1. Dulichand Hanram Murarka purported to purchase a four storeyed house No. 19 in Municipal Ward No. 14 and Nazul sheet No. 26-C. Plot No. 711 Malipura, Akola from Rameshwarappa, for a consideration of Rs. 12,000/- by a registered sale deed dt. 4-3-1964. The ground floor of the building consisted of three rooms out of which two rooms in the rear continued to remain with Vinayakappa the brother of the Vendor Rameshwarappa. The vendee Dulichand claimed that Vinayakappa was inducted into the premises as a tenant, that the rent was Rs. 50 plus Rs. 5 by way of electric charges per month and that Vinayakappa continued to pay the rent up to 3rd January 1967. Dulichand claims to have terminated the tenancy of Vinayakappa by notice dt. 29th October 1968, but as the latter did not comply, Dulichand filed Regular Civil Suit No. 8/69 in the Court of Second Joint Civil Judge, Junior Division, Akola, for eviction and possession. In the trial Court Vinayakappa resisted the suit denying the title of the plaintiff. According to him, he had borrowed Rs. 6,500/- from Dulichand and it was agreed that he would return the loan of Rs. 6,500/- and another promised one of Rs. 3,500/- to be advanced in future in a period of 5 years. Though the property was an ancestral property in which all the brothers and the mother had shares, it was ostensibly conveyed to the plaintiff after executing a Tabe Yadi in favour of Rameshwarapoa, so as to make a show of clothing him with title. Defendant Vinayakappa denied the relationship of landlord and tenant with Dulichand and payment of any rent for the rooms.
2. The lower Court decreed the suit of the plaintiff and the appeal filed against the judgment and decree having been dismissed, the defendant Vinayakappa has come up to this Court.
3. It is a common ground that the defendant is residing in two rooms on the ground floor all these years even though the entire house has been sold by his brother to the plaintiff. As the house was ancestral property of the family, it would not be unrealistic to conclude that the family was residing therein all these years prior to the sale and that the defendant Vinayakappa continued to occupy two rooms on the ground floor all these years even after the sale.
4. Coupled with the continued occupation of two rooms in the demised property, the lower appellate Court has repeatedly observed in its judgment that the consideration of the so called sale was inadequate. To cite the few instances:
“In any event, I am not inclined to accept that the house was only worth Rs. 12,000/- when it was conveyed over to the plaintiff for the said amount by virtue of sale deed Ex. P. 58. The house may reasonably be valued at double the said amount when it came to be conveyed to the plaintiff. It might also be that the plaintiff held out a hope to the defendant that if the family arranged to pay back the amount within a reasonable time, the plaintiff would accept it willingly and return the property…………. It might be that the plaintiff as I have said, already might have given a tacit understanding orally that if the circumstances for the defendant's family proved to be favourable, they could purchase back both the properties, plaintiff would not stand in the say….”
(Para 13)
“It is, therefore, clear that though the property originally was worth Rs. 10,000/- the defendant spent huge amount and made it worth much more. At the trial, the defendant said that it was worth Rs. 50,000/-. Making allowance for the exaggeration, I have stated that the property might be worth about Rs. 24,000/- to Rs. 25,000/- when the transaction Ex. 58 took place….”
(Para 14)
“……I have already given expression to my mental reservation regarding the sale deed taken by the plaintiff of four storeyed house for obviously inadequate amount of Rs. 12,000/-.”
5. With this clear finding about inadequacy of consideration and loan nature of the transaction it is difficult to understand how the learned District Judge granted the relief of possession based on title. The house property consists of a four storeyed pucca building on a plot having an area of 519 sq. ft. On this plot the construction has been described as being 42′ × 12′ i.e covering 504 sq. ft. The plot is bounded on the east by a wide road, on the west by a Nazul Galli. It has all the conveniences, water supply as well as electric fitting. Even the plaintiff Dulichand in the quit notice that he had sent to the defendant on 29th October 1968, describes the building as one to which the House Rent Control Order does not apply and the plaintiff himself admits in the box that it was a new construction when he purchased it. A four storeyed construction with a built - in area of more than 2000 sq. ft. situated on a wide road was purchased — so the plaintiff alleges — for Rs. 12,000/-. The learned District Judge had reservation about the inadequacy of the consideration and he has given vent to his feelings at 2 or 3 places in the judgment. To top it all, the defendant never paid any rent to the plaintiff and the plaintiff even after purchase did not bother to pay municipal or nazul taxes for about 6 years. No inquiry was made by the parties to the document regarding the market value of the property in question and inadequacy of the consideration speaks volumes against the document being one of sale and supports the theory of the defendant that it was a loan transaction.
