Abstract:
The long-standing principle of freedom of contract, has recently been criticised for it not achieving substantive justice by members of the judiciary. This research paper investigates the impact and effects of the classical model of freedom of contract on the UK’s approach to contracting. The paper highlights the effects the model freedom of contract has had from the time it was implemented to today. The paper finds that the introduction of the classical model of freedom of contract in the nineteenth century had a notable impact in the relationships of those who contracted as the model ensured there was a moral obligation to keep promises when made. However, across these recent years, this obligation has caused a negative financial impact for some parties as the model ignores inequality of bargaining power between parties. These results indicate that whilst the introduction of the classical model of freedom of contract was brought to serve the promotion of personal autonomy it has in recent times failed to achieve the three important elements of fair, just and reasonable.
Keywords:
Contract Law, Freedom of Contract, Consumer Rights Act 2015, Unfair Consumer Terms Act 1977, Autonomy, Inequality of bargaining power, Economic liberalism, Promise, Voluntary, Moral duty, Contractual obligations, impact, political liberalism, Substantive unfairness, procedural unfairness, Market credibility, Judicial intervention, Social justice,
Introduction:
Many believe it is our moral duty to uphold the promises we make to one another. The classical model of freedom of contract, a ‘fetish’ of contract law for many years, shares the same belief. The theory allows for contractual obligations to go through when there is a voluntary exchange of promises. This paper attempts to outline the impact that the theory has had across the years. The classical theory is rooted to go far as the eighteenth century and be the idea of French legal theorists, who succeeded to embody the theory within the French Civil Code. This allowed parties to have the decision-making power when determining the way their relationship was to govern. This approach is the product of political liberalism that England wanted to replicate under the principle of the economic liberalism in the nineteenth century.
However, a question that arises is, why should a promise produce obligations? Well, the classical theory looks to answer this question with two possible explanations. First of all, the principle stems from the political liberal theory, which holds that promises set expectations for other people. Promise-making and maintaining is a crucial behaviour that fosters cooperation and trust in society. According to the notion, mutual respect and property rights can only exist in a society where individuals can rely on one another’s commitments. Consequently, the duty to honour agreements, including contractual obligations, stems from the necessity of collaboration and trust, both of which are necessary for a civilised and well-functioning society. Second, commitments made in contracts are taken into account under the traditional notion of freedom of contracts because of the liberal economic ideas, which hold that people can be free to maximise wealth for the good of society. Promises, or contracts, have to be enforceable in order for markets to work successfully since this maintains the system’s credibility.
Current English contract law supports this perspective, particularly with relation to exemption provisions in contracts that are freely negotiated. These clauses provide the parties the freedom to divide up the risks among themselves however they see fit. Economists contend that the agreed-upon risk balance would be upset if these clauses were not enforced. Nevertheless, this traditional economic theory finds it difficult to account for legislation that restrict contract freedom in order to protect consumers, such as the Consumer Rights Act 2015 and the Unfair Contract Terms Act of 1977.
The Effects of Freedom of Contract in the 19th Century
As we previously explored the reasons why freedom of contract looks to obligate promises, it is now important to look at the effects it has had within the UK’s Contract Law. Its introduction was warmly welcomed by many members of the judiciary such as Chief Justice Erle who emphasised the importance of this principle by stating that ‘Every man is the master of the contract he may choose to make.’ This indicates that the principle appears to be a positive and essential need within contract law because of its want to give power and freedom to others to choose if they want to make a contract or not. It also appears that the principle is ensuring the law follows individual autonomy as it excludes judicial intervention from contracts. The judicial system also seem to respect the principle and believe it is right for it not to interfere with Sir George Steel stating ‘If there is one thing which more than another public policy requires it is that men of full age and competent understanding shall have the utmost liberty of contracting and that their contracts when entered into freely and voluntarily shall be held sacred and shall be enforced by Courts of Justice.’ Furthermore, Lord Shaw has stated that it is vital for the law when enforcing contracts to consider the freedom of contract and the freedom of trade as it is in the publics benefit to do which shows that the English Law views the doctrine of freedom of contract as a bedrock to contracting. In addition, Lord Morris stated “the policy of the law is to uphold freedom to contract” this reflects the legal system’s dedication to upholding the goals and expectations of parties to a contract.
However, it is also evident that, even though the principle of freedom of contract encourages autonomy and certainty, this approach could lead to the strict enforcement of contracts even in cases where one party may face severe hardship—so long as the contract was initially signed without coercion. This therefore shows that the courts during the nineteenth century did not consider the inequality of bargaining power between parties. This can be further supported by the there is a long-standing principle that courts will not intervene to correct substantive unfairness in a contract rather only intervene with matters concerning procedural unfairness. Lord Brightman distinguishes the two concepts as he states that that procedural unfairness is caused when a contract is induced by undue influence etc, and substantive unfairness is where the terms of the contract are more favourable to one party than to the other.
