This article has been written by Arpita Tripathy, pursuing BA LL.B (Business Honours) in KIIT School of Law. This is an exhaustive article which deals with unconscionability as a ground to avoid agreement.
In our routine lives, all of us knowingly or unknowingly subject ourselves to ‘contract’. From boarding a bus and buying a bar of chocolate to hiring someone, a contract is an essential part of every small and big transaction of our day to day activities. Every agreement which can be enforced by law is a contract and an agreement is an accepted proposal.
Meaning of ‘unconscionable’
The literal meaning of the word ‘unconscionable’ is immoral or unethical. Legally, the term means showing unfairness towards a particular person and party. In contract law, the term unconscionability is understood as a contract between two parties that is advantageous to one party and highly unfair and unreasonable to the other.
The doctrine of unconscionability, which originated in the 18th century in English equity courts, permits a court to intervene in these biased contracts to rectify the biases or can refuse the contract. This doctrine is used as a defence in cases where the contract is unfair towards a party.
Essential elements of contract
The term ‘unconscionable’ and unconscionability as a ground to avoid contract has not been defined anywhere in the Indian Contract Act. However, to understand unconscionable contracts it is important to know the essential elements of the contract and how it may lead to an unconscionable contract. The following elements are to be mandatorily complied with for a contract to be a valid and successful one. The essential elements have been derived from various precedents as well as the provisions of the Indian Contract Act which essentially includes Section 10. Through the language of the statute, the essential elements are listed as follows:
- Competency to contract;
- Lawful consideration and object.
A contract can only be formed when there is a legally enforceable agreement. Every agreement is the result of a proposal or offer from one side and its acceptance by the other. Offer and acceptance is the major component of an agreement and thus a contract, without which agreement fails to materialize.
Offer and acceptance
Section 2(a) stipulates a proposal or an offer as the interest shown by one party to receive the consent from the other party to carry on with the agreement. Such a proposal is made towards a particular objective to be achieved. Therefore, an offer is made when one party, termed as ‘offerer’, desires to enter into an agreement and communicates his will to the other party, known as ‘offeree’, to obtain assent from such other party, to do or abstain from doing anything. If the offeree accepts the offer or proposal of the offerer then the offeree would become a promisee and the offerer would be the promisor.
One of the main elements for an effective proposal is to ‘signify’ the desire to enter into the agreement. The offer will only be completed when the communication of the willingness is complete. For a contract to be valid it is not mandatory for offer and acceptance to be specifically expressed. The communication of an offer will not be completed until and unless it comes to the knowledge of the person to whom it is made. For eg. If X sends a post on 11 September 2020 expressing his willingness to sell his bike at Rs. 15,000 to Y and the post is received by Y on 26 September 2020 then the offer will be said to be communicated on 26 September 2020.
In the case of Lalman Shukla v. Gauri Dutt, the nephew of the defendant was lost and the servant of the defendant went to search for the boy. Meanwhile, the defendant printed an advertisement that if someone finds the defendant’s nephew then he will be paid with Rs. 501. The servant was completely unknown to the advertisement. The servant returned with the missing child. He sued the defendant for the money. However, the court held that an acceptance is essential for a contract to be valid and there can be no acceptance without any knowledge. Hence, the suit by the plaintiff failed.
Without acceptance an agreement is incomplete. Assent has to be communicated clearly to the proposer for an offer to be accepted. Acceptance is complete for an acceptor when the letter of acceptance is out of his control. However, on the part of the promisor, the acceptance is only complete and his liability arises when he receives the letter of acceptance. For eg. If Y sends a post Mental assent is not sufficient for acceptance to be completed. The communication can be expressed as well as implied.
Bhagwati Prasad Pawan Kumar v. Union of India clarifies this position stating:
That a conduct can also be considered as an acceptance if it is clear that the act was done with the intention to accept the offer. If the conduct was done without any intention then such a conduct cannot be said as a valid acceptance. It can only be determined through the facts and circumstances of the case. Section 8 of the Contract Act defines implied acceptance.
Intention to contract
In day to day life, we tend to promise many things. Not everything we promise is accompanied by an intention to create a legal obligation. The intention to enter into a contract with legal rights and obligations has to be determined by the facts and the background of the case. For eg. A and B are friends. A called B and offered to invite B to a party which was to be organized on a weekend, B accepted the invitation. B travelled down to A’s hometown in another city just to know that the party had been cancelled. Here, A is not legally liable as there was no intention to create a legal relation.
