Courts uphold the idea of fair exchange by making a person induced to enter into a contract through fraud or misrepresentation to elect to affirm or avoid it (Atiyah, 1988). He cannot keep the benefit of the contract while repudiating liabilities under it. Furthermore, he argues that in fact few cases turn on express affirmation or repudiation – the courts are more often asked to ‘infer’ an affirmation or repudiation from what has been done. On analysis, the courts will often insist that the innocent party remains liable, in effect, because he has accepted the benefits of the contract, or behaved so as to induce the breaching party to act in reliance (Peyman v Lanjani [1984] 3 All ER 704). Thus, the integrity of the exchange transaction is maintained.
There are many trends, both in case law and statutes, to give protection to consumers who enter into contracts not wholly appreciating or understanding the full implications (Atiyah, 1988). In Lloyd’s Bank v Bundy [1975] QB 326 the court invalidated a mortgage granted by way of guarantee of the mortgagor’s son’s business debts. In cases like this, independent advice should have been obtained because the contract was one-sided in terms of the consideration. This point was confirmed by National Westminster Bank v Morgan [1985] 2 WLR 588. In cases like Bundy and Morgan procedural unfairness in the bargaining process was largely inferred from the gross inadequacy of the consideration (Atiyah, 1988).
Cresswell v Cresswell [1978] 1 WLR 225 and Backhouse v Backhouse [1978] 1 WLR 243 are two cases involving procedural unfairness. Both concerned separating spouses where the wives surrendered their interest in the matrimonial home in return for an indemnity against liability on the mortgages. It was suggested that these contract were entered into by the wives under some sort of emotional disturbance, so the cases can be characterised as involving procedural unfairness (Sutton v Sutton [1984] 1 All ER 168, at 174), although the judgements in both cases say very little about any element of emotional disturbance. The transactions in both cases were said to be “plainly grossly unfair or unequal exchanges” (Atiyah, 1988, p.344).
Collins (1994) distinguished three potential motives for regulating contract terms, which could all be described as interventions on the grounds of fairness. The first motive is market failure, as the law may be concerned about unfairness resulting from it. The law will attempt to regulate contract terms in order to ensure a competitive market in the terms on offer, thus promoting consumer choice. Under substantive fairness, the law may be concerned about unfair bargains, under which the consumer receives poor value for money. By regulating contract terms, fair prices are ensured as well as the fulfilment of legitimate expectations. The third motive is that of the social market. The law may be concerned with achieving a public good, which in a contract law situation would be ensuring that goods and services are of good quality. Legal regulation can work towards this public good by imposing compulsory terms in contracts and invalidating contrary agreements.
The common law has always been willing to set aside a contract or express contractual terms in certain cases where the agreements are contrary to public policy. This is obviously different from setting aside contracts on grounds of unfairness, and it is sometimes almost as if public policy is a reason invoked merely to overcome the general common law principle prohibiting courts from interfering on grounds of fairness (Atiyah, 1995). Once the element of public policy is admitted, the court is able to discuss freely the question of fairness as well as public interest (Lord Diplock in A. Schroeder Music Publishing Co Ltd v Macaulay [1975] 1 WLR 1308). An example of agreements contrary to public policy is where a person undertakes not to compete with another in a certain profession or trade. In examining the question of fairness in this context, the courts usually scrutinise the amount of the consideration for the promise in question. A person paid handsomely for his promise not to compete is unlikely to challenge the agreement, but where the consideration appears deficient, the agreement is likely to be held void (Atiyah, 1995).
Express contractual terms may also be overridden at common law when the contract is ‘unconscionable’. In other words, one party has extracted an extortionate and unfair bargain by taking advantage of the other party in some unfair way (Atiyah, 1995). In the case of Bundy Lord Denning suggested that there was a general equitable jurisdiction to set aside contracts where the parties were of unequal bargaining power, and one of the parties had extracted an advantage unfairly or unconscionably. His dicta was not approved in Morgan – Lord Scarman who delivered the opinion of the House of Lords doubted whether there was today any need for any general principle affording relief in cases of inequality in bargaining power.