It is clear that the classical model of freedom of contract has a strong influence in the UK’s approach to contracting, as it stands that promises should be obligated and failure to achieve substantive justice is not a reason for judicial intervention. The famous Lord Bramwell provides an explanation, “For here is a contract made by a fishmonger and a carrier of fish, who know their business and whether it is just and reasonable is to be settled by me who am neither fishmonger nor carrier, nor with any knowledge of their business”. This reinforces the principle that freedom of contract should be upheld as parties have more knowledge of a particular business than the judiciary. Furthermore, Lord Bramwell also states that it is difficult to show proof of inequality of bargaining power as for the courts the contract was voluntarily entered into, ‘I am for my part prepared to hold, not that an agreement between two people which has been voluntarily entered into by them cannot be unreasonable, but the fact that it has been voluntarily entered into by them is he strongest possible proof that it is a reasonable agreement, and that I should require the strongest possible evidence, or something more even than a possibility, to shew me that was an unreasonable agreement.’ This emphasises that the onus of demonstrating the unreasonableness of a contract is mostly on the party contesting it. This reinforces the binding nature of contractual promises under the freedom of contract concept and makes it more difficult to challenge agreements based on fairness after they have been reached.
The Effects of Freedom of Contract in the 21st Century
While the doctrine of freedom of contract was dominant through the 19th century and parts of the 20th century, as Lord Morris stated, ‘the policy of the law is to uphold freedom to contract’, there seems to be a change in attitude towards contracting from the courts as while before substantive fairness of the exchange was completely irrelevant and in line with the rule that courts should not interfere in matters of substantive unfairness , the principle is now receiving much more attention from courts. Chadwick LJ has stated, ‘Unless satisfied that one party has, in effect, taken unfair advantage of the other— or that a term is so unreasonable that it cannot properly have been understood or considered—the court should not interfere.’ This demonstrates that while the courts should still enforce contracts under the doctrine of freedom of contract they could avoid doing so if they believe the principle of substantive justice has been breached. This aligns with the perspective that courts intervene in contracts to address substantive unfairness, whether is due to the content or outcome of the contract.
Moreover, the addition of the act of parliament, the Consumer Rights Act 2015 represents the clear intentions of the English in the way they are trying to enforce contracts as the act is looking to avoid excluding liabilities of parties relying on unfair and unreasonable terms despite the doctrine of freedom of contract being in place because both parties have voluntarily agreed on the contract. The doctrine of freedom of contract places utter importance on promises as once a party agrees with terms placed then those terms should be obligated no matter how unreasonable because the parties accepted the risk. Although the introduction of the Consumer Rights Act 2015 imposes limitations for the doctrine to function in today’s modern world as a promise to agreed terms will not be enforce by courts where the terms are unfair. Section 62(4) of the act states “A term is unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer.” The emphasis on protecting customers against unfair terms highlights a larger goal of consumer protection as a public policy. This limitation on freedom of contract once again highlights the ‘true construction of a contract’ as through this piece of legislation judges put the interests of the customer ahead of unbridled contractual freedom because they understand that the intentions of the customer would not have been to be taken advantage of. Furthermore, Lord Bingham states when there is a considerable disparity between the parties’ rights and obligations: the clause cannot materially benefit the proferens at the expense of the customer. This demonstrates, under the act, the courts have the authority to examine and void any clauses that seem unjust which is not something which the courts have previously done.
Furthermore, Lord Denning encapsulates the tension between the need to enforce the doctrine of freedom of contract and the need for judges to intervene to uphold substantive fairness in contractual relationships by stating ‘Faced with this abuse of power – by the strong against the weak – by the use of the small print of the conditions – the judges did what they could to put a curb upon it. They still had before them the idol, freedom of contract. They still knelt down and worshipped it, but they concealed under their cloaks a secret weapon. They used it to stab the idol in the back. This weapon was called the true construction of the contract.’ Lord Denning portrays judges as supporters of substantive fairness rather than the doctrine of freedom of contract, as the ‘the true construction of the contract’ allows for judicial interpretation on a contracts term to see if it is in a manner that aligns with fairness and justice and if it is not, it can be rejected. Lord Denning’s perspective aligns with the argument presented by P. Saprai that the courts set aside contracts on the basis of basis of substantive unfairness in the name of procedural unfairness, as the ‘true construction of the contract’ is a disguise for which courts can set aside a contract on the basis it is substantively in the language of procedural fairness to justify it to the ‘idol’, the doctrine of freedom of contract.
