Where the terms of a transaction are unconscionable under the principles of law relating to contracts such as transaction is considered as?

Shrey Sharma

There are various grounds for avoiding an Agreement like Ambiguity, conflicting terms, vague timeline etc. Unconscionability is one such ground on which an agreement can be avoided. Unconscionable contracts are those contracts which are heavily inclined towards one party and impose unfair, harsh conditions on the other party. Unconscionablity is of two types Procedural and Substantial unconscionability.  The main difference between the two is that in the former the entire way of going about the contract is flawed right from the starting like the age of the party/s, relative bargaining power etc. However, as per the latter one or few provisions of the contract are flawed like unjust price, one sided remedies which further make the contract unconscinable. [1]

In an unconscionable contract/agreement one party always has superior bargaining power over the other. Such contracts are considered arbitrary on the face of it and give courts the power to intervene and reinstate equality and justice. One of the essentials of  a valid contract as per the Indian Contract Act is Consensus Ad Idem, meaning meeting of minds and if a contract is formed without meeting of minds; it is considered to be a void contract. However, even in a case where the meeting of minds is there but the consent so taken by either party is taken through force or by fooling the other party, is not considered to be a willfull consent and subsequently the contract is considered to be unconscionable in the eyes of law.

This further proves that for a contract to be valid in the eyes of law it needs to be balanced and not tilting towards a particular side. Thus, this essay will revolve around exploring how the Doctrine of Unconscionability is applied by the Indian Courts as per the Indian Law and how it is acknowledged by various other statutes like The Uniform Commercial Code(UCC) and Restatement (Second) of Contracts.[2] 

Position in India Law 

Unconscionability is not defined explicitly anywhere in the Indian Law  however, Law Commission in its 103rd and 199th Report suggested that there should be changes in the present laws to safeguard the interests of the citizens against unconscionable contracts. Nonetheless there are various provisions in the Indian Contract Act that deal with the Doctrine of Unconscionablity.

Section 16 of the Indian Contract Act defines  ‘Undue Influence’ as a relation between two parties where one party is in a position to dominate the will of the other party and take undue advantage of it.[3] Moreover as per Section 19A of the Act such contract is considered to be voidable at the discretion of the party whose consent was taken unlawfully.[4] Apart from undue influence Section 19 lays down three other grounds (coercion, misrepresentation and fraud) which make a contract voidable at the option of the party whose consent was so obtained. Further as per Section 23makes an agreement void if the object of the agreement is unlawful, immoral etc.[5] Though there are multiple grounds to render a contract unconscionable but the doctrine of uncoscionability is embodied in Section 16 of the Indian Contract Act which talks about ‘Undue Influence’. The predominant reason behind it being the difficulty to prove the hampering of free consent under undue influence as compared to coercion or fraud. In other words one can say that Section 16 leads to moral coercion as opposed to physical coercion under Section 15 of the Act[6]

There are numerous number of case laws available on the issue of unconscionability of contracts dealt by different courts across the territory of India. The most being the employment agreements, where the agreements are so poorly drafted that they adversely affect the interests of the employee while favouring the employer outwardly. One such example being the case of Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly[7]. The Supreme Court of India in the present case declared the three month termination notice given to an employee to be arbitrary and unconscionable in nature as the clause puts the employer in an advantageous position while making the employee vulnerable and open to exploitation. The Court further held that any contract/agreement which imposes harsh, unfair and unjust conditions on a party privy to the contract/agreement is considered to unconscionable in nature. As mentioned above the rules governing the application of the doctrine of unconscionability are mentioned in Section 16 of the Indian Contract Act. Undue influence arises when one party tries to manipulate the free will of the other party with the dominating position the former is in.[8]

Intriguingly,  there is a three fold test that has to be proven under Section 16 to establish unconscionability. The party claiming unconscionability needs to show that firstly, the other party was in a position to dominate the will, Secondly the party actually took advantage of the other party and finally, post these two conditions have been proven the onus is shifted on the other party (the party who took advantage) to prove that the contract was not induced by undue influence.[9] Section 16(3) of the Act shifts the onus on the party who is in a dominating position to prove that the contract in question is not unconscionable in nature as the free will of the other party is not at all affected.[10] Moreover, somewhat similar but a rule with a wider ambit is contained in Section 111 of The Indian Evidence Act. The Section says “Where there is a question as to the good faith of a transaction between parties, one of whom stands to the other in a position of active confidence, the burden of proving the good faith of the transaction is on the party who is in a position of active confidence”.[11] The underlining difference between the application of Section 16 and Section 111 of the respective acts is that Section 16 only applies to contract actions while Section 111 applies to all tranactions in which one party stands in a position of active confidence to the other.

In a country like India where the majority of the population is ignorant, not aware and blindly abide by the teachings given by a spiritual guru, there are a lot of cases of harassment by the gurus. People tend to give their precious belongings to these leaders in hope of  achieving “Moksh”[12]. Parties have challenged the conscionability of these contracts in the court of law. One such case being the case of Manu Singh v Umadat Pande[13]. In the present case the plaintiff transferred his entire estate in favour of the guru he was a disciple of which was later challenged by the plaintiff in the court of law. The High Court of Allahbad held that as per Section 111 of the Indian Evidence Act and Section 16(3) of The Indian Contract Act, the burden is on the guru to prove that the transaction so made was made in good faith and without any undue influence, absense of such proof gives the plaintiff all the rights to cancel the deed.

