Striking a Fair Balance between the Buyer and Seller within a Contract

Striking a Fair Balance between the Buyer and Seller within a Contract:

 

Consider the extent to which statutory controls on unfair contract terms foster genuine freedom of contract as opposed to promoting a protectionist strategy.

 

 
In this essay, the author considers two diverging ideas regarding statutory controls on unfair contract terms. Section 1 will address the idea that statutory controls on unfair contract terms foster genuine freedom of contract. In this section, the development of freedom from the 19^th century to present shall be discussed, how it reached excessive heights causing exploitation and the implementation of statutory controls to overcome this. Common law approaches will also be considered. Moreover, the author recognises that contractual freedom is now limited but nonetheless still in existence, with the idea of market ‘searchers’, as well as other ideologies influencing this maintenance. Section 2 will subsequently look at how on the other hand however, these statutory controls promote a protectionist strategy. Thus, focus will be on the key statutory controls that protect consumers and the common law approaches that coincide with these controls. I shall investigate the concept of good faith and how this would impact the protectionist strategy. Furthermore, acknowledgement will be given to alternative proposals to replace protectionism, and in doing so I will look at criticism this strategy receives. Finally, a conclusion will be provided, namely to decide which of these approaches is favourable.

 

1.      Freedom of Contract:
“Every man is the master of the contract he may choose to make”. [1] Freedom of contract soared in the 19^th century with the belief that people should have freedom to deal and judge for themselves the contract being entered into with minimal judicial intervention. Terms were enforced firmly in comparison to previous centuries where the court would ‘stretch out the hand of equity’ to a party receivable of a bad deal. [2] Ultimately, freedom of contract stemmed from an increasing desire in contractual individualism and voluntarism. In the 19^th century laissez faire was at the heart of contract law and statutory controls mirrored this. Section 55 of the Sale of Goods Act 1893 allowed terms to be ‘negatived or varied by express agreement or by the course of dealing between parties’. This allowed allocation of risk which provided the positive liberty of individualism but created the negative liberty of being free from obligation.[3] Overtime this statute lost its initial purpose of providing party autonomy and ‘allocation of risk’ became a facilitator to corporations to exploit weaker parties and take advantage of their unequal bargaining power. This enabled freedom to reach excessive heights and cause undesirable effects.

 

Eventually a stricter system of standards was introduced by the Supply of Goods (Implied Terms) Act 1973. This Act moved away from 19^th century provisions like the SGA 1893 which provided minimum shielding to consumers. Within this Act there were provisions for both consumer contracts and business contracts. Its purpose served to accommodate a society which demanded a burgeoning industry in the direction of commercial and economic freedom. [4] This provided protection for consumers whilst restricting excessive freedom.  The intentions of this Act were re-interpreted into the Unfair Contract Terms Act 1977 but with sole intention to protect consumers which placed limitations on freedom but did not strictly prohibit it.

 

There are now higher standards imposed on businesses in relation to products and descriptions in the UCTA 1977, section 6 and section 12. “When balancing the gain of freedom for the potential surety on the one hand and the loss of freedom on the side of the credit institution on the other, the overall ‘gain’ would seem quite palpable”. [5] Protection provided by statutory controls on unfair terms therefore do not intend to discourage freedom but maintain it through balancing the lack of surety on behalf of consumers so that both parties enter contracts resourcefully equal. This is justifiable because with businesses having superior bargaining power, combined with the fact that they are gaining commercial credit, makes their gain much greater.

 

Evidently, a transformation from contractual autonomy to a regulated modern model of law occurred”. [6] However, courts applied statutory controls only where necessary, recognising their role was not to make contracts but to interpret their intended meaning, therefore party autonomy was still recognised. The ECJ ruled that national courts cannot find the entirety of a contract unbinding on a consumer on the grounds of it being disadvantageous for them. The ECJ emphasized the importance of this through the interpretation of Article 6(1) Directive 93/13/EEC on unfair terms in consumer contracts. If a contract contains unfair terms but can still remain in existence minus the unfair terms, the contract will remain binding upon both parties. [7] Similar application can be seen in national case law. In Nicolene v Simmonds, a term that was meaningless and unimportant to the continuance of the contract was struck out. [8] This enables a degree of freedom by not releasing consumers from contracts because of insignificant terms. It illustrates minimal judicial intervention to change a contract; the key component of fostering genuine freedom.

 

A term cannot be unfair if it is not incorporated into the contract by the parties. In Christopher Hull Fine Art Ltd, it was held that the description of goods was not a term as there was no reliance on a description during the sale. Slade LJ stated, “One cannot impute to the parties a common intention that it should be a term of the contract” [9] therefore it did not fall within section 13(1) of the SGA 1979. Again, this illustrates the courts unwillingness to vary contract terms because they prove unfavourable for a party. The application of these statutory controls illustrate that there is freedom of the formation of contracts and that commercial interests are not neglected in favour of consumer protection. However, despite the UCTA 1977 and UTCCR 1999 being aimed at protecting consumers there are also statutory provisions to protect businesses. The SGA 1979 which has been amended by Directive 99/44/EC provided excellent consumer protection whilst allowing businesses a necessary degree of freedom to contract using reasonable clauses.

