UNCONSCIONABILITY IN CONTRACTS: A COMPARATIVE ANALYSIS

The author of this blog is Mahathi. U,  2^nd Year  student at The National University of Advanced Legal Studies, Kochi

It is ironic that during the last few years of the nineteenth century running into the twentieth century, “freedom of contract,” which was primarily used to invalidate those contracts which were made without the free consent of the parties, became the very device used to establish the solemnity of standard form contracts. The aim of this article is to analyze the approaches to unconscionability in three representative common law systems; England, India and the United States and in civil legal systems of Germany and France.

Unconscionability:

The unconscionability of a particular contract, can be determined by examining the position of the parties at the time the contract was made, such as their age, bargaining power, and mental capacity. In order for the defense of unconscionability to apply the contract ought to have been unconscionable at the time it was entered into. There are generally no criteria formulated to determine unconscionability; it depends upon the subjective judgment of the presiding judge and his interpretation of the principles of natural justice. Upon deeming a contract to be unconscionable a court exercises flexibility on how the situation is remedied.

English Law and Unconscionability:

The origin of this rule of equity, can be traced back to the decisions of Lord Chancellors Bacon and Ellesmere.[1]

In the landmark case of Earl of Ardglass v. Muschamp,[2]  it was observed that equity would refrain from interfering in cases where a bargain was entered into voluntarily by the parties.[3] Cases that were decided post-Ardglasse attempted not merely to grant a remedy against an oppressive bargain, but also to protect the landed classes’ estates. The decision in Gwyne v. Heaton[4] mirrors this characteristic of special protection.

This may have been, positively, one of the factors that led to the tilting of the doctrine in favor of the heir of an estate.[5] By the nineteenth century, mere insufficiency of consideration had become an acceptable reason to reopen the bargain.[6] There were two cases where it was held that the courts could reopen an unconscionable and harsh lending transaction even when the defaulter was not heir to an estate.[7] However, all these cases were oddities and did not lead to the formulation of a general rule. If this attitude were to persist, it would defeat statutory rules of unconscionability. Nonetheless, concepts analogous to unconscionability were successfully employed in a few areas of contract law, like estoppel and restraint of trade.

United States’ Uniform Commercial Code:

The prominent U.C.C. provision governing unconscionability is Section 2-302.[8] Some decisions emphasize the limited scope of applicability of Section 2-302,[9]. It has, notwithstanding that, been used in transactions apart from sales, such as insurance contracts, guarantees, and leases of chattels.[10]

Unconscionability has not been defined in the U.C.C. It only provides for several remedies, including reopening the transaction. Another such remedy is the setting aside of liquidated damages or a penalty clause to prevent the weaker party from remitting more than the stronger party’s actual loss.[11]

The idea behind the U.C.C. was stated in a nutshell in the Kugler v. Romain case;

“The standard of conduct contemplated by the unconscionability clause is good faith, honesty in fact and observance of fair dealing…In such a context, a material departure from the standard puts a badge of fraud on the transaction and here the concepts of fraud and of unconscionability are interchangeable.”[12] This quote succinctly states the criteria used by the American judiciary to adjudicate a case involving unconscionability.

Indian Law:

The concept of unconscionability is contained in Sections 14, 16, and 19A of the Indian Contract Act of 1872 and Section 111 of the Indian Evidence Act of 1872. Section 14 states that free consent exists only when there is evidence that the contract was entered into without coercion, undue influence, fraud, misrepresentation, or mistake. Section 16 defines undue influence. Section 19A empowers Indian courts to declare void a contract where one party induced by undue influence.

Despite this, even before the Indian Contract Act was enacted, undue influence(a rule of equity) grew out of an anticipated necessity to confront “ insidious forms of spiritual tyranny and the infinite varieties of fraud.”[13] The Supreme Court arrived at the conclusion that the doctrine is substantially based on the principles of the common law in England.

Section 16 defines undue influence particularly in terms of contracts. This particularization however is only a part of a larger principle.[14] This larger principle was elucidated in Amir Chand v. Sucheta Kriplani [15] by the High Court of Punjab and Haryana.

The two criteria to be fulfilled for the setting aside of a contract under Section 16 are reflective of the basic precepts of undue influence. Under Section 16(1), the person who wants to avoid the contract must be able to prove that the other party was in a position to dominate his will,[16] and that said party used his position to gain an unfair advantage over the party who seeks relief. Only a party to the contract is allowed to raise the plea of undue influence in order to seek relief under Section 16.[17] Section 16(3) shifts the burden of proof from one contractual party to another when the contract is found to be unconscionable, prima facie and that party’s will be proven to have been dominated by the latter party. This is the stance in Indian Law.

