English Contract Law Recognises Freedom Of Contract

“English contract law recognises freedom of contract and not fairness as the overriding principle in the formation and performance of a contract.”

Critically discuss this statement with reference to relevant law and academic opinions.

The law relating to freedom of contract is defined as individuals of full capacity being able to freely choose who they contract with and on what terms within that contract. This began in the nineteenth century when judges believed that people should be able to make their own decisions, since they know what is best in their interests, under the assumption that nobody would choose unfavourable terms. The courts simply acted as an umpire, ensuring parties were upholding their promises. They only interfered in special cases, including those involving misrepresentation, undue influence or illegality and it was not within their role to question whether the contract was fair.

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There is a need for stability, certainty and predictability under the notion of Freedom of Contract however; even though these values play an important part, they are not absolute and there are people who require protection, especially consumers. Legislation, such as The Unfair Contract Terms Act 1977 and The Sale of Goods Act 1979 has been passed to help protect the disadvantaged, especially in fields of employment law, racial and gender discrimination, by shaping the law of Contract. This in turn has brought about social justice and equality of bargaining power has been restored, resulting in the United Kingdom being of great benefit to this legislation. However, freedom of contract still remains in the majority of cases, despite these new legislations. Lord Denning, in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd[1] stated;

“I myself have always regarded it as in the public interest that parties who, being in an equal position of bargaining, make contracts, should be compelled to perform them, and not to escape from their liabilities by saying that they had agreed to something which was unreasonable.”

In an article called ‘The Ideologies of Contract Law,’[2] Adams and Brownsword favour Lord Denning by proposing that realist judges fall into two categories. These are known as ‘market-individualists’ and ‘consumer-welfarists.’ They suggest that market-individualists are firm believers in the principle of freedom of contract and hold the view that individuals are capable of making their own decisions and bargains, with the courts interfering as little as possible.

However, one could argue that the principle of freedom of contract is being undermined by the law and its legislation. Exemption and limitation clauses, for example, are regulated under the Unfair Contract Terms Act 1977. Although weaker parties are protected within their contracts, those with individually negotiated terms are also regulated. This means that large companies and corporations who are able to individually negotiate terms within a contract could potentially take advantage of these legislations and exclude themselves from liability or even leave the contract.

Some academics, especially Professor Atiyah, best known for his work in the law of contract, have suggested that the courts always considered, if not established, the concept of fairness. This view has been challenged, however, it is apparent that the courts have moved away from their laissez faire belief that they should not intervene. This might have been on their own accord or due to legislation under the guidance of the government.

It is difficult to define fairness; however, it may be taken to mean the treatment of people without discrimination. An unfair contract may be defined as one in which the price is grossly excessive or deficient, or is simply an unequal exchange. The basis for the approach of fairness is derived from the laissez-faire belief, which, it was thought, required the law to simply provide a framework, allowing parties to know what they had to do to make their agreements binding. This framework was intended to treat everyone equally, since to make different rules for one type of contracting party than another would be to intervene in the fairness of the bargain.

“The best way of describing most rules is that they are more orientated towards freedom than fairness or vice versa. However, rules that are more orientated in one direction will still tend to have elements of the other approach.” Fairness in Consumer Contracts – The case of unfair terms. Chris Willet. 2007 Ashgate Publishing Limited. Page 17.

Fairness can be divided into two areas; procedural and substantive. This was distinguished by Lord Brightman in the case of Hart v O’Connor[3], a Privy Council case involving a contract made by a party of unsound mind.Procedural fairness concerns the process by which the contract was made, whereas substantive fairness is to do with the outcome of the contract. Atiyah, in his article ‘Contract and Fair Exchange’[4]suggests that procedural and substantive fairness “feed upon eachother”, in that it is difficult to draw the distinction between the two as they are somewhat overlapped. However, Atiyah also believes there has been a move from principle to pragmatism, meaning in simpler terms, the practical consequences are considered most vital. The courts have been more concerned with producing justice in individual cases.

Fairness is widespread in the law of contract in that it attempts to equalise unfair contracts between parties contracting with one another. Cases of duress and undue influence in particular are noticeable of this, where, traditionally, the ‘deficiencies of will’ was the basis of defence of one of the contracting parties. The purpose of these doctrines is to provide relief from the consequences of involuntary consent to contracts, not relief from substantive unfairness.

Courts give effect to their ideas of fairness, however;  they are reluctant to acknowledge this openly, resulting in, as suggested by Atiyah, a “highly complex contractual apparatus which often obscures what is actually going on.”[5]  It is often acknowledged that courts do, at least to an extent, give effect to their sense of fairness in construing contracts or implying terms, as opposed to giving effect to what the parties concerned intended. One can see the interest of the courts in ideas of fair exchange in virtually any case where the court is called upon to construe an ambiguous or vague contractual provision or to supply some kind of implied term. In the case of Liverpool City Council v Irwin[6], the entire nature of the landlords’ obligations under the lease had to be constructed by the court out of the nature of the relationship.

There are many cases where the principle of fairness is taken into consideration, to give protection to consumers who enter into contracts not fully appreciating or understanding all the implications. In Lloyds Bank v Bundy[7], for example, the court invalidated a mortgage granted by way of guarantee of the mortgagor’s son’s business debts. Independent advice should have been sought because the contract was one-sided in terms of consideration. Procedural unfairness in the bargaining process was largely inferred from the gross inadequacy of the consideration.

There are several other areas where fairness has a role in the English law of contract. At common law there exists the doctrine of misrepresentation which may render a contract voidable at the suit of the party misled and gives rise to an action for damages in respect of the deceit. (Beatson 2002.) Such a doctrine is required to protect contracting parties who have entered into a contract because they have been fraudulently misled.

In reality, fairness plays a large role in the law of contract – the courts do attempt to uphold fairness and eradicate unfairness. But they do so behind guises of doctrines and policies, and for good reasons too. Fairness in the abstract is a wildly subjective concept, and every individual will have different ideas of fairness. Basing judicial decisions on fairness may appear to be subjective and illogical, resulting in opprobrium and undermining the faith in the judicial system. I believe freedom of contract still exists within the law today but it is more to do with the interpretation and application of the law by judges than actual legislation itself. On the whole, I feel that law has somewhat restricted such a notion but this has been for the better of the UK population at large. It has provided us with legislation and regulation that protects us in the many contracts we make on a daily basis.

[1] [1968] AC 269

[2] J Adams and R Brownsword, ‘The Ideologies of Contract Law’ (1987) 7 Legal Studies 205.

[3] [1985] AC 1000 (PC) 1017-18

[4] Patrick Atiyah, ‘Contract and Fair Exchange’ [1985] 35 U. Toronto L.J. 1

[5] Patrick Atiyah, Essays on Contract [Oxford: Clarendon Press, 1988] p.337

[6] [1977] AC 239

[7] [1975] QB 236