 

Freedom does not mean fostering a lax and uncertain approach to contracts as seen in common law approaches, such as the “parol evidence rule”. In Shogun Finance Ltd v Hudson, Lord Hobhouse stated this rule is fundamental to commercial law. [10] This rule stops parties adducing extrinsic evidence to contradict the terms of a written contract. Despite appearing restrictive, it ensures both parties are entering into contracts voluntarily whilst neither party can avoid obligation, ensuring the entirety and purpose of contract terms cannot be removed. However, freedom would be limited if this rule were to be applied stringently as contracts need to be interpreted individually to achieve the intended outcome of both parties. [11]

 

An ideology of ‘searchers’ has limited the fostering of freedom to contract. [12] The reason for statutory controls limiting freedom is because consumers are generally ignorant to contract terms and their involved risks. However, there are consumers who have basic understanding of a ‘bad contract’ and will search for a better deal to correlate with their preferences. If enough ‘searchers’ existed and their preferences corresponded with the general consumer market then this would create a protection mechanism amongst consumers. This is because it would be too expensive for businesses to identify the ‘searchers’ from the ‘non searchers’. Hence, for fear of dealing with a searcher and knowing their ability to recognise and challenge terms businesses would accommodate all consumers and meet required standards that are controlled by statute which would limit burdensome exclusion clauses whilst allowing for a competitive market for consumers to deal within. [13]

 

It is clear that there has been a rise and fall of freedom to contract but a degree of freedom still exists. “Man is no longer mans wolf, but akin to exchange and collaboration”. [14] This exchange mechanism produces positive results for both parties by enabling them to input their desired terms into the contract whilst being on an equal platform of resources and knowledge to overcome consumer exploitation. [15]  The courts aim to uphold contracts and interfere minimally in order to maintain both parties’ original intentions, illustrating development from 19^th century approaches where court interference was much greater.  The ECJ also recognise the fostering of freedom to contract in article 16 of the Fundamental Rights (freedom to conduct business). Europeanisation and materialisation are two key developments in the fostering of freedom to contract, which if continued would ensure harmonisation therefore maintain a degree of genuine freedom but without defeating the progression of consumer protection. [16] However it must be acknowledged that the promotion of a protectionist strategy places extreme limitations on freedom, especially upon parties dealing commercially. This strategy will now be discussed.

 

2.      Protectionist Strategy:
“The ‘protectionist strategy’ introduced by Directive 93/13/EEC was based on the idea that consumers were in a weak position vis-à-vis the seller, regarding both bargaining power and level of knowledge”. [17] The Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999 administer the statutory framework for the protection of consumer contracts.

 

Throughout the 19^th century the courts developed the principle of caveat emptor, or ‘let the buyer take care’ as opposed to the more recent adoption of caveat venditor, which places responsibility on sellers. As per Lord Denning, the courts will set aside a contract “when the parties have not met on equal terms- when the one is so strong in bargaining power and the other so weak that, as a matter of common fairness, it is not right that the strong be allowed to push the weak to the wall”. [18] This emphasises how the common law applies statutory controls on unfair terms to provide significant protection for vulnerable consumers. However this extensive protection does face criticism as it needs to be appreciated that despite an unequal bargaining power, there is a common rationality amongst contracting adults.

 

The ECJ have recognised that due to the minimum harmonisation character of Directive 93/13/EEC, member states are not prohibited from laying down legislation that would declare a consumer contract void if it contained one or more unfair terms. This would ensure almost boundless protection for consumers enabling them to be released from burdensome contracts. [19] Furthermore, Directive 2005/29/EC on Unfair Commercial Practices places maximum protection on standards of trading and gives effect to its ‘black list’ of prohibiting unfair commercial practices. [20] National courts have much judicial discretion over the application of this Directive which allows individual contracts to be put into context and a proportionate level of protection to be applied to the proportionality of the unfair term. [21] Further statutory intervention to protect consumers is seen in the Consumer Credit Act 1974 which removed the requirement that a transaction must be significantly disadvantageous to the party suffering the loss. [22] Its aim was to ensure a ‘meeting of minds’ [23] , in other words that contracts were given entire consent by both parties and that there was a clear understanding and agreement of terms.

 

Common law approaches operate closely with statutory controls to promote protection. “Both the ‘Parker’ and the ‘red hand’ rule are products of an attempt to develop the law according to a basic principle of maintaining a fair balance between parties”. [24] The parker rule allows clauses from an unsigned document to be incorporated into a contract once ‘reasonably sufficient notice’ has been given of them. The Parker rule [25] when compared to red hand rule is seen to be illogical. However, despite illogicality, it provides practical purpose. [26] Similar to the fact that standard form contracts provide a practical purpose in reducing drafting costs, the ‘parker rule’ reduces the burden placed upon businesses in needing to obtain the signature of each consumer. This serves practical purpose for businesses whilst ensuring that consumers have the opportunity to ascertain themselves with the contract terms. [27] The incorporation of exclusion clauses through notice otherwise known as the ‘red hand rule’ also plays a role in consumer protection. As stated by Denning LJ, “Some clauses 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”. [28] This can be contrasted with the L’Estrange case to show the development of law within the space of just 20 years, as in this case the exclusion clause was held valid despite being written in ‘regrettably small print’. [29] However, any illogical or problematic issues arising from these common law approaches can now be regarded as insignificant due to the UCTA 1977 and the Regulations 1999. Notice of exclusion clauses must be proportionate to how onerous they are. This enhances the protectionist strategy by regulating terms intending to incorporate burdensome consequences on consumers.