6. When parties to a transaction with open eyes fix a consideration which later on appears low and complete the transfer by execution and registration of a sale deed, on a proper stamp paper, it becomes difficult for the Courts to assume the duties of policing such transactions simply on the ground that the consideration appears to be on low side. With land-prices in cities spiralling high, every vendor regretsa sale of real estate made in the yester year. But this regret will not enable him to get the sale rescinded after repaying the consideration with interest.
7. There was a time when the shield of ‘caveat emptor’ would protect the most unscrupulous in the market place — a time when the law, in granting parties unbridled latitude to make their own contracts, allowed exploitative and callous practices which shocked the conscience of both legislative bodies and the Courts.
8. With the entrenched warning of caveat emptor and the general stance adopted by the Courts that if people with their eyes open choose wilfully and knowingly to enter into unconscionable bargain, the law has no right to protect them, it was a wellnigh impossible task to unsettle a transaction of sale of moveable or immoveable property. Only when the plaintiff came to court of equity to specifically enforce a contract which the Courts considered to be unconscionable did the Courts exercise the discretion and refuse the specific performance. “Policing” of such contract against unconscionability was largely based on techniques of interpretation, such as “adverse construction of language of the contract”, and courts thus granted relief indirectly. This indirect power of granting relief was usable both as a sledge-hammer and a scalpel; i.e to avoid enforcement entirely or to excise the offending portion of the contract leaving the rest intact.
9. In the United States of America, the U.S Supreme Court in Scot v. United States, (1870) 79 U.S 577: 12 Wall 442, 445: 20 Law Ed 438 stated:
“If a contract be unreasonable and unconscionable, but not void for fraud, a court of law will give to the party who sues for its breach damages, not according to its letter, but only such as he is equitably entitled to…”
10. The effort to identify an unconscionble contract poses a difficult problem. On the one hand it is necessary to recognise the importance of preserving the integrity of agreements and the fundamental right of parties to deal, trade, bargain and contract. On the other hand there is the concern for the unprivileged who are victims of gross inequality of bargaining power. Concern for the protection of such exploited persons against over-reaching by the small but hardly breed of greedy persons such as money-lenders, land sharks, etc. who would prey on them is not novel.
11. Failure to satisfy the demands of conscionability has been invoked in number of different contexts over the years as a means of relieving a promisor of an obligation to fulfil his promise. In a recent restraint of trade case Schroeder Music Publishing Co. Ltd. v. Macaulay (1974) 3 All ER 616, 623 (H.L) Lord Diplock has placed the matter in historical perspective and formulated the justification underlying such protection in the following term:
“Under the influence of Bentham and of laissez-faire the courts in the 19th Century abandoned the practice of applying the public policy against unconscionable bargains to contracts generally, as they had formerly done to any contract considered to be usurious; but the policy survived in its application to penalty clauses and to relief against forfeiture and also to the special category of contracts in restraint of trade. If one looks at the reasoning of 19th century judges in cases about contracts in restraint of trade one finds lip service paid to current economic theories but if one looks at what they said in the light of what they did, one finds that they struck down a bargain if they thought it was unconscionable as between the parties to it, and upheld it if they thought that it was not.”
12. Relief against unconscionability is not, therefore, a new concept in the law of contract. The Chancellor's protection was given primarily to expectant heirs who had borrowed money on the strength of their inheritance at exorbitant rates of interest. But the Chancellor's protection was also given to others who were susceptible to exploitation or pressure including the needy, the ignorant and the sick. Certain whole classes of “Presumptive sillies” such as sailors, farmers and women were taken under the Chancellor's wing. Unconscionability has also been invoked in land law; but they frequently do no more than indicate the terms on which equitable and thus discretionary remedies will be granted.
13. In recent times contracts which are unconscionable but cannot be held to be void for fraud or undue influence, largely belong to the area of consumerdurable purchases on hire purchase basis. The aggressively persuasive live wire salesman manages to disgorge mass-produced consumer articles like stereo and television sets, washing and drying machine, furniture, etc. in the houses of economically disadvantageous people promising them long term credit and in the process the purchaser is made to pay more than three times the market price of the article under pain of forfeiture in the case of single default. The Uniform Commercial Code (U.C.C 2-303(1)) specifically empowers the court to grant relief in such cases:
“If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.”
