Unconscionable contracts are agreements that are so one-sided and oppressive that they shock the conscience of the court. In Indian law, such contracts are addressed through various legal provisions and doctrines to ensure fairness and equity in contractual relationships.

MEANING AND DEFINITION

An unconscionable contract is one that is grossly unfair to one party, often due to unequal bargaining power, resulting in terms that are oppressive or unjust. These contracts are typically characterized by:

• An absence of meaningful choice for the disadvantaged party.
• Terms that unreasonably favor the other party.

HISTORICAL BACKGROUND

The concept of unconscionability in contracts has its roots in equity, aiming to prevent exploitation in contractual dealings. In India, while the term “unconscionable” is not explicitly defined in statutory law, the principles addressing such unfairness are embedded in the Indian Contract Act, 1872.

LEGAL PROVISIONS IN THE INDIAN CONTRACT ACT, 1872

1. Section 16: Undue Influence

This section defines undue influence as a situation where one party is in a position to dominate the will of another and uses that position to obtain an unfair advantage. A person is deemed to be in such a position if:

• They hold real or apparent authority over the other.
• They stand in a fiduciary relationship to the other.
• They make a contract with a person whose mental capacity is affected by age, illness, or distress.

If a contract appears unconscionable on its face or based on evidence, the burden of proof shifts to the dominant party to prove that it was not induced by undue influence.

2. Section 19A: Power to Set Aside Contracts Induced by Undue Influence

According to this section, when consent to an agreement is obtained by undue influence, the agreement is voidable at the option of the affected party. The court may set aside the contract either absolutely or upon terms and conditions as it deems just.

3. Section 23: Lawful Consideration and Objects

This section states that the consideration or object of an agreement is lawful unless it:

• Is forbidden by law.
• Is fraudulent.
• Involves injury to a person or property.
• Is immoral or opposed to public policy.

Agreements with unlawful considerations or objects are void.

TYPES OF UNCONSCIONABILITY

1. Procedural Unconscionability

This occurs when there is unfairness in the process of forming the contract. Factors include:

• Lack of understanding of terms due to complex language.
• High-pressure sales tactics.
• Disparity in bargaining power.

2. Substantive Unconscionability

This pertains to the actual terms of the contract being oppressive or overly harsh. Examples include:

• Exorbitant prices.
• One-sided penalty clauses.
• Limitations on legal remedies for one party.

DOCTRINES AND PRINCIPLES

1. Doctrine of Inequality of Bargaining Power

This doctrine recognizes that when there is a significant disparity in bargaining power between parties, the stronger party may impose terms that are oppressive on the weaker party. Indian courts have applied this doctrine to strike down unfair terms in contracts.

2. Doctrine of Unjust Enrichment

This principle prevents one party from being unjustly enriched at the expense of another. If a contract results in one party gaining unfairly, the courts can intervene to rectify the situation.

LEGAL REMEDIES

1. Rescission of Contract

The affected party can seek to have the contract rescinded, rendering it void and relieving both parties from their obligations.

2. Restitution

The court may order the party who has been unjustly enriched to return the benefits received under the contract.

3. Reformation

The court can modify the terms of the contract to make them fair and equitable.

CASE LAWS

1. Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly (1986) 3 SCC 156

• Facts: An employment contract allowed the employer to terminate the services of a permanent employee by giving three months’ notice without assigning any reason.
• Issue: Whether such a clause was unconscionable and against public policy.
• Held: The Supreme Court held that the termination clause was arbitrary, unreasonable, and against public policy, rendering it void under Section 23 of the Indian Contract Act.

2. LIC of India v. Consumer Education and Research Centre (1995) 5 SCC 482

• Facts: LIC introduced a scheme that discriminated between different classes of policyholders.
• Issue: Whether the terms of the scheme were unfair and unconscionable.
• Held: The Supreme Court held that the terms were arbitrary and discriminatory, thus unconscionable and violative of Article 14 of the Constitution.

INTERNATIONAL PERSPECTIVE

In the United States, the Uniform Commercial Code (UCC) under Section 2-302 addresses unconscionable contracts, allowing courts to refuse enforcement of unfair terms. Similarly, the Restatement (Second) of Contracts provides guidance on identifying and addressing unconscionable agreements.

CONCLUSION

Unconscionable contracts undermine the principles of fairness and equity in contractual relationships. Indian law, through various provisions and judicial interpretations, provides mechanisms to identify and remedy such contracts, ensuring justice and protection for disadvantaged parties.

REFERENCES

1. Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly (1986) 3 SCC 156.
2. LIC of India v. Consumer Education and Research Centre (1995) 5 SCC 482.