 

There has been an argument for a replacement of a protectionist strategy for a ‘market for lemons’ approach. [30] This talks about information asymmetry and the seller acquiring more knowledge about the contract than the buyer. Akerlof argued this would increase market competitiveness and provide consumers with cheaper deals, but reduced quality. However, if buyers were aware of this it would deter commercial dealings and lead to market failure. Hence a ‘market for lemons’ has little substance and is irrelevant to the current contract world today. A protectionist strategy fits better because it doesn’t lead to disadvantageous terms being burdened upon consumers, whereas the ‘lemons’ approach leads to detrimental impacts on consumers such as quality being drastically decreased, which frictions with s.6(2)(a) of the UCTA 1977. If quality decreased consumers would face extremely onerous exclusion clauses within contracts by businesses in order for them to exclude themselves from the liability of poor quality dealings.

 

The UCTA 1977, alike the common law, favours a test of reasonableness as seen in section 11. The 1999 Regulations, however, favour a fairness approach. Both operate independently yet also overlap considerably. For instance, one of the most necessary areas of consumer protection is insurance contracts as exclusion clauses within these can be onerous and may not be pointed to with a ‘red hand’. Insurance contracts are excluded from the UCTA 1977 under Section 1(2) and Schedule 1(a). The 1999 Regulations are not so restrictive. [31] This ensures consumers are still protected within contracts of extreme vulnerability and inferior bargaining power.  However, protection would be limited if these contracts are excluded from one and not the other. A question of relevance would be whether or not the two statutory controls are working in a complimentary manner alongside one another, or whether they are causing uncertainty. This question was considered by the Law Commission in 2005 and reviewed in 2013. They proposed the replacement of these with a single Act attempting to make the law more accessible to consumers looking for protection instead of looking to two pieces of overlapping legislation. [32] This report compliments the protectionist strategy and would subject all terms to a test of fairness and reasonableness.

 

It is controversial whether the adoption of good faith approaches instead of tests of reasonableness, would promote consumer protection. [33] Good faith is criticised by many as being “an invitation to judges to abandon the duty of legally reasoned decisions”. [34] However with its meaning being unfamiliar to English law its assumed meaning is to maintain self-interest whilst being consistent with fair community dealings. This would favour the balancing of bargaining power whilst instilling market competitiveness which is a more positive and realistic interpretation of a ‘market for lemons’ approach [35] , therefore if courts used good faith tests on unfair terms it may have more desired results for consumers than using tests of reasonableness as reasonableness is judged on the merits of individual cases and so may not prove as favourable for consumers.

 

The inequality of bargaining power being a justification for judicial interference faces criticism, especially regarding standard form contracts. [36] Consumers tend not to challenge terms within these contracts. This is a general assumption regarding these contracts, for instance, “despite being economically and intellectually capable of doing so, lawyers will normally not negotiate the small print when they buy a used car”. [37]  For consumers, they tend not to challenge these terms because of the time and money to go through the ‘small print’ and make alterations regarding a term. These types of contracts are open to much criticism as they give consumers an ultimatum of ‘take it or leave it’. However this approach seems agreeable because consumers currently have wide alternative market options and have choice of contracts they enter. [38] It could therefore be argued that inequality of bargaining power is not a justification for judicial interference and the protectionist strategy has perhaps gone too far through introducing overprotective statutory controls. In hindsight it seems there may be excessive amounts of consumer protection through judicial intervention and possibly placing unfair burdens on sellers that use standard form contracts.
3.      Conclusion:
It is apparent that there once existed freedom to contract. However due to this freedom having little or no restrictions throughout the 19^th century, it became excessive and allowed businesses to exploit vulnerable consumers. This then called for the implementation of two key statutory controls, the UCTA 1977 and the 1999 Regulations. These regulated the use of exclusion clauses and removed consumers from the vulnerable and powerless position they once were in. Despite the law moving away from freedom in favour of promoting a protectionist strategy there is evidence of limitations, scrutiny and proposals for alternative strategies such as a ‘market for lemons’. Furthermore it is undeniable that these two laws overlap and the Law Commission proposed replacing them with one piece of legislation. This would make the law on unfair terms more certain and accessible to consumers. Overall, statutory controls which promote a protectionist strategy are favourable, as opposed to fostering excessive contractual freedom because the commercial market is in a present state of ‘dog eat dog’. Therefore, without these controls consumers would face exploitation and injustice by entering into contracts with powerful and ruthless sellers.