Unpacking the Doctrine of Unconscionable Contracts: Protecting Vulnerable Parties in Commercial Transactions

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Introduction

The Doctrine of Unconscionable Contract is a legal principle under which a contract may be declared illegal if it contains clauses that are unfair or overly one-sided. In such a case, the agreement can be declared void by a court of law. The purpose of this paper is to provide an in-depth analysis of the Doctrine of Unconscionability and to discuss its application in India, US and UK. This article will also highlight some landmark judgments made by Indian courts on this doctrine.

Unconscionable Contracts

Unconscionable contract is one that is unfair or oppressive to one of the parties involved. In these types of contracts, the terms and conditions of the agreement are often written in such a way that one party is at a significant disadvantage compared to the other party. This can lead to situations where one party has no meaningful choice but to enter into the agreement, or where the terms of the contract are so one-sided that they are essentially unenforceable.

The Doctrine of Unconscionable Contract holds that a contract may be declared illegal if it contains clauses that are so unfair or one-sided that they are unconscionable. In practice, this means that a court will review the terms of a contract for any provisions that are grossly unfair or that give one party an undue advantage over the other. If such clauses are found to be present, the court may declare the agreement to be void and unenforceable.

Landmark Judgments in India

In India, the Doctrine of Unconscionable Contract has been used by courts to declare agreements void and illegal in a number of cases. Some of the most significant judgments on this doctrine are discussed below.

In the case of Poosathurai v KannappaChettair, (1919) ILR 43 Mad 546 PC, it was observed that, “… both the elements of dominant position and the unconscionable nature of the contract will have to be established, before the contract can be said to be brought about by undue influence.”

In the case of Central Inland Water Transport Corporation v. Brojo Nath Ganguly, 1986 AIR 1571, the Supreme Court of India held that “The types of contracts to which the principle formulated in this case applies are not contracts which are tainted with illegality but are contracts which contain terms which are so unfair and unreasonable that they shock the conscience of the Court. They are opposed to public policy and required to be adjudged void."

A clause in an employment contract that waived an employee's right to sue his employer for breach of contract was unconscionable and therefore void. The court reasoned that such a provision gave the employer an unfair advantage and deprived the employee of any remedy in case of a breach of contract.

In Life Insurance Corporation v. Consumer Education and Research Centre (1995) it was observed that the above principle will apply where the inequality of bargaining power is the result of the great disparity in the economic strength of the contracting parties. It will apply where the inequality is the result of circumstances, whether of the creation of the parties or not. It will apply to situations in which the speaker party is in a position in which he can obtain goods or services or means of livelihood only upon the terms imposed by the stronger party or go without them. It will also apply where a man has no choice, or rather no meaningful choice, but to give his assent to a contract or to sign on the dotted line in a prescribed or standard form or to accept a set of rules as part of the contract, however unfair, unreasonable and unconscionable a clause in that contract or form or rules may be. This principle, however, will not apply where the bargaining power of contracting parties is equal or almost equal. This principle may not apply where both parties are businessmen and the contract is a commercial transaction. In today's complex world of giant corporations with their vast infra-structural organizations and with the State through its instrumentalities and agencies entering into almost every branch of industry and commerce, there can be myriad situations which result in unfair and unreasonable bargains between parties possessing wholly disproportionate and unequal bargaining power. These cases can neither be enumerated nor fully illustrated. The court must judge each case on its own facts and circumstances.

In New India Assurance Company Limited v. Rajeshwar Sharma and Others, (2019) 2 SCC 671, it was held that the disparity between the bargaining power of consumers and large enterprises (both private and public) means that terms have often been imposed upon consumers which are unfair in their application, and which exempt the enterprise putting forward the document, either wholly or in part, from its just liability under the contract.

These cases reaffirm the doctrine of unconscionability in Indian contract law and emphasizes that contracts can be declared unconscionable if they contain clauses that are harsh, oppressive, or fundamentally unfair to one party. The court also noted that the doctrine of unconscionability is an important tool for protecting the rights of vulnerable parties in commercial transactions.

Application in the UK and US

United Kingdom

In the UK, the concept of unconscionability is closely related to unfair contract terms under the Unfair Contract Terms Act 1977 and the Consumer Rights Act 2015. Key judgments include:

·?????? Lloyds Bank Ltd v. Bundy (1975)

The court recognized unconscionable bargains where one party exploits a significant imbalance in bargaining power. Lord Denning MR held that the bank took advantage of the elderly defendant's trust and confidence, making the transaction unconscionable.

·?????? Director General of Fair Trading v. First National Bank (2001)

The House of Lords held that unfair terms causing significant imbalance to the consumer’s detriment could be struck down. This case affirmed that contractual fairness must be maintained, particularly in consumer contracts.

·?????? CIBC Mortgages Plc v. Pitt (1993)

The House of Lords held that a loan agreement signed under undue influence, where one party was in a position to dominate the will of the other, could be voided. This judgment highlighted the role of unconscionability in cases of undue influence.

United States

In the US, the Uniform Commercial Code (UCC) and various state laws address unconscionable contracts. Notable cases include:

·?????? Williams v. Walker-Thomas Furniture Co. (1965)

The court established a two-prong test for unconscionability: procedural (lack of meaningful choice) and substantive (terms unreasonably favorable to one party). This seminal case set the standard for evaluating unconscionable contracts.

·?????? Campbell Soup Co. v. Wentz (1948)

A contract term allowing one party to unilaterally modify the contract was found unconscionable. This case underscored the importance of mutual fairness in contractual obligations. The contract’s provisions were excessively stringent, and oppressive which precluded equitable relief.

·?????? Jones v. Star Credit Corp. (1969)

The court ruled that a contract for the sale of a freezer at an exorbitant price was unconscionable. This judgment emphasized the need for courts to protect consumers from exploitative pricing practices. The court Section:2-302 of UCC as applying to the price term of a contract. The purpose of Section:2-302 is to protect the unequal bargaining power that is often inherent in some contractual agreements.

·?????? Frostifresh Corp. v. Reynoso (1966)

The court invalidated a sales contract due to its oppressive terms, highlighting the role of courts in ensuring equity in commercial transactions.?

Conclusion

The Doctrine of Unconscionable Contract is a vital legal principle designed to protect individuals from being exploited by unfair or one-sided agreements. When a contract contains clauses that are unconscionable, courts have the authority to declare the agreement void and unenforceable. Landmark judgments by Indian courts have solidified the application of this doctrine, providing clear guidelines on identifying and addressing unconscionable terms in various situations.

In India, although significant progress has been made through judicial pronouncements, the current legislative framework does not fully equip courts with the statutory backing needed to enforce the doctrine of unconscionability comprehensively. As India continues to advance as a commercial hub, it is crucial to strengthen legal protections against unfair contractual practices to ensure equitable treatment for all parties involved.

Understanding the Doctrine of Unconscionability empowers individuals to safeguard themselves from exploitative contracts. However, there is a pressing need for enhanced legislative measures to support the courts in upholding this doctrine, thereby promoting fairness and justice in commercial transactions.

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Disclaimer: This Article is made available by lawyer for educational purposes only as well as to give you general information and a general understanding of the law not to provide specific legal advice. This Article should not be used as a substitute for competent legal advice. The author can be reached at [email protected] or 9782620448.