Moreover, while the doctrine of freedom of contract is an integral part of contracting and as established the doctrine will not allow for courts to interfere in substantive matters, cases have shown to get around this as seen in Banque Financiere v Skandia, where the defendants avoided paying out on insurance, relying on a ‘fraud exception’ clause which the claimant was not aware about and argued that the defendant owed a duty to disclose the information. The courts on this issue stated that failure to disclose made the contract voidable however that failure of disclose did not amount to a claim for damages. This aligns with P. Saprai’s argument that in some cases the courts try to use the language of procedural fairness to justify transaction avoidance as this case demonstrates a problem of the parties entering into an agreement, but it amounts to a void contract an outcome suitable to achieve substantive fairness and not amounting to a claim for damages an outcome suitable to achieve procedural fairness.
Furthermore, Lord Denning once again emphasised the importance of courts in the UK to not enforce contract where there is unfair terms and advantage taken of, despite being voluntarily entered into as when the “parties have not met on equal terms, when the one is so strong in the bargaining power and the other so weak that, as a matter of common fairness, it is not right that the strong should be allowed to push the weak to the wall.” Therefore, Lord Denning does imply that there is a need for the legal system to resolve circumstances in which parties transfer property or enter contracts with uneven bargaining power. He further states that the English law must develop a doctrine of fairness which he implies will combat the doctrine of freedom of contract, “But I think the time has come when we should seek to find a principle to unite them.” However, this idea of a general doctrine of fairness was rejected by Lord Scarman who calls into question whether a general concept addressing the imbalance of negotiating power in contemporary contract law is really necessary. He suggests that the idea of a universal principle addressing disparity of negotiating power is unnecessary since already-existing legal concepts, such as undue influence, may sufficiently address situations in which one party exercises undue pressure or influence over another.
The Future of Freedom of Contract in the UK
A fundamental component of UK contract law, the freedom of contract model offers a framework that is both adaptable and effective for individuals and enterprises to enter into agreements. But the introduction of “click-wrap” and “browse-wrap” agreements, together with the emergence of digital platforms, have added new layers of complexity to the idea of contract flexibility. Customers frequently accept terms and conditions without reading or even completely comprehending them. Courts may examine these agreements more closely in the future, particularly if they are thought to be unduly one-sided or if consumers don’t really provide their consent. The Supreme Court recognised in Beavis v. Parking Eye Ltd that although the concept of freedom of contract is still important, courts are ready to consider whether a contract’s terms are reasonable and fair, where the negotiating power of one side over the other is substantial.
There is a growing recognition that freedom of contract can result in unfair outcomes and abuse, which has led to calls for restrictions to safeguard vulnerable people. Others, on the other hand, contend that protecting contract flexibility is essential to individual autonomy and economic liberty and urge cautious assessment of the effects of any limitations on innovation and entrepreneurship.
It is crucial to strike a balance between contract freedom, social justice, and society interests. While encouraging economic freedom and innovation, safeguards against exploitative agreements should be in place for individuals. Improving consumer protection and regulating certain contract types could be necessary in the future to achieve a balance between the benefit of society and individual.
Conclusion
The notion that parties are typically free to discuss and agree upon the terms of their contracts without excessive intervention has been reinforced by the freedom of contract principle, which has unquestionably altered the landscape of UK contract law. In the past, this theory encouraged individual liberty and market efficiency, guaranteeing that contracts were kept, and the legal system acknowledged the parties’ wishes. But this theory has not been without its flaws, as the examination of its impacts from the 19th century to the current day shows.
The approach was praised in the 19th century for providing people and companies equally control over their contractual responsibilities. However, this same flexibility also meant that stronger parties might put conditions on the weaker party that could result in unjust decisions. These disparities were made worse by the judiciary’s unwillingness to get involved in cases involving real injustice.
As we enter the twenty-first century, the concept of freedom of contract is still developing. Although the concept of contractual freedom is still upheld by courts, there has been a discernible shift in their recognition of the significance of substantive justice and fairness. Important protections have been implemented by laws such as the Consumer Rights Act 2015, which make sure that contracts do not unjustly harm consumers and correct the power imbalances that freedom of contract can occasionally increase.
Even while the freedom of contract is still a cornerstone of UK contract law, fairness and justice concerns are increasingly influencing how contracts are applied. Maintaining this equilibrium between protecting against the possibility of misuse and preserving the advantages of contractual flexibility will be the task for the future.
By- Tanmeet Sachdeva, University of Surrey