However, it is important to note that in order to prove unconscionability it has to be established by the party claiming unconscionability that the other party is in a position of dominance and possess unequal bargaining power. This is a pre-requisite to avoid a contract on the ground of unconscionability, absence of which wont render the contract unconscionable. This was further elucidated by the Supreme Court of India in the case titled as Phulchand Exports Ltd. V O.O.O. Patriot[14]. It was held by the Apex Court that where the parties are involved in international business transactions, holding equal bargaining power and have entered into a contract, then the agreed terms between them cannot be said to be unreasonable, unjust and unfair. Thus, the application of the doctrine of unconscionablity and the position taken by the Indian Courts on the doctrine is quite clear and unambiguous.

Unconscionability Under Other Statutes

 Unlike the Indian law where ‘Unconscionability’ as term is nowhere used explicitly, there are statutes like the Uniform Commercial Code(UCC) and Restatement (Second) of Contracts where the word in contention is used in unequivocal terms. Section 2-302 of UCC says “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”.[15] The end goal of the Section is similar to the Indian Law i.e. to prevent one party from being exploited at the hands of the other party who is more powerful and in a position to supress the other party.

Surprsingly, Section 2-302 of the UCC only applies to the transactions of sale of goods. However, there are various other transactions apart from sale of goods like lease agreements, transactions governing the relationship between the bank and his customer etc. Fortunately, these have been covered by Section 208of the Restatement (Second) of Contracts which is an international treaty and lays down general principles governing common law contracts. Section 208 is defined as follows “If a contract or term thereof is unconscionable at the time the contract is made a court may refuse to enforce it, 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”.[16] Unconscionability is not clearly defined in either of the two Statutes so, its better to rely on some cases for better understanding of the concept of Unconscionability.

In Williams v Walker Thomas Furniture Company[17]where Walker Thomas used to provide credit services to Williams for the purchase of furniture and it was mentioned in the contract that no furniture will be considered to be paid off till the time money for all the furniture is paid off. In other words it meant that the past payments which were already made for buying the furniture will not be counted if the party defaults in future. The Court defined unconscionability as something which is  completely to the detriment of one party while outrightly favouring the other party. The Supreme Court of New Jersey also held one of the cluses to be unconscionable as it gave superior bargaining power to one party and moreover, was concealed from the other party.[18] Further, in Ferguson v Countrywide Credit Industries, Inc.[19]the Court declared an arbitrattion clause in an employment contract to be unconscionable because it was levying harsh conditions on one of the parties in question and was turning out to be a one sided contract as per the court.

Conclusion

It can be easily deduced from the facts above that any contract which puts a party on a weaker footing in comparison the opposing party can never be enforced and shall be rendered unconscionable by the court as per the Doctrine of Unconscionability. This has been a well established practice all over the world followed by various jurisdictions and has been embodied within various statutes followed across the world. However, though there has been a proper application of the doctrine in the Indian Law but in order to make the law more air tight  certain additions should be made to the law governing the principle of  Unconscionability. Like the suggestion made by the Law Commission of India in its 199th Report asking the courts to take suo moto cognizance on contractual matters even when not argued by either party so that the interests of both parties are secured and a contract if unreasonable in existence is set aside[20]

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[1] Arora, N, Unconscionable Contracts Under the Indian Contract Act iPleaders, https://blog.ipleaders.in/unconscionability-a-ground-for-avoiding-agreements/ (last visited Nov 20, 2018)

[2] Id.

[3] Indian Contract Act, 1872

[4] The Indian Contract Act, 1872

[5] Arora, N, Unconscionable Contracts Under the Indian Contract Act iPleaders, https://blog.ipleaders.in/unconscionability-a-ground-for-avoiding-agreements/ (last visited Nov 20, 2018)

[6] Manmohan Lal Sarin, https://digitalcommons.lmu.edu/cgi/viewcontent.cgi?referer=https://www.google.co.in/&httpsredir=1&article=1250&context=ilr (last visited Nov 20, 2018)

[7] Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly, 1986 AIR 1571

[8]Amir Chand, 1961 A.I.R. (Punjab) at 386.

[9] Ladli Prasad Jaiswal, [1964] 1 S.C.R. at 300.

[10] Section 16(3), The Indian Contract Act, 1872

[11] Section 111, The Indian Evidence Act, 1872

[12] Manmohan Lal Sarin, https://digitalcommons.lmu.edu/cgi/viewcontent.cgi?referer=https://www.google.co.in/&httpsredir=1&article=1250&context=ilr (last visited Nov 20, 2018)

[13] Manu Singh v Umadat Pande, 12 Indian L.R. (Allahabad) 523 (1890)

[14] Phulchand Exports Ltd. V O.O.O. Patriot, (2011) 10 SCC 300

[15] Section 2-302(1), The Uniform Commercial Code, 1952

[16] Section 208, The Restatement (Second) Of Contracts, 1981

[17] Williams v Walker Thomas Furniture Company, 350 F.2d 445 (D.C. Cir. 1965)

[18] Arora, N, Unconscionable Contracts Under the Indian Contract Act iPleaders, https://blog.ipleaders.in/unconscionability-a-ground-for-avoiding-agreements/ (last visited Nov 20, 2018)

[19]Ferguson v Countrywide Credit Industries, Inc, United States Court of Appeals for the Ninth Circuit 298 F.3d 778 (9th Cir. 2002)

[20] Law Commission of India, 199th Report on Unfair(Procedural and Substantive)

(Author can be reached at [email protected])

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