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In this article, Arihant Agarwal discusses Unconscionability as Grounds for Avoiding an Agreement.

Unconscionable is usually a term which we come across while reading welfare legislation cases where it is repeatedly used to portray the gross inequality which the court is trying to address. The term unconscionable means an action which is bad or immoral enough to make a person feel ashamed of his actions[1]. The legal dictionary alters the meaning to a certain degree by defining unconscionable as unreasonableness and unfairness[2]. Though both dictionary meanings have a slight difference in their definition of the term, both have the common ground that the term unconscionable includes certain extent of troublesome activity which is subjective in nature. The Doctrine of Unconscionability which was developed in the 18th century in the English Equity Courts[3] can be related to this. This doctrine was used in the equity courts to provide justice for parties who had entered into extremely unreasonable and unfair contracts in moments of necessity and it has been developed into a common law doctrine since[4].

The doctrine of unconscionableness

The doctrine of unconscionableness was introduced in the India jurisdiction through the common law route. This is because the Indian legislations do not define this term. Due to the lack of this doctrine in Indian legislation, the courts have read it under undue influence[5]. For a contract to be unconscionable, either a few clauses, or the entire contract has to be unreasonable in relation to the general practices of the time[6]. However, for the parties to be bound by the contract, they both have to agree, sign and enter into the contract. Therefore, the law assumes that there is undue influence upon the party which has agreed to such unconscionable terms without which it would not have entered into the contract. Also, for the contract to be legally binding, it has to have the consent[7] of the parties and such consent should be free consent[8]. Hence, if the consent has been influenced by another party, then the consent is not free consent and hence the contract is voidable at the option of the influenced party[9]. Therefore, if the contract is unconscionable, then the law assumes undue influence on the weaker party to include unconscionable contracts under the ambit of undue influence and therefore reading it under one of the important and fundamental section of the Indian Contract Act.

However, this presumption of undue influence can only be raised when one party is in a position to influence the will of the other party and this presumption cannot be raised even if two parties of equal footing drive a hard bargain[10]. Once the presumption is raised, the burden of proof shifts on the other party to show that they have not caused any undue influence which is difficult to prove if the terms shock the judicial conscience of the court[11]. Courts will look into the inception of the transaction or in its subsequent dealings to see if there is something unconscionable which will make the contract unenforceable[12]. The court will not look into inequality in bargaining power until the presumption of undue influence is established and hence general cases like inadequacy of pecuniary consideration[13], high interest rates in a loan agreement[14] or a claim in a suit which exceeds the money originally lent[15] will not directly be vitiated for unconscionableness. However, once the presumption is raised, the court will look whether the inequality in bargaining power might have led to the weaker party accepting an unconscionable contract[16]. Hence, inequality of bargaining powers is a novel way for the courts to intervene in commercial contracts where there is always going to be inequal bargaining powers.

Apart from undue influence, the courts have also interpreted unconscionable contracts to be against public policy, which makes the contract void under Section 23[17]. This happened for the first time in 1986 when the Supreme Court held that since the terms of the contract were arbitrary and against public policy, the contract itself was unconscionable[18]. In this case, the court also held that there was a clear inequality in the bargaining power between the parties to the contract which too was a sign of undue influence and unconscionability[19]. The grounds on which a contract can be termed unconscionable in Indian law are thus undue influence and against public policy. The remedies which are available are simply voidability at the option of the influenced party or the court vitiating the agreement on behalf of the aggrieved party.

It is evident that such social welfare doctrines should become a part of the law and the same has been suggested to the legislators by the 103rd and 199th Law Commission Reports. However, the same has not been incorporated in any Indian legislation leaving the future of the doctrine and its applicability solely in the hands of the Judiciary. While the absence of law and sole validity of a doctrine coming in through precedents has its benefits, it can also be a dangerous position to be in. There is no basic touchstone on which the parties can appeal for unconscionability and they have to show undue influence or inequal bargaining powers which can sometimes be tedious and costly. Hence, it would be advisable to have a provision for unconscionability in India.