The landmark case of Balfour v. Balfour is often cited to deeply understand the concept of intention to contract. In this case, the husband and wife travelled to Ceylon to spend their vacation. While returning the doctors advised the wife to stay back citing her health condition. The husband went back to England for his work. Before returning he promised his wife to pay 30 Pound every month. However, after a few months, the husband stopped sending money because differences arose between them. The wife sued her husband for breach of contract. Lord Atkin held that the relationship between husband and wife is such that generally there is no intention to enter into a legal relationship with the other party. Even if there is a consideration it cannot still be said as an agreement to contract if there is no legal intention to get bound by legal consequences. The court also said that if such cases are brought within the ambit of the contract then it might lead to a multiplicity of cases.
Competency to contract
Section 11 of the Indian Contract Act enumerates the competency to contract. From the statute, it can be inferred that, firstly, the age of majority, secondly, the person should be of sound mind and finally he should not have been disqualified from contracting by any law, for being competent to contract.
- MINORITY – In India, generally a child attains his age of majority at 18. However, when a court appoints a guardian then the age of majority is 21 years. In the case, Mohori Bibee v. Dharmodas Ghose, the minor Dharmodar Ghose mortgaged his property to secure a sum of Rs. 20,000 against Brahmo Dutt. He later sued the minor to enforce the mortgaged property on the basis of the contract. The court however held that Dharmodar Ghose was a minor at the time of entering the contract and therefore, the contract is void. The court said that a contract, when entered by a minor, is void ab- initio.
- PERSON OF UNSOUND MIND- If a person is of unsound mind then he might not be able to understand and weigh the contract and therefore it would be difficult for him to understand the content of the contract and consequently, he won’t be able to fully utilize his right to choose. The position of a person of unsound mind is different in England and India. In England, a person who has an unsound mind can enter into a contract. However, the contract can be set aside and is voidable at the option of the person of unsound mind if he satisfies the court that he was incapable of understanding the contract and the other party was aware of the incapacity. On the other hand, in India, if the person making the contract is of unsound mind then the contract would be void. According to Section 12 of the Indian Contract Act, a person who is generally of unsound mind but at certain times he is in his right state of mind then at those certain periods of time, when he can understand the content of the contract, he can enter into such contract. Eg. A is usually a person of an unsound mind. However, he remains the same during certain occasions. If he enters into a contract on those occasions then it is a valid contract. It is essential to know that at the date and time of execution of the contract the person was suffering from the disability or not. In the case, Inder v. Parmeshwardhari Singh a person sold a property worth Rs. 25000 at Rs. 7000. His mother successfully proved in the court that at the time of entering into the contract the person was of an unsound mind. The court held that the essential point is to see if the person while entering into the contract is capable to make an independent rational judgment and understand the consequence of it.
- DISQUALIFIED FROM CONTRACTING- The alien enemies, foreign sovereigns and ambassadors, convicts, insolvents in certain cases, and joint-stock.
Section 23 of the Indian Contract Act clarifies about lawful consideration and object in the following words, “The consideration or object of an agreement is lawful, unless—” it is forbidden by law; or is of such a nature that, if permitted, it would defeat the provisions of any law; or is fraudulent; or involves or implies, injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void.” ‘Law’ means any enactment or rule of law that is in force. It includes any legislative enactment, rules of Hindu and Mahomedan law, and any other rule for the time being in force. Generally, object and consideration are taken to be the same, however, in the provision, ‘object’ means the purpose of the contract.
- FORBIDDEN BY LAW– If the object or consideration for a contract has been expressly declared as unlawful under any law of the land then such object and consideration will not be valid and consequently, the agreement will also be void. However, it cannot be said that whatever is void, is forbidden by law.
One of the cases, when a contract is forbidden, is when there is a violation of license and permit. To declare a contract void, the intention behind the provision of licensing has to be looked at. If the contract violates a provision of licensing where the intention and purpose behind the provision of the license is public policy, then the contract would be declared void. In the case Bhikanbhai v. Hiralal, a man who was given a lease of a toll under the Bombay Tolls Act, 1975 was not allowed to sublease the toll without the permission of the collector. But the plaintiff sublet the toll without obtaining permission from the collector. Under the Act, any person who would sublet the property would be liable to pay Rs. 200 as fine. The court held that the contract of the sublease is not void as the purpose behind the provision was to regulate revenue and not to protect the public interest.
