Report No. 199

The learned Judge referred to what Richard A. Lord stated in the Commentary on, Williston on Contracts (4th Ed) (1998):

"The concept of unconscionability was meant to counteract two generic forms of abuses: the first of which relates to procedural deficiencies in the contract formation process, such as deception or a refusal to bargain over contract terms, today often analysed in terms of whether the imposed-upon party had meaningful choice about whether and how to enter into the transaction; and the second of which relates to the substantive contract terms themselves and whether those terms are unreasonably favourable to the more powerful party, such as terms that impair the integrity of the bargaining process or otherwise contravene the public interest or public policy; terms (usually of an adhesion or boilerplate nature) that attempt to alter in an impermissible manner, fundamental duties otherwise imposed by the law, fine-print terms or provisions that seek to negate the reasonable expectations of the non-drafting party, or unreasonably and unexpectedly harsh terms having to do with price or other central aspects of the transaction."

The learned Judge referred to the views of the above authors further as follows:

"It has been said that this formulation requires a showing that the contract was both procedurally and substantively unconscionable when made. It has often been suggested hat a finding of a procedural abuse, inherent in the formation process, must be coupled as well with a substantive abuse, such as an unfair or unreasonably harsh contractual term which benefits the drafting party at the other party's expense. Another way of viewing this problem is that the fact that a contract is one of adhesion does not itself render the contract unconscionable.

The distinction between procedural and substantive abuses, however, may become quite blurred; overwhelming bargaining strength or use of fine print or incomprehensible legalese may reflect procedural unfairness in that it takes advantage of or surprises the victim of the clause, yet the terms contained in the resulting contract - whether in fine print or legal 'gobbledygook'- would hardly be of concern unless they were substantively harmful to the non-drafting party as well. Thus, the regularity of the bargaining procedure may be of less importance if it results in harsh or unreasonable substantive terms, or substantive unconscionability may be sufficient in itself even though procedurally unconscionability is not."

In our view, the last part of the above analysis is more true. Though the cases of procedurally voidable situations referred to in the Indian Contract Act, 1862 do not require any substantive unfairness to be proved, and we do not disturb that state of the law, still our formulation of section 5 is that "procedural unfairness" as now defined requires some 'unfair advantage' or 'unfair disadvantage' to one party to be proved. But, so far a substantive unfairness is concerned, it can lead to unenforceability without it being simultaneously unfair procedurally. Whereas on our formulation of not only procedural aspects but 'substantive unfairness' in section 12 is therefore that

"a contract or a term thereof is substantively unfair if it is in itself harsh, oppressive or unconscionable to one of the parties". whereas our formulation of 'procedural unfairness' in section 5 requires not only procedural aspects but some substantive aspects such as unjust advantage or unjust disadvantage.

We shall refer to some more views elsewhere.

The British Columbia Law Institute in its Interim Report on 'Unfair Contract Terms' (Feb. 2005) has referred to Morrison vs. Coast Finance Ltd.: (1965) 55 DLR (2d) 710 (B.C.C.A), which refers to proof of inequality, ignorance, need or distress of one party but also to proof of unfairness of the bargain. Likewise Harry vs. Kreutziger (1978)95 DLR (3d) 231 (CA) also speaks of the need for proof on both:

"where a claim is made that a bargain is unconscionable, it must be shown for success that there was inequality in the position of the parties due to ignorance, need or distress of the weaker, which would leave him in the power of the stronger, coupled with proof of substantial unfairness in the bargain." (per Mc Intyre JA)

That would mean that in the case of procedural unfairness, apart from the circumstances prevailing at the time when the contract was entered into, substantial unconscionability of the terms must also be proved. The Report of the British Columbia Institute further traces the inequality of bargaining principle to what Lord Denning stated in Lloyds Bank Ltd.vs. Bundy: 1974(3) All ER 757(CA).

The Report observes stating that in British Columbia, as far as unconscionability is concerned, the emphasis is still more on procedural unfairness leading to unfair terms but (see p. 35 of the Report) "the application of that doctrine in British Columbia has not proved effective in dealing with substantive unfairness. Its focus has been on protecting vulnerable people from procedural unfairness. This approach may fall wide of the mark in dealing with the issues raised in the Report". It concludes stating (see p. 38):

"The options to reform the law of unfair terms discussed in this Report remain starting points for discussion at this time. Tellingly, they were not engaged in any substantive way by the respondents to our consultation."

We shall next refer to the Discussion Paper on 'Unfair Contract Terms' (2004) of the Standing Committee of Officials of Consumer Affairs, Victoria (Australia). It discussed various models, including those which deal with procedural unfairness and substantive unfairness or both. The Australian law in section 51AB of the Trade Practices Act, 1974 concentrates on procedural unfairness as was the position under Common law except for two clauses (b) and (e) of 52AB(2) which deal independently with substantive unfairness. The Paper says: "However, in practice, Courts have been reluctant to base a decision on 51AB solely on substantive grounds".

The Report says (para 2.1.2) that in New South Wales, under the Contract Review Act, 1980 while the emphasis is again on procedural unfairness, except in clauses (d) and (g) of section 9 which deal with substantive issues. Analysis of case law of 20 years by T. Carlin (vol. 23) (Sydney Law Review, p. 133) revealed that out of 160 cases, only in one case was substantive unfairness applied by the Courts independently. Goldring et al have criticized the above Act for not dealing separately with substantive unfairness. In UK, though guidelines relating to procedural and substantive unfairness are contained in the statute, the sections have mixed up both concepts instead of dealing with them separately.

The Report observed (para 2.2) that in UK, the focus is on 'substantive' unfairness rather than procedural. The UK Law Commission Paper notes (see para 2.2.2) that "it must be the case that substantive unfairness alone can be a term unfair under (the UK Regulations)".

The Report (para 2.3.2) says that in US, section 2.302 mixed up both concepts. In Canada, the position according to the Report (para 2.3.3) is that the position is same as in Australia. It says:

"However, similar to Australia, it would seem that Canadian common law jurisdictions have not differentiated between substantive or procedural matters."

Courts in Australia, the Report says, are reluctant to apply substantive unfairness alone.

It is in the above background of various authorities that in section 5 we have proposed that so far as 'procedural unfairness' is concerned, it is necessary to prove some unfair advantage or unfair disadvantage to one of the parties. For that purpose, we have provided guidelines in section 6 for deciding whether there is procedural unfairness.

(So far as 'substantive unfairness' as proposed in section 12 is concerned, in our view, if the contract or terms are oppressive, harsh or unconscionable, they must independently be declared unenforceable and it is not necessary to also prove procedural unfairness.)