive unfairness separately. They said:

"The Contracts Review Act and by inference, the other legislation (TPA and Uniform Consumer Credit Code) has been criticized for failing to distinguish between procedural and substantive unconscionability as 'the list of factors to which the Court is required to have regard, in determining whether a contract is unjust, is a mishmash of process-oriented and outcome-oriented considerations."

One of the conclusions of the Discussion Paper of Victoria at the end of Part A is that 'the current statutory regimes in Australia have created some confusion in practice because of their failure to distinguish between procedural and substantive unfairness (per Goldring et al and Duggan).

Again in Chapter 4 (para 4.5) of the Paper it is stated that "whilst it has been argued that there is probably sufficient coverage of the procedural aspect of unfair contract terms, the criticism noted earlier by Goldring et al, that current Australian legislation is problematic in that it does not distinguish between procedural and substantive issues, is considered to be valid. In order to create clarity, the opportunity might be undertaken, whilst addressing the issue of unfair contract terms, to rectify this situation". At the end of the para, it is stated,

"There would be better Court outcomes for aggrieved individuals due to the differentiation between procedural and substantive matters."

(e) A Paper on 'Why we must regulate Unfair Contract Terms' prepared under the auspices of the Consumer's Federation of Australia in conjunction with the Australian Consumers' Association, states under the heading 'the current laws fail consumers' that unfortunately,

"unconscionable conduct laws are focused on procedural, not substantive unfairness. Procedural fairness looks at the actions of the parties to the contract at the time of signing and the circumstances in which the contract was entered into. The fact that a person may have had a disability at the time of signing a contract is a good example of procedural unfairness. Substantive unfairness looks at what is written on the contract itself - what the nature of the bargain is... Paying ten times the market value of something is a good example of substantive unfairness.

Because they are procedurally focused, unconscionable contract laws must consider the individual circumstances of particular cases if they are to be applied, and therefore, can only deal with cases at one time. This means that they are no good fighting the systematic use of unfair terms in standard form of contracts, which is how most unfair contract terms are used.

Because they depend on 'oral evidence' about 'who said what' and 'what happened when', cases based on procedural unfairness are difficult to fight in the Courts, where well-resourced businesses can quickly outgun a battling consumer. A case based on substantive unfairness is easier, because the only relevant evidence is a copy of the unfair contract itself."

The Paper states that in UK, the Office of Fair Trading (OFT) received more than 1000 complaints during 2002-2003 alone and 1,477 contract terms were abandoned or deleted as a result of OFT enforcement action.

The Australian Paper above referred under the heading 'What must be done', says that the "variety of consumer protection laws that focus either wholly or predominantly on procedural unfairness, and operate poorly or not all in the context of substantive unfairness. As a result, a wide range of markets regularly employ contracts that contain unfair contract terms, against which consumers are given no adequate or accessible remedies."

The Paper further states that "While procedural unfairness is already regulated, that regulation is neither unfair nor consistent. There is likely to be great benefit to all market participants in codifying what matters are likely to constitute unfair conduct, and clarify what remedies are available to consumers who are induced to enter into unfair or unconscionable transactions. We support unfair regulations of consumer contracts in their entirety.

(f) The source of the labels 'procedural unconscionability' and 'substantive unconscionability' is an American law review article by Arthur Allen Leff, Asst. Prof. Washington University Law School, on 'Unconscionability and the Code - The Emperor's New Clause'. (1967) 115 University of Pennsylvania Law Review, p. 485. We have referred to his views in Chapter I.

Unfair (Procedural and Substantive) Terms in Contract Back

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