2. DEFEAT THE PROVISION OF ANY LAW- The words, “if allowed will defeat the provision of any law” essentially refers to the execution of the contract. If an act has not been expressly prohibited by law but the object and consideration of the contract are in contravention to the purpose of the provision. If such a contract is executed then it will be void.
3. FRAUDULENT- Any agreement which has been entered into for fraudulent purposes is void. When two parties come together and enter into a contract to commit fraud on a third party would render the object and the consideration unlawful and the contract, void. In Mann Ram v. Puroshottam Lal, here A entered into a contract with B and asked him to present an application for a contract before the railway authority and once the application is granted, A would act as the real contractor. Here, the contract was held to be void because the object of the contract was fraudulent.
4. INJURY TO THE PERSON OR PROPERTY OF ANOTHER- A contract that would result in injury to another person or his property is void. For eg. A and B contract to take a portion of the property of C forcefully, this agreement between A and B is void.
5. IMMORAL – Under Section 23 of the Act, a contract that involves immorality is void. Immorality has no definite definition and has to be looked at by the Court, and decided according to the facts and the current standards of morality in society. Morality in society differs from each civilization, society and time. In the case of Baivijli v. Nansa Nagar, P provided W with certain consideration to divorce her husband H, such a contract is immoral and hence was held to be void under Section 23 of the Act.
6. PUBLIC POLICY – If a contract is contrary to the welfare of the people then it is said to be against public policy. It refers to the welfare of not only the parties involved in the contract but beyond it. Public policy cannot be defined but can mean anything which is for the public interest. In the case ONGC Ltd. v. Saw Pipes, it was said that public policy does not remain the same for ages but varies from time to time.
Public policy was appropriately defined in Gherulal Parakh v. Mahadeodas Maiya And Others as “Public policy or the policy of the law is an elusive concept; it has been described as ” untrustworthy guide “, ” variable quality “, ” uncertain one “, ” unruly horse “, etc.; the primary duty of a Court of Law is to enforce a promise which the parties have made and to uphold the sanctity of contracts which form the basis of society, but in certain cases, the Court may relieve them of their duty on a rule founded on what is called the public policy.”
Types of Unconscionability
Procedural Unconscionability means the biases or unfairness which occurs before the parties enter into the contract. It occurs at the beginning, bargaining, or during the discussion stage of the contract. How the parties go about the contract seems to be unfair and unreasonable, when there is a huge gap between the parties to the contract where one position is at a dominant position procedural unconscionability. An example of such procedural unconscionability can be the level of education, age, intelligence, etc.
This is a type of unconscionability where the terms of the contract are biased against a party. It does not refer to the process of contract but the substantive part or in other words the content of the contract. The objectives of the contract in substantive unconscionability is extremely harsh.
Unconscionability as a ground to avoid agreement
There is always a reason for the parties to enter into an agreement, it is not moral to use someone’s weakness for one party’s advantage. This principle has been the reason behind the usage of this doctrine. This doctrine has been clearly defined with the case, Earl of Aylesford v. Morris in case the unconscionable contract was defined as a contract where one of the parties is dominant and misuses his position to put the weaker side in a disadvantageous position. The dominant party commits fraud by carefully and consciously using the circumstances in his favour and making the terms of the contract grossly unfair.
In the case, Weaver v. American Oil Company, the American Oil Company entered into a lease contract with a filling station operator. The contract contained the normal lease clauses and along with it, a clause was added which was, “hold harmless” clause. The clause allowed the Oil Company to cause negligence and still won’t be held liable. However, Weaver would have to indemnify for the negligence of the company. There was no evidence that Weaver had read the license and specifically “hold harmless” clause. Weaver had also left high school and did not understand the technical legal language. The court saw this as a contract where one of the parties has less bargaining power. The court recognized the clause as an unconscionable clause and held that the clause is invalid. The landmark case of Lemke v. Arrowood has accurately defined the doctrine. Here, Lemke owned a trucking company but the company finally became bankrupt.