Section 5.108(1) of the Uniform Consumer Credit Code (U-30) which tracks Uniform Commercial Code Section 2.302 lists a number of factors which are to be ‘considered’ in determining whether an agreement or transaction was indeed “unconscionable”;
“(4) In applying sub-sec. (1), consideration shall be given to each of the following factors, among others, as applicable:
(a) belief by the seller, lessor, or lender at the time of transaction is entered into that there is no reasonable probability of payment in full of the obligation by the consumer or debtor;
(b) in the case of a consumer credit sale or consumer lease, knowledge by the seller or lessor at the time of the sale or lease of the inability of the consumer to receive substantial benefits from the property or services sold or leased;
(c) in the case of consumer credit sale or consumer lease, gores disparity between the price of the property or services sold or teased and the value of the property or services measured by the price at which similar property or services are readily obtainable in credit transactions by like consumers;
(d) the fact that the creditor contracted for or received separate charges for insurance with respect to a consumer credit sale or consumer loan with the effect of making the sale or loan, considered as a whole, unconscionable; and
(e) the fact that the seller, lessor, or lender has knowingly taken advantage of the inability of the consumer or debtor reasonably to protect his interests by reason of physical or mental infirmities, ignorance, illiteracy, inability to understand the language of the agreement, or similar factors.”
14. Comment 4 to UCC 5.108 includes the following illustration as one which would meet the section's criteria of unconscionability:
“Under sub-section (4)(c), a home solicitation sale of a set of cook ware or flatware to housewife for £375 in an area where a set of comparable quality is readily available on credit in stores for £125 or less.”
15. Section 2-302 of the Uniform Commercial Code enacts the moral sense of the community into the law of commercial transactions. It authorises the court to find, as a matter of law, that a contract or a clause of a contract was “unconscionable at the time it was made”, and upon so finding the court may refuse to enforce the contract, excise the objectionable clause or limit the application of the clause to avoid an unconscionable result. The principle is one of the prevention of oppression and unfair surprise. It permits the Court to accomplish directly what heretofore was often accomplished by construction of language and determinations based upon a Presumed Public Policy. There is no reason to doubt, moreover, that this approach is intended to encompass the price term of an agreement. Indeed, no other provision of an agreement more intimately touches upon the question of unconscionability than does the term regarding price.
16. It is not as if that the Courts in America are giving relief from unconscionable contracts, only after the passing of the Uniform commercial Code. As Corbin observes in his Contracts, S. 128 (1963):
“The courts have often avoided the enforcement of unconscionable provisions in long printed standardized contracts, in part by the process of ‘interpretation’ against the parties using them, and in part by the method used by lord Nelson at Copenhagen.”
17. Professor Ellinghaus, “In Defense of Unconscionability”, (1969) 78 Yale I.J 757 agrees that, it is very difficult to lay down any guidelines to determine whether a particular agreement suffers from unconscionability but finds in this very vagueness a frank and purposeful invitation to the courts to fashion a new body of law, in time, honoured common law fashion, by “reasoned and creative exegesis and implementation.”
18. An unconscionable contract is such an agreement as no sane man not setting under a delusion would make, and that no honest man would take advantage of. Mere pecuniary inadequacy of consideration will not generally make the terms of a contract seem too unfair for enforcement unless the degree of inadequacy is extreme. The inadequacy must be so extreme so as to call for interposition of equity, either offensively or defensively.
19. The facts of the present case have to be viewed in the light of the above general test viz. that whether a contract could be called unconscionable would depend upon whether the terms are so extreme as to appear unconscionable according to mores and business practices of the time and place. In the factual background of this case, certain factors stand out in relief so prominently that it is hardly necessary to gloss over the transaction or read it down: no exegesis are needed, nor one need resort to the method adopted by Lord Nelson at Copenhagen. These circumstances cry loud and clear that the transaction could not have been one of sale but is a sham document used as a front for a loan transaction. The factors are: Extreme inadequacy of consideration considering the commercial prosperity of Akola even in the sixties, location of the house on main road, continued occupation of the defendant in two rooms on the ground floor without paying any rent or compensation, concurrent finding of both the courts that the defendant was not a tenant, the non-payment of municipal and nazul taxes by the alleged purchaser for a number of years, the challenge thrown by the defendant and his family members at the time of mutation-all this militates against the claim that the property was sold to the plaintiff. In the first-place the pittance of the consideration of less than Rs. 10/- per sq. ft. of built up area is an index that it was an unconscionable bargain considering the fiduciary capacity in which the plaintiff a lender stood towards the defendant a borrower. Secondly it was a document executed nominally as being not supported by adequate consideration. See Prashad v. Govind Swami Mudliar AIR 1982 SC 84. The transaction being harsh and unconscionable bargain for a nominal consideration supports the theory of loan transaction and hence a claim of title cannot be founded on the deed dated 4-3-1964 Ex. P38.
20. In these premises the appeal is allowed and the suit of the plaintiff is dismissed. However, under the circumstances, I order that the parties shall bear their respective costs. As regards the refund of periodical deposits of the amounts made by the defendant as a condition for staying the execution, the question is left for determination by the trial court consequent upon the reversal of the two judgments and decrees of the lower courts:
Appeal allowed.