Essay: Freedom to contract and implied contractual terms

Contracts in modern day society are now consistently incorporated into what regulates “planned exchanges” and this can be seen as outdated due to consistent intervention to limit ‘freedom of contract’. A system of laissez-faire or “leave to do” and the idea that a person ought to have ‘freedom of contract’ with minimal state or judicial interference will be discussed as has been examined in recent cases.
The basis of all contracts consists of the terms whether this is express or implied as express terms are stated either orally or in writing whereas implied terms are those applied by the courts or by statute as fact, law, custom or for trade usage and cannot be excluded in the formation of a contract . For parties to form contracts on their own terms they must be completely autonomous in their will to do so and the doctrine of ‘‘freedom of contract’’ was therefore established in the 19th century being adopted by the English judiciary .
The point in which the ‘freedom of contract’ was first officially legally recognised was that in the case of Printing and Numerical Registering Co v Sampson (1875) . An agreement to sell all future rights for a patent and obtaining the right to exclude other from using, making or selling an invention had been tested in conflicting with public policy . Sir George Jessel, Master of the Rolls , held the contract was valid and that this was not against public policy. During this time, a consensus ad idem or a meeting of minds between parties in a contract had been consistently emphasised in the formation of contracts which meant that this reliance of intention was a belief in autonomous contracting. In turn, the ‘freedom of contract’ has been outdated as the sanctity of fairness is to be upheld as Sir George Jessel MR expressed that “you have this paramount public policy to consider that you are not lightly to interfere with this ‘freedom of contract’.”
Even though the courts are unwilling to interfere with the parties’ freedom to contract, it still remains their duty to protect the inferior against their oppressors to guarantee equality of all parties in law. To tackle this, strict requirements have been imposed to monitor the development of contractual terms and by rejecting to incorporate terms that do not fulfil the criteria. This has been demonstrated in the case of Liverpool City Council v Irwin [1977] where a term was implied for the landlord to take reasonable care and maintain the common areas in the property. In turn, revealing more restrictions placed on parties in their freedom to contract.
The individualist approach in our legal system developed the classical model of contracting embodying the French Civil Code into accepting and adopting the doctrine of ‘freedom of contract’ . Consumer contracts are entered in to so frequently in every day agreements that protection is required on both sides of agreement. This protection means that businesses contracting with consumers must abide by the Consumer Rights Act 2015 which therefore limits businesses to contract on their own terms as they must incorporate the CRA into their agreements. Thus, this supports the view that ‘freedom of contract’ has become outdated as parties are increasingly being limited in contracting freely without Parliamentary or judicial intervention. The introduction of consumer rights aimed to balance the bargaining power between the consumer and the business.
To give the consumer more bargaining power, the CRA 2015 gives away specific freedoms which businesses used to have prior to unfair contract terms legislation . The CRA 2015 led to fairness in bargaining power through wages and labour conditions to ensure consistency with freedom in the economy demonstrates how legislation regulates contracting. This must be done in “good faith and fair dealing” as a manner categorised by “honesty, openness and consideration for the interests of the other party to the transaction or relationship in question” . As a result, certain terms have been made illegal and off limits to protect parties such misleading the consumer regarding the contract or their legal rights, deny all redress if a problem occurs or changing the terms of the contract after agreement of the terms. Not addressing exclusion clauses before or at the point a contract is being made also renders a contract void such as in the case of Olley v Marlborough Court [1949] where a hotel failed to mention they would not be taking responsibility for stolen or damaged personal belongings before or when the contract was being made and the contract was deemed void . This can again reinforce the courts’ power to interfere in contractual agreements meaning a lack of autonomy for parties forming agreement on their own terms.
‘Freedom of Contract’ was previously a highly-regarded idea and judges would not interfere if the two parties had freely agreed to the contract even if there was an onerous term in small print that was not brought to attention . It was simply not their role to judge the terms if the parties had agreed to them. But now the CRA 2015 has made it the court’s duty to judge the fairness of terms. The CRA limits ‘freedom of contract’ since the act mainly focuses on securing consumer rights and protection and this comes at a cost. Businesses involved in ‘business to consumer’ contracts are no longer free to contract on their own terms thus.
If the L’Estrange v E Graucob [1934] case was decided after acts such as the Unfair Contract Terms Act 1977 and Sales of Goods Act 1979. It would have been decided differently since both acts give strict treatment to unfair terms whereas previously ‘freedom of contract’ was considered of utmost importance. But judicial and Parliamentary interference demonstrated a need to sacrifice ‘freedom of contract’ due to its threat to fairness. The judges deemed that the onerous terms were valid since the two parties had signed the contract thereby agreeing to all terms. This case demonstrated the ‘freedom of contract’ being upheld by the courts since L’Estrange’s claim was unsuccessful as the rule from this case was made that if a contract is signed, the person signing would become bound by its terms. It is apparent that fairness is prioritised much more than ‘freedom of contract’ is in the eyes of the law.
In contrast, the case of Arnold v Britton and others [2015] is one that was decided after the UCTA 1977 that shows how court procedures have changed due to legislation and the courts no longer uphold the ‘freedom of contract’ like they used to. The courts said they will respect the clear, ordinary meaning of the terms of the contract over what makes sense commercially, therefore; signifying that if parties write their contract in a clear and comprehensive manner, the court will uphold their terms, unless legislation deems this unfair.