Later, Arrowood desired to initiate a start-up of his own, M & G Trucking. Arrowood started his work and approached many for the various aspects of starting the business. Arrowood also approached Lemke for leasing of computers. A contract was entered into where one of the terms of the contract was that Lemke would provide start-up assistance without any remuneration for a period of 5 years. When the start-up period starts then it was agreed that Lemke would be paid on an hourly basis, he would additionally be paid half from the net profits of the company for a period of three years from the date of the agreement. Lemke had to provide M&G Trucking with the software, computers, and other types of equipment on lease. The agreement could be declared void by the mutual consent of the parties. Later, Lemke asked Arrowood to buy the pieces of equipment which he was supposed to rent. Arrowood provided Lemke with money to buy the same. After this, Arrowood asked Lemke if the purchase ended their contract. Lemke said that the lease part is void but he still expects to get half of the profits as was decided before. However, Arrowood did not pay Lemke.
It was contended by Arrowood that the contract was one-sided and termed it as an unconscionable contract. The trial court found the contract unconscionable but did not find enough evidence to calculate damages. The case appeared in the Courts of Appeals. The court held that the contract is not unconscionable because Lemke had already initially worked without pay. He had also done the work with considerably low cost. The contract is not unconscionable only because Lemke did not provide work after the execution of the contract. Both the parties had the right to cancel the agreement within six months or not more than sixty days. Arrowood did not exercise his power to terminate the contract even after it was evident that Lemke is not going to provide any more services. Therefore, holding that the contract is not unconscionable, ordered Arrowood to pay money to Lemke.
Elements to determine unconscionability
- To determine unconscionability it has to be seen if one of the parties is really in a disadvantageous position in comparison to the other party. For example, if one of the parties is uneducated then it can be said as a disadvantageous position.
- It has to be also observed if the dominant party has directly tried to defraud the disadvantageous party by using his points of weakness.
- The terms of the contract have to be such that, it is seen to be harshly oppressing the weaker party which shocks the conscience of the court. In the case Fry v. Lane, Fry was a very poor man who sold his land at a low rate. The court in this case suggested that the low rate has to be at an extreme level which shocks the conscience of the court.
In the case, Portman Building Society v. Dusangh, the defendant was granted a mortgage when the defendant was 72 years old. The mortgage was granted to help the defendant’s son’s that he can help to start a business. When the time of returning the money came, the defendant took the plea of the contract being immoral and hence unconscionable. However, the court held that the contract did not shake the conscience of the court, hence, cannot be held as an unconscionable contract.
Unconscionability in India and standard contracts
A recent trend among the employers has been that they retain the power of termination of contracts without providing them prior notice of the employee. The case, Life Insurance Corporation v. Consumer Education and Research Centre is a landmark case to understand the stand of Indian courts towards unconscionable contracts. After asking for details about the insurance policies, the plaintiff framed policies. However, even after proposing the policies several times to LIC, each time, LIC rejected the proposal on the basis that it did not meet statutory standards. The court said that, generally, the standard form of contract keeps the clauses of the contract favourable to the party creating the contract. To understand if the contract is unconscionable or not, the bargaining power of both parties has to be seen. The party which does not have the bargaining power will have to forcefully either accept all the terms or will have to leave the agreement altogether.
In the case, Central Inland Water Corporation Ltd. v. Brojo Nath, the Central Inland Water Corporation is a Government company. There was another company named Rivers Steam Navigation Company which became insolvent. The Calcutta High Court declared that the Central Inland Water Corporation would be taking over the company. After the takeover, Brojo Nath who was selected as Deputy Chief Accounts Officer was given a letter regarding his negligence. He was asked to provide a reply within 24 hours. Brojo Nath gave a detailed reply and explained his side. However, later, he was served with a notice of termination. The court said that an unconscionable contract means a contract that lacks conscience and is unreasonable.
The court focused on the provisions of the Constitution and stated that there has to be economic justice. If such a standard contract is brought before the court, then the court can straight away strike away from the contract. If one of the parties is not a weaker party then the contract will not be struck down. Therefore, before deciding if the contract is unconscionable or not, the court has to look if the parties have equal bargaining power. If the contract is such that, one of the parties is at such a stage that if he does not agree to the agreement’s unreasonable clause then he might lose his means of living. In such a case, the agreement is undoubtedly biased, which should be termed as an unconscionable contract. The above cases can conclude the view of the courts of India. The courts intend to strike down the contracts when the biases of the agreement are clearly evident. The court suggests to look into the bargaining power of the parties and decide the same.
Every contract has to be fair for all the parties to the contract. The use of a dominant power against a weaker party is what is termed as an unconscionable contract. An unconscionable contract is outrightly advantageous to one and is disadvantageous to the other party. Therefore, such a contract that is not only disadvantageous to one party but is also against the constitutional provisions of the country should be liable to be struck down by the court.
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