Notes - Section 16, Indian Contract Act 1872

1. A short summary of Subhas Prosad Mushib v Ganga Prosad Mushib (1967 SC):
- The donor who was of advanced years made a gift of properties in favour of his younger son’s grandson
(donee), with whom he was residing, to the exclusion of the plaintiff (elder son) and his daughter.
- SC held - donee’s father was not in a position to dominate the will of the donor since the donor was not subject
to senile decay or mental unsoundness (sec 16(2) (b)) and the case did not otherwise, fall within s.16 (2).
- The premise of the SC’s reasoning was that ‘ position to dominate the will’ contemplated by s.16 (1) was
exhausted by cases in s. 16(2).
- The court goes on to hold: Generally speaking, the relation of solicitor and client, trustee and cestui que trust,
spiritual adviser and devotee, medical attendant and patient, parent and child are those in which such a
presumption arises.
- Reading ‘position to dominate the will’ in s. 16(1) as being exhausted by s. 16 (2) is incorrect. This line of
authority has unrealistically cranked up threshold to create a presumption under s.16 (3) to deny relief to
claimants on the grounds of presumed undue influence in all but the most obvious of cases falling under s.
16(2).
- SC overlooked the phrase “without prejudice to the generality of foregoing principle” appearing in Sec 16(2).

2. Unconscionability in India – A separate concept with Sec 16 that can vitiate free consent in a contract or only a part
of the general concept of Undue Influence?
- Pollock & Mulla notes that Section 16 is not flexible to deal with new emerging principles like ‘unconscionability’
as a vitiating factor that affects validity of contracts. It is true that our Act does not provide separately for the
concept of unconscionability. Instead, some scholars argue that the definition of undue influence in S.16 was
deliberately designed to be capacious enough (unlike S.15 viz-a-viz economic duress) to incorporate the
principle of unconscionability within its fold as a separate ground for making a contract voidable as envisioned
by the drafters. They say that S.16 has intertwined together the doctrines of unconscionability and undue
influence. But courts in India have interpreted s.16 strictly going by its language that sees only undue influence
in its conventional sense.
- The main reason for drafting S.16 and S.19 A in this manner (amendment in 1899) was to address the acute
problem of rural indebtedness and usurious money lending in India in the second half of 1890s. They drafted it
in such a manner (as they claim in the Statement of Objects and Reasons 1 of the Usurious Loans Act 1918) so
as to empower the courts to intervene in cases where parties do not ‘contract with each other on a footing of
equality’ and consequently the stronger imposes ‘unfair terms on the other’ even without proving position of
dominance and use of that position. On that basis, scholars claim that the resultant sections, although
ostensibly still a provision on undue influence, incorporated a ‘general principle’ of unconscionability which
protected a party to an unequal transaction from being subject to an unfair bargain. For them, the provision went
well beyond undue influence in its conventional sense.
- The remedy in the case of a contract vitiated by Sec 16, which is contained in S.19A, empowered the courts to
set aside the agreement ‘either absolutely or, if the party who was entitled to avoid it has received any benefit
thereunder, upon such terms and conditions as to the Court may seem just’ . The aim of the amendment
appears to have been to allow the courts to provide relief that stopped short of rescinding the contract in its
entirety. This would be particularly useful in the kind of case which motivated the amenders to act, namely, the
case of loans taken on usurious interest. Setting aside the contract in its totality would mean returning the
borrowed amount under S.64. S. 19 A allowed the borrower to retain the loan while the court scaled down
interest to a reasonable sum. More generally, the legislature and scholars claim that S.19 A also made it
possible for the courts to excise substantively unconscionable terms in appropriate cases without burdening
the plaintiffs to prove undue influence in its conventional manner (position to dominate and misuse of it).
- Unfavorable attitude towards Unconscionability –
Since early 1900s, Indian courts did not find in S.16, a principle of unconscionability with the
consequence that they read the provision as requiring the claimant to prove undue influence in the
orthodox sense in order to get any relief. This interpretation, apparently, diluted the legislative plan of
regulating usurious money lending by incorporating a doctrine of unconscionability in S. 16. Consider
for instance, in Haripada v Jagai Shao [1934] AIR Cal 511, the Calcutta HC did not interfere in a