Furthermore, Lord Bingham placed value on the issue of fairness distinguishing between “significant imbalance” and “good faith” as the courts question if contractors exploit the consumer’s “necessity, indigence, lack of experience, unfamiliarity with the subject matter of the contract, weak bargaining position” . These factors all relay back to freedom and procedural fairness when creating a binding arrangement within a contract.
The basis of a contract consists of its express terms which allow parties to contract to lay out terms for a contract themselves. Legislation, however, now distinguishes between which rules are unfair and therefore illegal. This is assessed and carried out by the courts while utilising Schedule 2 the ‘Grey List’ of the UCTA [1977] aiding in identifying terms that are unconscionable such as limiting liability for death or personal injury, liability for faulty and misdescribed goods or digital content and liability for a failure to perform certain contractual obligatory acts This has been a method of introducing unfair terms into basic contracts but this can be argued to undermine the ‘freedom of contract’ due to its clear restrictions. Before, courts would usually only uphold express terms due to the doctrine of ‘‘freedom of contract’’ and all terms expressly stated would have previously guaranteed the ‘freedom of contract’, but now express contractual terms can be debated in court and weighted for fairness. The case of Parker v South Eastern Railway (1877) reveals a case regarding an exclusion clause where the court ruled that an individual cannot part from a contractual term since failing to read the contract, however, a party relying on an exclusion clause must take the practical initiative to make this clear for the customer. Usually, the law upholds exclusion clauses, no matter how unfair they were or whether were written in small print as demonstrated in this case. Therefore, judicial intervention has worked against the ‘freedom of contract’ here since the law states that a person may be bound as a result of an exemption clause in a contract even if the party has been oblivious of its content. On the other hand, then Denning LJ developed this idea in Spurling v Bradshaw and held that “some clauses which I have seen would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient” . The ‘red hand’ rule was seen as a rational improvement of the common law as it emulated the nature of the common-law system. This ‘red hand’ rule can be said to help preserve a fair balance between all parties in a contract
The courts had recognised express contractual terms to be a turning point in dealing many cases individually using an interpretive approach such as in the case of Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] . Lord Hoffmann set out five principles for interpretation given that emphasised that courts should interpret contracts in their contextual sense which should make it more clear what the parties intended by the contract . This, again, signifies a moment of change reinforcing the fact that the ‘freedom of contract’ was outdated since we can see that any ambiguity in a clause would be construed against what is called the ‘proferens’ , which is, the party that proposes a clause of the contract. Therefore, this rule encourages parties to draw up their clauses in an unambiguous and clear way and if they cannot do so the clause will ultimately be held ineffective.
To contrast, there are three ways in which terms in a contract can be implied as fact, law, custom or through trade usage and various tests have been developed for implying factual terms into a contract. The business efficacy test applies when terms implied with common law practice and as long as they are “obvious and necessary” including they are “desirable and reasonable” also. The Moorcock (1889) case is an example of implied terms read in and added as a fact where the harbour authority had an obligation to let the ship owner know that there was rock instead of soft silt at the sea bed. Therefore, there was an implied term that the ship should be safe because without this essentially the business would not be a business. This term was implied under the business efficacy test because without it the contract could not be performed as the parties intended. In turn, the CRA 2015 also puts restrictions on ‘freedom of contract’ for the purposes of consumer protection. The UCTA 1977 doesn’t allow any attempts by a party of a contract to limit or exclude certain terms in a contract such as liability for negligence . In addition, terms including a cause of death or personal injury is automatically void by statute and automatically implied in to the contract . However, damage caused to or a loss of property under a contract must be reasonable . Another test was the officious bystander test applied in the case of Shirlaw v Southern Foundaries [1926] where an express provision had not been included in a contract even though it would have been an obvious term to include at the time of formation of the contract. Also, the case of Marks and Spencer plc v BNP Paribas Securities Services Trust Company Ltd [2015] reveals that a term will only be applied if it satisfies the test of business necessity . Consequently, implied terms can support the ‘freedom of contract’ as the courts will only imply a term when it is so obvious that it is obvious or only if it is absolutely necessary for the contract to work in business terms.
In recent cases, such as Attorney General of Belize v Belize Telecom [2009], Lord Hoffmann states how implying terms does not actually improve anything new in the contract but acts as a tool to make sense of the existing terms therefore supporting the terms that the parties freely decided. Nonetheless, implied terms give the courts more power to skew the basis of the contract. Lord Hoffmann’s judgement in the case of Belize claimed that these tests do allow new terms to be implied therefore going against ‘freedom of contract’ as was argued otherwise. The theory of laissez-faire can be applied here in this recent case. In addition, judges extended their duties beyond interpretation and no longer considered the parties’ free intentions to be as important as factors such as reasonableness.
Terms can also be implied by custom of a particular industry, trade customs or according to previous contracts between the same two parties. This is particularly has been outlined in the case of Hutton v Warren [1836] where the courts implied a term into a tenancy agreement providing compensation for the work and expenses undertaken in growing the crops. This was due to the fact that during the period this took place it was common practice for farming tenancies to contain clauses as such to protect parties in contracts. It could be argued that, implying terms by custom is a bigger violation of ‘freedom of contract’ since a party may decide they would not like to keep to custom and the court may decide otherwise.