One reason why Lord Scarman doubted the need for any such general principle was the enactment of the Unfair Contract Terms Act in 1977. But no statute is all-embracing, so Atiyah (1995) argues that some residual principle will remain necessary to deal with any unconscionable contracts not caught by statutes. Furthermore, Atiyah argues that bargaining power is nearly always unequal, and is necessarily so. So even if some residual equitable power remains to avoid unconscionable contracts, there is no doubt that some very serious unfairness must be shown. In Boustany v Pigott [1993] NPC 75 the Privy Council held that to set aside a contract as unconscionable it must be shown that the defendant was guilty of some moral impropriety, actual or constructive fraud.
The Unfair Contract Terms Act 1977 is the first statutory attempt to deal specifically with the problem of unfair contract terms, although there are many other statutory provisions which invalidate particular contractual clauses in certain contracts, like the Consumer Credit Act 1974. The 1977 Act deals with an unfair contract resulting in too light a burden being imposed on one of the parties. Of most importance, it imposes a total ban on exemption clauses concerning negligence actions for personal injury or death (s2(1)). It would be unfair for a party to rely on such an exemption clauses following a personal injury or death caused by their negligence. The same policy can be applied to defective and dangerous goods bought by a consumer. A consumer buying or acquiring goods on hire-purchase is entitled to goods that are of ‘satisfactory’ quality and reasonably fit for their purposes, so that no exclusion clause can exclude the seller’s responsibility for defective goods (ss6-7). Where goods are bought by business firms, exemption clauses protecting the seller from liability for defective goods are only valid as against a business buyer if they are reasonable.
The test of reasonableness (s11) is widely used throughout the Act. Exemption clauses are generally only valid against a consumer if they are reasonable and, as against business parties, they must be reasonable to be valid. As a result, business parties may invoke the 1977 Act and attack the validity of a contractual exemption clause on three grounds of reasonableness – if it is a case of defective goods in a contract of sale or hire-purchase; if the clause excludes liability for negligence; or if the clause is contained in the other party’s written standard contract.
In the case of R. W. Green v Cade Bros Farms [1978] 1 Lloyd’s Rep. 602 a farmer bought some seed potatoes which turned out to be defective, resulting in crop failure. The sale contract contained two exemption clauses. The first exemption clause required the buyer to give notice of any complaints within three days of delivery. The second exemption clause specified that the seller was responsible only for refunding the buyer’s price. The first clause was held to be unreasonable because the disease afflicting the potatoes was not discoverable until the crop began to grow, and it would therefore have been quite impossible and unfair for the buyer to make his complaint within three days of delivery. However, the second clause was upheld on the basis that it was reasonable. The reasons given were that the parties were of roughly equal bargaining power, and the seed potatoes were uncertified hence they were cheaper than certified potatoes, so the buyer was deemed to have bought an inferior product with some element of risk attached.
This case contrasts with George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd where the clause was void as unreasonable. The House of Lords relied on the important factor that seed merchants often negotiated settlements and paid proper compensation in such farming cases, even where contracts contained such a clause. This demonstrated that even those in the trade did not think their clauses were reasonable, or did not think they should be strictly applied.
Disclaimers of liability by surveyors are often void for unreasonableness. If a surveyor is employed by a building society to value a house and negligently fails to discover serious defects so that the valuation is over-estimated, a borrower from the building society, prima facie, has a claim against the surveyor for damages in tort. Surveyors previously attempted to avoid such liability by disclaimers. These disclaimers were held to be unreasonable because it was evident that the majority of such buyers would rely on the surveyor’s report, rather than incur further costs by commissioning an independent survey. In addition, this fact was well known to surveyors and building societies, and if such disclaimers were not held unreasonable then buyers would be unprotected against a serious risk, whereas surveyors may have insurance (Atiyah, 1995).
In Smith v Eric S Bush [1990] 1 AC 831 the House of Lords held that the surveyor’s attempt to exclude liability for a negligent survey was invalid. There was notable judicial resistance to the exclusion of negligence liability by professionals towards consumers. Even if the survey had been cheap, the House of Lords would have been reluctant to permit the clause to stand.
A binding contract is grounded in consent and the consensual assumption of legal contractual obligation which in turn emphasises the fundamental values of freedom and autonomy (Barnett, 1986). At the core of contract is a respect for the individual’s liberty, and if respect for liberty requires that one be permitted to enter into binding agreements, it also demands that binding agreements reflect one’s voluntary choices (Bigwood, 1996). Hart (1968) points out that it is for the very reason that the law exists to render our preferences effective that it also includes ‘invalidating conditions’ such as misrepresentation and duress. To enforce agreements made by fraud or coercion would not only be greatly unfair, it would nullify the point of allowing binding agreements in the first place (Wertheimer, 1987).
