Report No. 199

General substantive fairness: section 12

As stated earlier, we have defined 'substantive unfairness' as follows:

"a contract or a term thereof is substantively unfair if such contract or the term thereof is in itself harsh, oppressive or unconscionable to one of the parties"

Guidelines for substantive unfairness: section 13

We have also culled out in section 13, several guidelines to judge if a contract or its terms are substantively unfair. They are as follows:

"13. For the purposes of sections 9 to 12, the court may take into account the following circumstances, namely:-

(i) unreasonably difficult to comply with, or

(ii) are not reasonably necessary for the protection of the legitimate interests of any party to the contract;

(b) whether the contract is oral or wholly or partly in writing;

(c) whether the contract is in standard form;

(d) whether the contract or a term thereof is contrary to reasonable standards of fair dealing or commonly accepted standards of dealing;

(e) whether the contract, agreement or a term thereof has resulted in a substantially unequal exchange of monetary values or in a substantive imbalance between the parties;

(f) whether the benefits to be received by the disadvantaged party are manifestly disproportionate or inappropriate to his or her circumstances;

(g) whether the disadvantaged party was in a fiduciary relationship with the other party; or

(h) whether the contract or a term thereof

(i) requires manifestly excessive security for the performance of contractual obligations; or

(ii) imposes penalties which are disproportionate to the consequences of a breach of contract; or

(iii) denies or penalises the early repayment of debts; or

(iv) entitles a party to terminate the contract unilaterally without good reason or without paying reasonable compensation; or

(v) entitles a party to modify the terms of a contract unilaterally."

It will be seen that there may be some guidelines in sections 6 and 13 which are common to both procedural unfairness and substantive unfairness. That is quite real.

Special provisions as to substantive unfairness: exclusion of certain liabilities to be substantively unfair:

Apart from the 'general substantive unfairness' defined in section 12 upon which the Court may have to decide on facts, we have formulated sections 9, 10, 11 as special provisions where the very existence of certain terms is sufficient to declare them as substantively unfair.

The 103 rd Report of the Law Commission, formulated section 67A to be introduced into the Contract Act, 1872, and while subsection (1) was general, subsection (2) proposed:

"Section 67A(2): Without prejudice to the generality of the provisions of this section, a contract or part of it is deemed to be unconscionable, if it exempts any party thereto from:

(a) the liability for wilful breach of the contract, or

(b) the consequences of negligence"

Such a provision is also contained in section 3 of the (UK) Unfair Contract Terms Act, 1977 which stated that liability arising in contract cannot be excluded or restricted except in so far as the term satisfies the requirement of reasonableness.

Such provisions are also contained in the UK Regulations, 1999 and are also found in Bill attached to the UK and Scottish Law Commission Report of 2004. It should not be permissible for excluding liability for negligence. It should not be permissible to exclude liabilities for breach of contract so far as one party is concerned, without justifiable reasons.

We have proposed section 9 as follows:

"Exclusion or restriction of liability to be substantially unfair:

9. A contract or a term thereof shall be deemed to be substantively unfair and void if it

(a) excludes or restricts liability for negligence;

(b) excludes or restricts liability for breach of express or implied terms of contract without adequate justification."

In clause (b), we have added the words 'without adequate justification' in as much as in our opinion, it is permissible, where there is adequate justification to exclude or restrict liability for breach of express or implied terms of contracts.

We next come to the proposed section 10 of the Bill which deals with another situation concerning section 62 of the Sale of Goods Act, 1930.