Comparative Law:

This Article reveals the fact that, though unconscionability was derived from the doctrine of freedom of contract, there are pronounced differences in the tools, each of these countries use to fight misdeeds.

The merit of a general unconscionability concept in English law, is that it creates room for the courts to exercise flexibility. Any court can apply the doctrine in a case without modifying the entire law governing the contract in question. This is the rationale behind the absence of a necessity to exclude unconscionability rules from any specific area of contract law.

Moreover, the experience gained in the United States shows that a general unconscionability doctrine does not bring uncertainty into the law of contract. The fact is that the courts in the United States have been conservative and cautious in the exercise of their powers under the unconscionability rules that are applicable to their system. The Official Comment, the official case report of the US Supreme Court has contributed to the achievement of a certain degree of uniformity in the decisions concerning Section 2-302.[18]

The principles of justice, equity, and good conscience that originated in the equity courts in England may not fully prevail in view of legislations like the Indian Contract Act, 1872, and the Specific Relief Act, 1963. The courts on the other hand, continue to be influenced by English principles and are expected to apply them whenever a provision is either inapplicable or silent. 

Conclusion:

This article focused on the development of the Unconscionability doctrine in the legal systems of India, the USA, England, and Germany. The doctrine’s origin in England, and its subsequent application in India and the United States were mentioned. It also analyzed standard form contracts in India through the looking glass that is unconscionable and the inherently unfair nature of various contracts. The comparative analysis has proven that despite the differences in the manner of application of this doctrine in these countries, the merits of this doctrine stand unaffected.

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[1] See Batty v. Lloyd, 23 Eng. Rep. 375 (1682); Earl of Chesterfield v. Janssen, 28 Eng. Rep. 82 (1750).

[2] 23 Eng. Rep. 438 (1684).

[3] Id.

[4] 28 Eng. Rep. 949 (Ch. 1778).

[5] See, e.g., Osmond v. Fitzroy, 24 Eng. Rep. 997 (1731); Janssen, 28 Eng. Rep. at 82.

[6] See Fry v. Lane, 40 Ch. D. 312 (1888); Earl of Aylesford v. Morris, All E.R. 300 (Eng. C.A. 1873).

[7] Barrett v. Hartley, 2 L.R.-Eq. 786 (1886) (Eng.), Nevill v. Snelling, 15 Ch. D. 679 (1880).

[8] See U.C.C. § 2-302 (1990).

[9] Bankers Trust Co. of Rochester v. Walker, 371 N.Y.S.2d 198 (App. Div. 1975); Hernandez v. S.I.C. Fin. Co., 448 P.2d 474 (N.M. 1968); Bekins Bar v. Ranch v. Huth, 664 P.2d 455 (Utah 1983); Preston v. First Bank of Marietta, 473 N.E.2d 1210 (Ohio Ct. App. 1983); Division of Triple T Ser. Inc. v. Mobil Oil Corp., 304 N.Y.S.2d 191, 200 (Sup. Ct. 1969).

[10] Blount v. Westinghouse Credit Corp., 432 S.W.2d 549, 554 (Tex. Civ. App. 1968)., Bishop v. Washington, 480 A.2d 1088 (Pa. Super. Ct. 1984); Truta v. Avis Rent A Car System, 238 Cal. Rptr. 806 (Ct. App. 1987)., Electronics Corp. of Am. v. Lear Jet Corp., 286 N.Y.S.2d 711 (Sup. Ct. 1967).

[11] Bogatz v. Case Catering Corp., 383 N.Y.S.2d 535.

[12] 279 A.2d at 652.

[13] Manmohan Lal Sarin, Contract Unconscionability in India, 14 Loy. L.A. Int'l& Comp. L. Rev. 569 (1992).

[14] Id.

[15] 1961 A.I.R. (Punjab) 383.

[16] Allcard, 1886-1890 All E.R. at 93.

[17] Id.

[18] A.H. Angelo and E.P. Ellinger, Unconscionable Contracts: A Comparative Study of the Approaches in England, France, Germany, and the United States, 14 Loy. L.A. Int'l& Comp. L. Rev. 455 (1992).