The common law has always recognised a defence of duress. It is often said that no relief is given for economic duress or duress of goods, but only duress of the person (Cheshire et al, 2001). Duress occurs where one party to a contract has “coerced the other or exercised such domination that the other’s independence of decision was substantially determined” (Beatson, 2002, p.276) Like misrepresentation, duress is primarily concerned with procedural unfairness. Undue influence is said to be the equitable counterpart of common law duress, providing relief in cases of pressure or coercion where the common law provided no remedy (Royal Bank of Scotland plc v Etridge (No. 2) [2001] 3 WLR 1021 at 103).
In formulating the doctrine of duress, judges have avoided making explicit reference to considerations of fairness, even though such considerations are often essential to a determination of whether duress has been established (Beale, 1986). The element of fairness is more obviously present in the doctrine of undue influence since the very name of the doctrine brings into question what amounts to ‘undue’ influence. Instead of giving thought to the idea that influence must coercively affect consent, the courts have attempted to define what kind of influence the law will regard as being so unfair as to invalidate the contract (Thal, 1988).
There are several other areas where fairness and unfairness have roles to play 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.
Fairness also has a role in the doctrine of promissory estoppel. For a contract to be formed there needs to be a clear and unequivocal promise (Woodhouse A.C. Israel Cocoa Ltd. S.A. v Nigerian Produce Marketing Co Ltd [1972] AC 741). This doctrine operates on the premise that it is inequitable for a promisor to go back on a promise and insist on the strict legal rights under the contract. But in D. & C. Builders Ltd v Rees [1966] 2 QB 617 Lord Denning M.R. took the view that it was not unfair for D & C to go back on its promise. The reason for this was that the settlement was not truly voluntary, as Rees had improperly taken advantage of D & C’s poor financial situation.
Atiyah (1988, p.347) said, “There simply is no basis for saying that a free and voluntary exchange is unfair”. Courts are meant to give effect to contracts, and not impose their sense of fairness. In reality, fairness plays a big 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 or unfairness may appear to be subjective and illogical, resulting in opprobrium and undermining the faith in the judicial system. In conclusion, fairness and unfairness play large roles in the English law of contract, but they operate behind a façade in front of which doctrines, policies and statutes take centre stage.
BIBLIOGRAPHY
ATIYAH, P.S. (1988) Essays on Contract, Clarendon Press, Oxford
ATIYAH, P.S. (1995) An Introduction To The Law Of Contract, 5th edition, Oxford University Press, Oxford
BARNETT, R. (1986) ‘A Consent Theory of Contract’ 86 Columbia Law Review 269
BEALE, H. (1986) ‘Inequality of Bargaining Power’ 6 Oxford Journal of Legal Studies 123
BEATSON, J. (2002) Anson’s Law Of Contract, 28th edition, Oxford University Press, Oxford
BIGWOOD, R. (1996) ‘Undue Influence: Impaired Consent of Wicked Exploitation?’ 16(3) Oxford Journal of Legal Studies 503
CHESHIRE, G.C., C.H.S. FIFOOT, M.P. FURMSTON (2001) Cheshire, Fifoot and Furmston’s Law of Contract, 14th edition, Butterworths LexisNexis UK, London
COLLINS, H. (1994) ‘Good faith in European Contract Law’ 14 Oxford Journal of Legal Studies 230
COLLINS, H. (1999) Regulating Contracts, Oxford University Press, Oxford
HART, H.L.A. (1968) ‘Legal Responsibility and Excuses’, Punishment and Responsibility: Essays in the Philosophy of Law, Oxford University Press, Oxford
RAWLS, J, (1971) A Theory of Justice Harvard University Press, Cambridge, Massachusetts
SMITH, S.A. (1996) ‘In Defence of Substantive Unfairness’ 112 The Law Quarterly Review 138
THAL, S.N. (1988) ‘The Inequality of Bargaining Power Doctrine: The Problem of Defining Contractual Unfairness’ 8(1) Oxford Journal of Legal Studies 17
WERTHEIMER, A. (1987) Coercion, Princeton University Press, Princeton