At a given point in time, America too lacked a legislation which incorporated unconscionableness as a ground for vitiating a contract, until the Uniform Commercial Code (“UCC”) was legislated and the American courts saw it as an equitable relief[20]. In 1952, when the UCC was legislated, it included a section on unconscionability of contracts and that is when the American Courts had legislation to follow on[21]. Following this, the Restatement (Second) of Contracts (“Restatement”) also incorporated a section on unconscionability of contracts to help provide justice in cases of unreasonable agreements[22]. However, the main distinguishing factor between the UCC and the Restatement is that Article 2 of the UCC applies only to the sale of goods, whereas the ambit of unconscionability under Restatement is wider as it applies to all other contracts[23].

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In USA, before the law incorporated unconscionability, the standard for stating so was whether a reasonable and sound man would enter into such a contract and whether an absolutely fair and honest man would propose such a contract,[24] and the damages were typically limited to those which would be equitable for the aggrieved party[25]. The equity courts of America were not too keen on enforcing specific performances in contracts where the entirety of the contract drove an extremely hard bargain for a party[26]. However, with the advent of the UCC and the Restatement, these equitable considerations got converted into legal remedies and the courts now had to allow inequal risk allocation due to inequal bargaining power while trying to prevent oppression[27]. However, if the hard bargain has gross inequalities in risk allocation in favor of the stronger party then it is definitely a hint towards unconscionability. Now, the courts have to look into the material facts, commercial setting, purpose, overall imbalance and effect of the contract whereas circumstantial setting holds lesser value while interpreting the contract[28]. The parties also have the opportunity to present evidence for the commercial setting, purpose and effect of the contract to prove their case as the matter is decided on law and not merely as equitable right[29].

American jurisprudence has evolved over the years and there are two types of unconscionability. These are procedural and substantive unconscionability, which were mainly enunciated in the Weaver v American Oil Company case[30]. Procedural unconscionability takes into the account the actual negotiation which must have taken place during the making of the contract keeping in mind the actual position of the parties, their bargaining power, any absence of meaningful choice, commercial setting, etc.[31] Substantive unconscionability looks at the outcome of the contract which may include one sided remedies or highly inequal allocation of risk favoring the stronger party[32]. American Courts try to identify the type of unconscionability which exists in a particular case and provide remedies which flow accordingly. Usually, procedural unconscionability calls for equity and the courts try to bring the parties to the state in which they were before they had entered into the agreement, or at least in an equitable position. Whereas in situations of substantive unconscionability the courts do not allow specific performance of the limited clauses which make the terms unconscionable. This can be seen through the various remedies which have been awarded to various parties in the past few years. In the T-Mobile case where the company’s motion to compel the other party for arbitration was quashed on the basis of unconscionability while the court allowed the rest of the agreement to pan out during litigation[33]. In the Discover Bank case, the court allowed the seat of arbitration that the bank had chosen but quashed the ‘no class action’ clause which they held to be unconscionable[34]. Whereas, in the Frostifresh Corp case, the court gave equitable damages to the refrigerator company too for the reasonable costs which it might have incurred for the sale in question along with shipping charges while transferring the title of the refrigerator to the customer at a reasonable price[35]. Hence, the court awards damages in accordance with the type of unconscionability in question which is evident from the above examples.

If one has a closer look into the UCC and the Restatement provisions which speak about unconscionability, then one glaring omission is a clear definition of the term unconscionable itself[36]. Over the years, this has not been amended either, so it can be inferred that the legislature is reluctant to include a strict definition of the same which will invariably help the judiciary to layout the standards for proving unconscionability in future cases[37]. A lack of definition helps as it does not restrict the judiciary from interpreting cases in different ways. This freedom will help the judiciary to evolve the doctrine over a period of time in consonance with the commercial setting of that time period. Unconscionability can go to the roots of the contract if it is procedural in nature and can have devastating effects if there is actual lack of bargaining power in a party like the Walker-Thomas Furniture case where multiple customers were being exploited by the company’s lien policy[38]. Hence, the fluidity is essential in developing such socially beneficial doctrines.

