If contracting parties actually create their own bargains, then how can the various instances of judicial and statutory interference with contractual terms be justified?

Contract Law DO NOT COPY

INTRODUCTION

In contract law, there are two competing accounts of the point, purpose and value of the whole body of rules that make up the law of contract. The first is the traditional orthodox account which is commonly referred to as the Will theory and the second gives a heretical account of what is known as the Reliance theory. Both theories can be divided into two elements. The first element of the theories gives us an account of the nature and basis of promissory and contractual obligations and the second elements deals with the value content of contract law.

WILL THEORY

The Will theory supports the notion that “contracting parties actually create their own bargains”. The first element of this theory states that promissory and contractual obligations are self-created and that obligations are brought into being through conventions and expectations. Fried supported the belief that once promises have been made and obligations created, it would be wrong to break them, describing it as “tantamount to lying”. The second element states that the value content of contract law is concerned with freedom and autonomy, indicating that parties should be free to create contracts without interference from the courts and statutes. The role of the courts is merely to act as an arbiter, giving effect to the parties’ agreements.

An example of the approach taken by Will theorist in interpreting contracts can be found in Chappell & Co. v Nestle Co. Ltd, where the court adhered to the rule that consideration must be adequate but need not be sufficient. It was established that it was for the parties to determine the value of consideration and the role of the court was merely to assess whether or not consideration was present and not to investigate the adequacy of consideration. This approach is an example of the principle that the parties create the contract and it is not for the courts to interfere with contractual terms.

Therefore, in coherence will the will theory, it seems that judicial and statutory interference cannot be justified. Any imposition of rules or inference with existing rules within the contract would go against the “will” of the parities. However, if we consider the conflicting theory of Reliance, we are able to find justification for the statutory and judicial interference of contractual terms.

RELIANCE THEORY

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RELIANCE THEORY

The first element of the Reliance theory is different from that of the Will theory as it states that obligations are not brought into being through conventions and expectations but rather the idea of reliance. When parties enter into a contract, they are relying on a promise and they should be ensured that they can rely on the promises given. Also in contrast with the Will theory, the Reliance theory states that contractual obligations can come into being whether or not there has been an explicit promise. This idea conflicts with the idea of self-created contracts and can be compared with obligations in the law of Tort, where obligations are not created but are, nonetheless, imposed upon parties.

The second element of the Reliance theory states that as well as including the values of freedom and autonomy, it should also include other values which can triumph the values of individual freedom and autonomy. These other values are referred to as “welfarist” values and include principles of justice, equality and fairness.

The approach that has been previously taken in the Will theory is a literal one, whereby Will theorists will be respectful of the parties actions and statements and a manifestation of that respect is to be found in the method that the courts have chosen to use, in which the judges will interpret the contracts written by the parties literally, assuming that both parties have meant and agreed on what is in the contract. This judicial attitude seems to have changed and this is demonstrated by the contextual approach found in Investors Compensation v West Bromwich Building Society. The contextual approach to interpretation of contracts involves a degree of interference by the courts as they are not just taking the literal meaning of the contractual terms and applying them to the fact, but instead they are examining the circumstances and background information involving the parties and contract in order to interpret the contract. In this case, using the literal meaning to decide whether the investors retained ‘any claim’ against the building society would have lead to a “ridiculous result” and therefore Lord Hoffman decided to refer to the context of the situation in order to come to a decision. This case clearly demonstrates the shift from strict literalism to contextualism in the interpretation of contractual terms and can be justified by the fact that it avoided an absurd and unfair outcome.

Another example of this shift is apparent with implied terms. An implied term is a term that has not been expressly stated by the parties but will nonetheless be included in the contract. Will theorists may argue against the addition of implied terms on the basis that they are a process of adding terms into the contract rather than attempting to understand and interpret the terms already within the contract.

Further evidence of judicial intervention can be seen in the cases of Williams v Roffey Bros & Nicholls Ltd and Errington v Errington & Woods. Williams v Roffey is regarded as a very important case which represents a triumph of the Reliance theory over the Will theory. The case of Williams v Roffey overruled the case of Stilk v Myrick which stated that merely doing what you are already contractually bound to do cannot be good consideration for a subsequent promise. In Williams v Roffey, it was established that, where a practical benefit is gained, then an agreement to perform an existing contractual duty is good consideration. The main contractor, in this case, had received the benefits such as avoiding the inconvenience of finding other carpenters to complete the work and the possible fine for late completion. In the case of Errington v Errington, the courts decided that a unilateral offer must be kept open for a reasonable period of time. It could be argued that if the courts wanted the offer to be open for a certain amount of time, then they would have stated as such in the contract. Here the courts are imposing an obligation on to the parties, with the justification that it would be unreasonable and even unfair to revoke a promise once the performance has commenced.

Doctrines that set aside problematic contractual transactions do not coincide with the principles of the Will theory. These are known as vitiating factors, one example being misrepresentation. By allowing contracts to be set aside where a false statement has induced a party to enter into the contract, the law is effectively ignoring the party’s will. There doctrines, therefore, fall into the scope of the Reliance theory. Misrepresentation is a false statement of fact made either before or at the time of the making of the contract by one party to another which induces that other to enter into the contract. The courts will interfere by setting the contract aside if it is established that one party entered into a contract as a result of another party’s wrong doing. Vitiating factors are justified as they set standard of behaviour that parties are expected to follow.

An example of statutory interference with contractual terms can be found within the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999. The function of these legislations is that they are designed to address contractual unfairness. This can be shown in section 2 of the Unfair Contract Terms Act, in which paragraph 1 excludes exemption of liability for death and personal injury. By invalidating some exclusion clauses and subjecting other clauses to the reasonable test, the statutes are trying to address the balance of power between parties in contracts. This justifies the interference of legislation upon contractual terms, as it seeks to ensure parties do not include unfair and unreasonable terms, which would be otherwise forced onto parties who entered into the contract.

CONCLUSION

As these examples show, the implementation of the welfare values that are found in the Reliance theory can be seen to justify the inference with contractual terms by judges and statues. The Will theory, whilst attempting to preserve the freedom of the contracting parties, fails to take into account issues such as bargaining power and economic duress and therefore the interference of statutory and judicial intervention is required in order to ensure the “freedom” of parties is not abused and weaker parties are protected. The second element of the Reliance theory is broader than that of the Will theory, giving judges the flexibility to the judges in the methods of interpreting contractual terms.