To what extent does the law require or encourage parties to long-term contracts to renegotiate the terms of the transaction in order to cope with changes in circumstances?

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To what extent does the law require or encourage parties to long-term contracts to renegotiate the terms of the transaction in order to cope with changes in circumstances?

The rules governing the enforceability of contracts are held in a balancing act. With one hand they must maintain the integrity of this essential instrument of market exchange whilst with the other allowing consenting parties to vary their obligations to exploit new opportunities and optimally manage market fluctuations. This paper will examine the extent to which this balance is held, and will use historical commentary to link changes in market conditions with changes in the law to determine the extent to which the law requires or encourages renegotiation.

The ‘classical’ approach perceives contracts as legal expressions of the intentions of rational, utility-maximising individuals making discrete exchanges in perfectly competitive markets. It is typified by a ‘binary’ approach to concepts like offer and acceptance, formalities and consent, and is most appropriate in unsophisticated capital markets involving one-off sales transactions with disinterested parties. There is no requirement to preserve business relations, and so every incentive to enforce promises, no matter how onerous they become (Blackburn Bobbin Co Ltd v TW Allen & Sons). Enforcing promises in this absolute sense leads parties to plan, as extensively as possible, for all foreseeable contingencies with exclusion, arbitration, liquidated damages and force majeure clauses. To this end, the law did not encourage renegotiation: it encouraged parties to keep their promises strike the right bargain in the first place.

Following two world wars and economically-turbulent inter-war years, the classical model of absolute enforcement was beginning to show weaknesses. Contracts were frequently frustrated by factors not anticipated by either party, and strict enforcement was often in the interests of neither. The courts responded with the Krell v Henry decision, in which a room-hire contract to watch Edward VII’s coronation was regarded as frustrated when the coronation did not take place. The legislature affirmed this judgment, following a series of post-war cases, with the Law Reform (Frustrated Contracts) Act 1943. The doctrine of frustrated contracts was the first ‘chink’ in the armour of absolute enforceability.

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The second ‘chink’ in the armour came with the courts’ increased use of elaborate interpretations of the parties’ obligations with a view to achieving a ‘fair’ outcome (the ‘true construction’ doctrine). This could involve implying conditions (Taylor v Caldwell); finding the scope of the contract did not cover new facts (Davis Contractors Ltd v Fareham UDC); or finding that the fundamental joint assumptions of the parties have transpired to be false (an alternative interpretation of Krell v Henry).

Collins argues that the courts frequently use notions of justice and fairness, disguised under the doctrines of construction and frustration, such ...

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