It can be seen from the discussion above that there is a massive difference in the understanding of unconscionability of contracts between both the jurisdictions. This is due to the fact that the American jurisdiction has a laid down legal provision which provides them with a base to develop the law upon, whereas the lack of the same has restricted the Indian judiciary to use the doctrine as a sub-part of another concept which effectively estops the development of the doctrine. In India, unconscionability is used as a welfare doctrine and its general usage is to protect the poor and illiterate from abuse. In America, the doctrine is used sometimes as a welfare provision but also as a tool to vitiate contracts or avoid specific performance. The major difference can be analogized that the doctrine acts as a shield in India whereas it is used like a sword in America.

References

[1] <https://www.oxfordlearnersdictionaries.com/definition/english/unconscionable> accessed 23 November 2018.

[2] <https://thelawdictionary.org/unconscionability/> accessed 23 November 2018.

[3] Warren Swain, The Law of Contract: 1670-1870 (Cambridge 2009).

[4] Ibid.

[5] Indian Contract Act, 1872. Section 16.

[6] P.C. Markanda, The Law of Contract (2nd edn, Wadhwa 2008).

[7] Indian Contract Act, 1872. Section 13.

[8] Indian Contract Act, 1872. Section 14.

[9] Indian Contract Act, 1872. Section 19A.

[10] Raghunath Prasad Sahu v Sarju Prasad Sahu [1924] Privy Council, AIR 1924 PC 60.

[11] Manmohan Lal Sarin, ‘Contract Unconscionability in Indian’ [1992] Loyola of Los Angeles International and Comparative Law Review.

[12] Risal Singh v Manohar Lal [1927] Lahore High Court, AIR 1927 Lah 748.

[13] Vinayakappa Suryabhanappa Dahenkar v Dulichand Hariram Murarka [1986] Bombay High Court, AIR 1986 Bom 193.0

[14] Ibney Hasan v Gulkandi Lal [1936] Allahbad, AIR 1936 All 611.

[15] Balla Mal v Ahad Shah [1918] Privy Council, AIR 1918 PC 249.

[16] Sankalp Jain, ‘Contract Is Not A Fair Bargain’ SSRN.

[17] Indian Contract Act, 1872. Section 23.

[18] The Central Inland Water Transport Corporation Ltd v Brojo Nath Ganguly [1986] Supreme Court of India, AIR 1986 SC 1571.

[19] Ibid.

[20] John A. Spanogle, ‘Analyzing Unconscionability Problems’ (1969) 117 University of Pennsylvania Law Review.

[21]Uniform Civil Code, 1952. Article 2, Section 302.

[22] Restatement (Second) of Contracts. Section 208.

[23] Randy E Barnett, Contracts: Cases and Doctrine (4th edn, Aspen Publishers 2008).

[24] Campbell Soup Company v Wentz, 172 E2d 80,84 (3d Cir. 1948).

[25] Hume v United States, 132 U.S. 406 (1889)

[26] Supra at n24.

[27] Randy E Barnett, Contracts: Cases and Doctrine (4th edn, Aspen Publishers 2008).

[28] Ibid.

[29] Ibid.

[30] Weaver v American Oil Company, 276 N.E.2d 144 (1971).

[31] John A. Spanogle, ‘Analyzing Unconscionability Problems’ (1969) 117 University of Pennsylvania Law Review.

    Weaver v American Oil Company, 276 N.E.2d 144 (1971).

[32] Ibid,

[33] Gatton v T-Mobile USA, Inc. 152 Cal App 4th 571 (2007).

[34] Discover Bank v Superior Court of Los Angeles, Christopher Boehr. 36 Cal. 4th 148 (2005).

[35] Frostifresh Corporation v Reynoso. 54 Misc. 2d 119 (1967).

[36] Stewart Macaulay, John Kidwell and William C Whitford, Contracts (LexisNexis 2003).

[37] Supra at n31.

[38] Williams v Walker-Thomas Furniture Company. 350 F.2d 445 (1965).

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