Central Inland Water v. Brojo Nath Ganguly and Anr.
Central Inland Water Transport Corporation v. Brojonath Ganguly
1986 SCR (2) 278
(Standardised Contracts-Public Policy-Unconscionable Bargains-S.23-Void)
FACTS:
Plaintiffs worked in a company which was dissolved by Court’s order and they were then inducted into defendant Corporation upon latter’s T&C. After years of serving Corporation, plaintiffs were arbitrarily kicked out of the Corporation by virtue of Rule 9(i) of said T&C which provided for termination of employees’ services on three months’ notice on either side upon which three months’ salary to be paid by Corporation. Plaintiffs requested Court to quash Rule 9(i) on grounds of unconscionability.
ISSUE: Whether an unconscionable term can be held to be void/ voidable under Indian Contract Act (ICA)?
HELD:
When the bargain is harsh or unconscionable, equity, grounded upon ‘distributive justice’ curtails the freedom of contract so as to protect the interests of party who entered into such bargain under distress. Freedom of contract is of little value when parties don’t stand on equal footing; party with weaker bargaining power enjoys no realistic opportunity to bargain and party has no alternative between accepting a set of terms proposed by other or doing without the goods or services offered. These agreements are called as ‘Adhesion Contracts’, however not every such contract is unconscionable: only when there is gross inequality of bargaining power compounded with terms unreasonably favourable to stronger party can the indication that weaker party had no meaningful choice except to consent to the unfair and unreasonable terms, hold ground.
Therefore Courts will strike down any unfair or unreasonable clause/ agreement entered into by parties when there is gross inequality in their bargaining power, and the victimized party had no meaningful choice but to give his assent to the contract, however unreasonable, unfair and unconscionable a clause in that contract may be.
These adhesion/ standardized contracts are entered into by parties enjoying much superior bargaining power with a large no. of people, hence, affect people at large and if unconscionable, unfair and unreasonable are injurious to public interest. These bargains therefore must be void on account of being opposed to public policy (S.23). Further, if they were to be merely voidable on account of undue influence (for in many cases, superior party has ‘real or apparent authority over other party’ and hence, uses that position to obtain unfair advantage over another as according to S.16) it would compel each victimized party to go to Court to get the contract adjudged as voidable which would lead to multiplicity of litigations.
In present case, plaintiffs had much less bargaining power as compared to that of Corporation, for they did not have any meaningful choice while assenting to the terms and conditions of their appointment in the Corporation. If they would have refused to accept the said rule, it would have led to their termination from service and exposed them to consequent anxiety, harassment and uncertainty of finding alternative employment.
Rule 9(i) was unreasonable and unfair to the extent of being unconscionable for it gave arbitrary and absolute power to the Corporation to dismiss its employees without providing any guidelines to that effect. The rule was also violation of principle of natural justice-audi alteram partem-for it neither provided for any inquiry to take place nor did it provide for any opportunity to accused employee to be heard.
Therefore it was unconscionable and opposed to public policy for it adversely affected the rights and interests of the employees and created a sense of insecurity and subservience to unfair and unreasonable terms of corporation. Hence, it was void according to S.23 of ICA.
Author: Vishrut Kansal (National University of Juridical Sciences, Kolkata)