In this article, Nivedita Arora discusses Unconscionable Contracts under the Indian Contract Act.

Introduction

Unconscionable contracts are drafted in such a manner that they favor one party and impose, harsh, unfair, unjust conditions on the other party. An unconscionable contract is one that is so gross and unreasonable in the light of the business practices of the time and place that it should not be enforced. The doctrine of unconscionability allows the court to intervene into the contractual relations of parties and modify such agreements.

Unconscionability is a contract defense used in cases where there is combination of unfair contract terms and deficient bargaining. This paper clarifies the distinction between the forms of unconscionability and how the doctrine of unconscionability is applied in Indian Law. Also, the article identifies the issue of Unconscionability with respect to the Uniform Commercial Code and Restatement emphasising how unconscionability is used as a ground for avoiding an agreement.

Types of Unconscionability

Unconscionability is categorized into procedural and substantive unconscionability.

Procedural Unconscionability can be understood by examining how each term became a part of the contract and the actual bargaining process at the time of making the contract. This arises due to difference in the bargaining position of the parties, absence of meaningful choice, unfair surprise. In Weaver v. Am. Oil Co, the Court explained various factors that can be considered while evaluating procedural unconscionability such as real and voluntary meeting of the minds of the contracting parties, age, educational qualifications, intelligence, relative bargaining power, who drafted the contract, whether the terms were explained to the weaker party, the deceptive appearance or language to the contract.

Substantial Unconscionability can be understood by referring to the contract or few unfair terms of the contract such as unfair price of the contract, the limitations of remedies and disclaimers of warranties, which make the contract very harsh, oppressive, unworkable or one sided.

Contract Unconscionability in India

Unconscionability is not defined anywhere in any Indian Law. There have been various debates on this issue and the Law Commission of India in its 103rd and 199th Reports recommended that there should be changes in the existing laws to protect the citizens of our country against unconscionable contracts. However, we can look at various other provisions of the Indian Contract Act to understand the doctrine of unconscionability and how it is used for avoiding the contract.

Section 16 of the Act explains that a contract is obtained by undue influence if one party dominates the other party and uses this unfair position to obtain unfair advantage over the other party. According to Section 19, such contract is voidable at the option of the party whose consent was so obtained.

According to Section 23, the agreement is void if the object of the agreement is unlawful, fraudulent, immoral, or opposed to public policy.

199th Law Commission Report explained procedural and substantive unfairness in Proposed Bill and laid out guidelines to find if a contract is procedurally or substantially unfair. It proposed that courts should be vested with sou moto power to enquire into substantive unfairness even if it is not pleaded by the parties and provide reliefs to the parties if the contract is proved to be unfair and unconscionable.

Unconscionability of Contracts in India – Employment Agreement

There are plethora of case laws available on the subject of Unconscionability of contracts. Most prominent of all relates to clauses of Employment Agreement wherein the contract, in most of the cases, are poorly drafted, thus favouring the employer.

The employers provide unreasonable clauses in employment contracts and impose very unfair conditions on the employees. In Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly, the Supreme Court held that a clause providing for termination of the services of a permanent employee by serving a three months notice on him is arbitrary, unreasonable, opposed to public policy and thus unconscionable. In a similar case, the Supreme Court held a clause unconscionable as it conferred unbridled and arbitrary power on the authority to terminate the services of a permanent employee without recording any reasons for such termination.

The employment contracts contain clauses where one party is allowed to modify or cancel the contract at his will even though there is no breach of the contract by the other party. Such clauses are held to be unfair, arbitrary and unconscionable.

There are various other judgments where Courts have held such arbitrary and unreasonable clauses in the contracts unconscionable and held that the principle of arbitrariness should not be extended to employment contracts to safeguard the interests of the employees.

The Uniform Commercial Code (UCC) and Restatement

There was no doctrine of unconscionability in the United States till 1952. However, American courts had the equitable power to set aside a contract if it shocks the conscience of the court even in the eighteenth century.

The Uniform Commercial Code (UCC) gave courts explicit authorization to rule that a contract was unconscionable in 1952. Substantive imbalance and unacceptable conduct are the prerequisites elements of unconscionability in English law.

According to Section 2-302 of UCC, the Court can refuse to enforce a contract or few terms in a contract to avoid any unconscionable results if it thinks that such contract is unconscionable.

“The main aim of Section 2-302 is to prevent oppression and unfair surprise. The basic test of unconscionability of a contract is to find out whether the clauses involved are so one-sided so as to oppress or unfairly surprise the other party. These clauses need to be analyzed depending on the circumstances that existed at time of making of contract, general commercial background and the facts and circumstances of the particular case.”

Article 2 of the U.C.C. applies only to the sale of goods. However, various transactions other than the sale of goods such as transactions between a customer and his bank, commercial leases, the termination of dealership franchise agreements, contracts for personal services can also be unconscionable. In Section 208 of Restatement (Second) of Contracts, the doctrine of unconscionability has been broadened for protection for consumers in various types of transactions and not just limited to a provision in a UCC for sale of goods.

Though, on a plain reading of Section 302 UCC and 208 Restatement (Second), the provisions appear to be similar, however, under Section 208, unconscionability is not a vitiating factor per se. Section 208 allows the court to refuse a whole executory contract denying both specific performance and damages.

Unconscionability is still not clearly defined in either the UCC or the Restatement. Thus we look at various case laws understand the doctrine of unconscionability in UCC and Restatement.

In Williams v. Walker-Thomas Furniture Company, the court considered the circumstances surrounding the transaction and held that the rule should be set aside due to procedural misconduct. The court described unconscionability as absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party. The Supreme Court of New Jersey also held a particular clause of the contract invalid because it was the against the public good, there was unequal bargaining power between the parties and the clause was hidden from the attention of the buyer.

The arbitration agreements are misused so much they allow employees to arbitrate their wrongful termination claims against the employer but not the employer’s potential claims against the employee. In Ferguson v. Countrywide Credit Industries, Inc., an arbitration provision in an employment contract was held unconscionable because it allowed the parties to arbitrate all claims, however, excluded remedies such as unfair competition, and use or disclosure of trade secrets and confidential information that the employer would likely pursue.

Conclusion

Courts have held various contracts unconscionable due to the unfair and unreasonable clauses in the contracts. Various clauses related to damages, arbitration, class action waivers, termination in employment contracts, construction contracts and real estate agreements are against public policy and give unfair advantage to the one party due to the unequal bargaining position.

Thus, it is the need of the hour to implement the suggestions proposed in 103rd and 199th Law Commission Reports. Our legal system needs to consider the provisions of UCC and enact a law allowing the courts to refuse enforceability of an unconscionable contract. The guidelines suggested in 199th Law Commission report related to procedural and substantive unfairness should be followed and a law should be enacted to safeguard the interests of the parties, to ensure more fairness in the contracts and equal bargaining position of the parties.

The law related to unconscionability should not be restricted to contracts. Some of the instances where undue influence is exercised outside contracts are influencing Pardanashin women, forcing an ill person to transfer his estate to someone. Such enacted law should be applicable to all transactions because there are various transactions apart from commercial contracts where undue influence is used.