1
Attaching the statement of objects and reasons at the end of this note.
1
 case where interest rate for a loan contract was 75% (patently unconscionable) since no undue
influence in the conventional sense was established. Even Raghunath Prasad v Sarju Prasad is
also a classic example of this trend.
In these circumstances, the legislature enacted the Usurious Loans Act 1918, which permitted courts
to intervene in usurious money lending transactions and expressly empowered them to relieve against
excessive interest. In this manner, the legislature tried to achieve the same purpose This further took away the issue of
unconscionability from the heartland of Indian contract law. The recent Consumer Protection Bill 2018
(Sec 2(46)) is also another example of this trend.
- Unconscionability Recognised within Contract Law; but not under Sec 16: Brojo Nath Ganguly
The Supreme Court sought to introduce a general principle of unconscionability and assert a
jurisdiction to intervene in unconscionable transactions in Central Inland Water Transport Corporation
v Brojonath Ganguly (1986 SC)2The terms of employment of Central Inland Water Transport
Corporation, a State-owned entity, allowed it to terminate the employment of an employee by giving a
three-month notice or payment of equivalent salary for 3 months. This termination clause also
conferred absolute and arbitrary power upon the Central Inland Corp. It does not even state who on
behalf of the Corporation is to exercise that power. There are no guidelines whatsoever laid down to
indicate in what circumstances the termination power is to be exercised by the Corporation. No
opportunity whatsoever of a hearing is at all to be afforded to employees whose services is being
terminated in the exercise of this power. Even where the dismissal of an employee on the ground of
misconduct is to be done duly after holding a regular internal disciplinary inquiry, the corporation is free
to resort to this termination clause to avoid the hassle of an inquiry. Thus, this termination clause in
their contract is not only arbitrary and grossly unreasonable.
SC struck down the above termination clause term for being unconscionable. But the Supreme Court
held that S. 16 is too narrow to include an independent doctrine of unconscionability because of its
language that throws light only on undue influence in its three layered structure. Instead, the court
hung the doctrine on the peg of ‘public policy’ in s.23 of the Act.
Justice Madon asked - ‘Should the courts sit back and watch supinely while the strong trample
underfoot the rights of the weak?’ He held that principle courts will ‘strike down an unfair and
unreasonable contract, or an unfair and unreasonable clause in a contract, entered into between
parties who are not equal in bargaining power.’ Brojo Nath, therefore, was at heart a public law
decision which proscribed a state entity from exploiting its inequality in bargaining power and imposing
unconscionable terms on the weaker party. Principles of contract law were only obliquely relevant in so
far the matter dealt with the terms imposed by the government corporations on its employees. Madon
J’s exposition proceeds, for the most part, on the premise that the unconscionability in the present
case arose from the fact that it was an instrumentality of State that was imposing unfair terms on its
employees. Indeed, Madon J located the fulcrum of the issue as being ‘whether an unconscionable
term in contract of employment entered into with a state corporation is void as being opposed to ‘public
policy’ under s. 23 of the Indian Contract Act - a provision which rendered unenforceable contracts that
were ‘against public policy’.
- But subsequent decisions restricted the application of Brojonath –
They read Brojonath as being inapplicable to contracts which do not involve the ‘State’. For example,
in Binny Ltd. v Sadasivam (2005 SC) where an employee of a private company whose services were
terminated sought to have a clause in the employment contract that resembled the one in Brojonath,
set for unconscionability, the Supreme Court declined to do so, holding that Brojonath had no
applicability to contracts between private parties. Like MP Sugar Mills’ legacy w.r.t. promissory
estoppel, the Brojonath legacy is also relevant only in a contract relationship between private
individuals and the state.
- Conclusion –
A general doctrine of unconscionability of the kind envisaged by legislature and other scholars under
sec 16 read with sec 19A still remains unrecognized in Indian contract law.
Unconscionability has been imported by legislature to give us some rights under other laws like
COPRA Bill 2018 & Usurious Loans Act 1918
Unconscionability argument is available against the state in a ‘citizen-state contract’ under Sec.23’s
public policy limb – Brojonath
2
The Supreme Court case we discussed at the end of April 5 morning session.
2
ATTACHMENT –

“The object of this Bill is to prevent the Civil Courts being used for the purpose of enforcing
harsh and unconscionable loans carrying interest at usurious rates. This subject has engaged
the attention of the Government of India frequently in the past and in 1899sections 16and19 of
the Indian Contract Act. 1872, were amended so as to enunciate more clearly the principle on
which a contract can be avoided on the ground of undue influence.

Those amendments had’ the effect of conferring on the Courts in India equitable jurisdiction in
cases relating to usurious contracts in which the element of undue influence is established, but
where undue influence cannot be estabilshed the result has been to emphasize the rigidity of
section 2 of the Usury Laws Repeal Act (XXVIII of 1855), however exorbitant the demand, and
however unconscionable the bargain.

Further there has been a tendency on the part of the Courts to place upon the word
“unconscionable” in section 16 of the Indian Contract Act the, technical meaning which it has
acquired in English equity, and consequently to limit their own powers of interference.

Lastly the particular transaction before the Court is often merely one of a series and unless
there is power to go behind it and examined antecedent agreements and attendant
circumstances there is little hope of the Courts being able to come to an equitable decision.

The remedy proposed by this Bill is to empower the Courts on the lines of section 1 of the
Money Lenders Act. 1900(63 & 64 Vict, c. 51) to reopen transactions by way of money or grain
loans in cases where the Court is satisfied (1) that the interest or other, return is excessive and
(2) that the transaction is substantially unfair and after investigation of the circumstances, both
attendant and antecedent, to revise the transaction between the parties and if necessary to
reduce the amount payable to such sum as the Court, having regard to the risk and all the
circumstances of the case, may decide to be reasonable. The Local Governments have been-
consulted and legislation in this direction has commanded almost universal approval. Provision
has been made to cover the case of loans of grain as well as of money, as loans in kind are often
made on very oppressive terms. As there may be urban or rural areas where the proposed law is
deemed unnecessary it has been provided that the Act shall not come into force in any Province
or part of a Province except by notification.” – Gazette of India. 1917. Part V, page 86.