What is the position of an unconscionable exclusion clause in Indian Contract?

What is the position of an unconscionable exclusion clause in Indian Contract?

Unconscionability is a loophole in the existing law, that makes one party having more power than another to a contract. The Supreme Court often intervened to compensate the affected party, but there is no codified law yet prohibiting it.

What is the unconscionable contract?

When a contract is drafted in a manner that favours one party over another, it is called an unconscionable contract. An unconscionable contract usually imposes unfair, harsh and unjust conditions on the weaker party.

In light of fair business practice, unconscionable contracts should not be practicable. In certain situations, the Court can intervene in the matter of unconscionable clauses of a contract or the whole contract to modify the unfair part.

What are the types of unconscionability?

Unconscionability of a contract can be categorized into two types:

• Procedural Unconscionability - The procedural unconscionable arises when the parties are in a bargaining situation. One party has more bargaining power in comparison to another.

• Substantial Unconscionability - Substantial unconscionability occurs when there are certain unfair terms in a contract such as unfair price, limitation in remedies, warranty disclaimer, etc. making the contract non-workable or one-sided.

What is contract unconscionability in India?

The concept of unconscionability is not explained anywhere in the Indian law but in nature, it is prohibited by the Contract Act, the provisions are as follows:

• Section 16 of the Indian Contract Act prohibits any undue influence on one party by another to agree to a contract to which he may not be agreed voluntarily.

• Section 19 of the Indian Contract Act makes any contract voidable if one party has used undue influence, coercion, fraud, misrepresentation, etc. to make the other party enter into the contract.

• Section 23 of the Indian Contract Act makes an agreement void if the object of the agreement is fraudulent, unlawful, immoral or against the public policy.

Is unconscionability practised in India?

As unconscionability in a contract is not expressively prohibited in India, it is practised often, and the most popular cases of unconscionability in India is an employment agreement.

Often the employer imposes unfair conditions on the employees under unreasonable clauses making the contract unconscionable.

It was observed by the Supreme Court in Central Inland Water Transport Corporation Ltd v. Brojo Nath Ganguly case, that a clause of forcing the employee to serve a notice period of three months in the event of resignation is arbitrary, unreasonable and opposed to public policy.

Similarly in another case, the Supreme Court held that the employer's authority to terminate the service any time without recording the reason for such termination is also unfair and unjust, thus is unconscionable.

Generally, the employment agreement empowers the employer to terminate a contract, even if there is no breach of contract by the employee. These clauses make the employment agreement one-sided. In several cases, the judgement has been passed by the Apex Court stating that the arbitrary and unreasonable terms and conditions of the employment agreement make them unconscionable, which should not be extending the arbitrariness of the employer to safeguard the interest of the employee under an employment agreement.

In another case, Bharati Knitting Company v. DHL Worldwide Express Courier Division of Airfreight Ltd, the Supreme Court pointed out that the clause in the contract limited the liability of the courier company if there is a loss or damage to the items during shipment. The Court upheld the previous order passed by the National Consumer Dispute Redressal Commission that such a clause has diminished the liability of the consignee in case of any damage. However, the Court found that though the consignee has signed the note of consignment, there was no mutual understanding at similar points.

The unconscionability of the contract is not directly prohibited under any modified law, therefore, it can be treated as a loophole in the law, which some people are making the best use of.