Unconscionable Agreements Between Parties With Unequal Bargaining Power Void: Kerala High Court Reiterates

The Kerala High Court has reiterated that unconscionable, unfair and unreasonable clauses in a contract entered into by parties who do not enjoy equal bargaining power are void.

While allowing a petition, Justice P.B. Suresh Kumar observed that a clause in an undertaking enabling the Water Authority in this case to recover the entire amounts disbursed to the contractors towards interest, merely on the ground that the funds disbursed are borrowed, is unconscionable.

The Court ruled that the incorporation of such an unconscionable term in the undertaking is because of the stronger bargaining power exercised by the Water Authority over the contractors.

"An unconscionable term in a contract is one which is irreconcilable with what is right or reasonable," it remarked.

Brief Facts:

The Water Authority could not disburse the admitted dues to its contractors on time due to paucity of funds. Therefore, a scheme was evolved for early disbursement of the dues to ease their financial burden.

According to this scheme, if the contractor exercises option to pay interest for the amounts payable to him, the Water Authority would disburse the dues by borrowing money from the bank, after deducting the interest payable for the said amount for a period of one year.

As per the prevailing practice, the contractor is required to exercise option for the said purpose in the form of an undertaking and once the undertaking is given, the Water Authority would disburse the dues less the interest for the period of one year from the account of an overdraft facility enjoyed by it from the bank exclusively for the said purpose. 

As and when the bill raised in respect of the work executed by the contractor gets matured, the Water Authority would liquidate the liability with respect to the borrowing made.

The petitioners are contractors who exercised the option to pay interest and received payments due from the Water Authority in terms of the scheme. 

However, the bills raised in respect of the works executed by the petitioners did not mature for payment within one year. Consequently, the Water Authority had to pay interest to the bank for the borrowings made for the period exceeding one year.

In such circumstances, the Finance Manager and the Chief Accounts Officer of the Water Authority issued orders to recoup the deficit interest from the forthcoming bills and other amounts payable to the petitioners from the Water Authority. 

The petitioners' undertakings to the Water Authority for effecting payments in terms of the scheme contained a term to the effect that the contractors would be liable to pay interest for the amounts borrowed beyond the period of one year also if the bills in respect of the works executed by them do not get matured for payment within one year.

Nevertheless, the petitioners contended that the said term is an unconscionable one and hence not enforceable. 

The primary argument was that the bills raised in respect of the works executed by the petitioners would get matured for payment at any rate within one year, and the Water Authority is, therefore, not justified in realising interest for the amounts disbursed for any period exceeding one year.  

Accordingly, they sought for these orders to be quashed.

Key Findings:

The question before the Court was whether the Water Authority is justified in obtaining undertakings from the petitioners to the effect that they would bear interest for the amounts disbursed to them till the bills in respect of the works executed by them get matured for payment. 

The Judge noted that since the inability of the Water Authority in effecting the payments due to the petitioners on time was not due to any reason attributable to the petitioners, it was not fair at all on the part of the Water Authority which extracted works from the petitioners to require the petitioners to bear the interest burden for effecting disbursement of their dues. 

It was further found that the impugned term enables the Water Authority to recover even the entire amount disbursed to the petitioners by way of interest if they are unable to get funds sufficient for honouring the bills from their funding partners.

"The term in the undertakings given by the petitioners which enable the Water Authority to recover even the entire amounts disbursed to the contractors towards interest if the Water Authority is unable to get funds sufficient for honouring the bills, merely on the ground that the funds disbursed are borrowed, is grossly unfair to the contractors." 

Reliance was placed on the Apex Court decision in Central Inland Water Transport Corpn. v. Brojo Nath Ganguly to develop on the understanding of an unconscionable term in a contract is one that is irreconcilable with what is right or reasonable.

The Single Judge held:

"I am convinced that the petitioners would not have given such undertakings, had they been put notice that the Water Authority would be in a position to realise even the entire amounts disbursed or a substantial portion thereof if the Water Authority is unable to find funds for honouring their bills. An unconscionable term in a contract is one that is irreconcilable with what is right or reasonable. In other words, the term aforesaid is unconscionable, unreasonable and grossly unfair." 

The Bench also examined the effect of such a term in an undertaking obtained by a public body.

In Central Inland Water Transport Corpn (supra), the Apex Court had laid down that contracts containing unconscionable, unreasonable and unfair clauses entered into with a large number of persons or a group of persons who have far less bargaining power or no bargaining power at all, are injuries to the public interest as well and that such terms are to be adjudged void. 

It was also found that since the actions of public bodies bear public character and contain an element of public interest, it is necessary to strike down unconscionable, unfair and unreasonable clauses in a contract that has been entered into by parties who do not enjoy equal bargaining power as violative of Article 14 of the Constitution. 

On the said grounds, the petition was allowed. 

Senior Advocate K. L. Varghese and Tessy Jose appeared for the petitioners while Advocate Bijily Joseph and Government Pleader Benjamin Paul represented the respondents.

Case Title: Jyothi Basu V. & Ors. v. Kerala Water Authority & Anr.

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