“This contract is so one-sided, I am astonished to find it written on both sides of the paper.” – Lord Evershed M.R.
The Doctrine of Unconscionability is one of the exceptions to the freedom of parties to contract. It comes into play where bargaining power is not evenly distributed. As a general rule, as long as a contract involves some form of consideration, courts do not get involved. However, if a contract is excessively one-sided, courts are willing to step in and come to the aid of the injured party.
Section 16 of the Indian Contract Act 1972 deals with undue influence. It says that a contract is said to be induced by undue influence if one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other. For example, a person who is in a position of authority over another, or who stands in a fiduciary relation to the other, or who makes a contract with a person of sub-normal mental capacity is deemed to be in a position to dominate the will of that other person. If, in such situations, the transaction appears, on the face of it or on the evidence adduced, to be unconscionable the person who is in a position to dominate the will of the other is required to prove that the contract was not induced by undue influence.
Further, under Section 19A of the Act, the party whose consent was obtained by undue influence may choose to avoid the contract. The Court may set the contract aside either absolutely or, if the party entitled to avoid it has received any benefit under it, upon such terms and conditions which the Court thinks are just.
However, the application of the doctrine under Indian statutory law is on a much firmer footing under Section 23 of the Act which says that the consideration or object of an agreement is not lawful if it is immoral, or opposed to public policy. And if the consideration or object is not lawful, the contract is void and unenforceable.
Deciding whether or not a contract is unconscionable though is often difficult to do – in some instances, it is obvious such as in Employment Contracts which contain absurdly broad non-compete clauses or in boilerplate contracts which favour sellers and other drafters. In others, however, it is more difficult to tell the difference between a well negotiated deal (for one party) and between the imposition of an unconscionable contract term on another party to the contract. Also, the decision as to whether or not a contract is actually unconscionable relies heavily on morality. As such, the factors which come into play to reach a decision are decidedly subjective.
Augusto C. Lima says, “The defense of freedom of contract, which finds contemporary resonance in the economic analysis of contract law, usually entails the narrow application of unconscionability. The concept of unconscionability for such a purpose is narrowed by the assignment of a procedural, rather than substantive, nature to it. In such a procedural view, unconscionability is but a device to fill in the gap between a defect in contract formation (such as fraud or duress) and unconscionability as substantive unfairness (focused on the morality of the transaction),” in ‘When Harry Met Kreutziger: A Look into Unconscionability Through the Lenses of Culture‘.
Indian courts have generally been willing to interfere in boilerplate contracts on the ground that they are unconscionable. However, proving unconscionability in other situations can be an uphill task in the absence of clear evidence either within the agreement itself or otherwise.
Some Indian cases on the subject:
- Chairman and MD, NTPC Ltd. v. Reshmi Constructions, Builders and Contractors, 2004
- LIC of India v. Consumer Education Research Centre, 1995
- Delhi Transport Corporation v. DTC Mazdoor Congress, 1990
- Bihar SEB v. Green Rubber Industries, 1989
- Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly, 1986
- Pierce Leslie and Co. Ltd. v. Violet Ouchterlony Wapshare, 1968
(This article is by Nandita Saikia and was first published at LawMatters.in.)