12 UNFAIRNESS AND COERCION
CHAPTER 12
UNFAIRNESS AND COERCION
INTRODUCTION
The standard of fairness is central to much of what is discussed in this book. In one sense we have learnt that according to the classical model the common law does not investigate whether an exchange is fair as that is for the parties to determine. But considerations of what is fair cannot be avoided by the judiciary. When the courts come to determine what is reasonable in the circumstances or determine the fate of a fraudster, it is inevitable that notions of fairness will come into play. Ideas of what constitutes a fair deal or negotiation process differ considerably but there is no doubt that the matter is important to contract lawyers.
While discussion of the issue is pervasive, debate about the concept has also continued in a number of specific contexts. In the last section we looked at misrepresentation and in next section we will be concerned with the idea of unfair and unreasonable contract terms. In this chapter, we will look at a number of particular doctrines which the courts have tentatively developed in order to mitigate the most extreme types of unfairness in contract and the illegitimate use of power. We will be examining ideas around inequality of bargaining power, unconscionablility and duress. The chapter raises a number of important questions. Is there a universal notion of unfairness? Should we look to what the parties think is fair or is there a general standard that can be applied? Can any one agreement between the parties be analysed alone or should we look to the backdrop of circumstances such as age, intelligence, norms in the industry or market position? Does our concern amount to anything more than value for money? When is intervention justified?
Many different approaches to the mitigation of gross unfairness are revealed by the doctrines discussed in this chapter. In some cases the approach is to look at the victim and to ask whether their consent to the contractual terms can be considered genuine when unacceptable levels of pressure have been put on them. Another standpoint is to look at the position of the oppressor and to impose particular duties on them because of their specialist knowledge or economic power. A third approach, less discernible in the English doctrines discussed, is to look at the terms of the contract in the search for oppression and unfairness. In each of these cases the most pressing issue is how we separate the acceptable from the unacceptable.
We have already considered the ways in which nineteenth century rules of contract were developed in the context of laissez-faire and a free-market economy. The parties’ capacity to bargain freely and equality of bargaining power were often assumed. Fierce competition and commercial pressure were taken for granted and the courts generally declined to recognise a requirement for a general legal standard of fairness in transactions. The concepts of freedom and sanctity of contract inevitably led the courts to assume a primary role as upholders and enforcers of contracts rather than agents of their destruction. The judiciary were not prepared for the courts to be used to relieve parties from the type of risk-taking which was deemed inevitable in the commercial world.
However, even the most conservative judicial statements regarding freedom and sanctity of contract were qualified. The courts, then as now, would set aside contracts and grant relief to parties where agreement was clearly not genuine. Agreement mistakes and fraudulent misrepresentation are examples of this. Similarly, some parties, such as infants and persons of unsound mind, were afforded protection against those who would take advantage of their lack of business acumen. The fundamental idea that agreement or consent to a contract must be free and voluntary also allowed for a number of narrow rules to set aside agreements in which improper pressures had been applied. Such pressures ranged from actual physical violence to the improper use of a position of trust, such as that existing between solicitor and client.
GENERAL STANDARDS
A key question to be resolved in this area is whether relief should be granted to parties in such cases because the voluntary nature of the undertaking was called into question or because there is a general standard of fairness which pervades all contractual doctrines. The first of these possibilities was not necessarily offensive to proponents of the classical or neo-classical contract model because of the emphasis on the inadequacy or lack of true agreement. But the second suggests a more interventionist approach to the policing of bargains than traditionalists would find acceptable. Case law in the area suggests that extreme caution has been exercised in relation to the suggestion that a general standard would be the most fruitful approach to concerns about improper pressure or unscrupulous conduct. This approach is reflected in the development of specific doctrines relating to particular types of behaviour. English courts have not committed themselves to one overriding principle such as good faith and the development of the law has been piecemeal. This lead has been followed by the legislature which has tended to concentrate on the needs of particular classes of people it assumes to be in a relatively weak bargaining position. The protection of consumers in sale of goods legislation is an excellent example of this. That is not to say that attempts have not been made to develop more generic standards of fairness. So, for instance, Waddams (1976) has argued that:
Despite lip service to the notion of absolute freedom of contract, relief is every day given against agreements that are unfair, inequitable, unreasonable or oppressive. Unconscionability, as a word to describe such control, might not be the lexicographer’s first choice, but I think it is the most acceptable general word. (p. 390)
Unfairness, protection against improper pressure and inequality of bargaining power were also linked together by Lord Denning in the case of Lloyds Bank Ltd v Bundy (1975), where he also argued that English law should give relief to people who, without independent advice, enter into contracts on terms which are very unfair or transfer property for a consideration which is grossly inadequate when their bargaining power is seriously impaired. In his words:
There are cases on our books in which 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 should be allowed to push the weak to the wall. Hitherto these special categories have been treated as a special category in itself. But I think the time has come when we should seek to find a principle to unite them.
In his analysis Denning reviewed the various doctrines considered in this chapter as all being examples of one doctrine of inequality of bargaining power rather than separate ones.
The development indicated by Denning appeared at the time to promise the emergence of a new judicial doctrine which would provide relief against harsh bargains where there existed a patent inequality of bargaining power between the parties. It was assumed by many commentators that later case law would allow the courts to define more clearly the scope of the emergent principle, whether expressed in terms of unconscionability or inequality of bargaining power. There was some support for Denning’s approach in Schroeder Music Publishing Co Ltd v Macaulay (1974). However, for some, the difficulty with the judgment was that the idea of inequality of bargaining power outlined could be seen to be enunciating the rule that any exercise of abnormal market power is prima facie reviewable by the courts. Further clarification was not forthcoming beyond statements that the principle would not operate where the bargain was ‘the result of the ordinary interplay of market forces’. Moreover, in National Westminster Bank v Morgan (1985), Lord Scarman argued that discrete doctrines dealing with unfair contract had not been sufficiently developed to need the support of a general principle of inequality of bargaining power (see also Barclays Bank plc v O’Brien, 1993 and TSB Bank v Camfield 1995).
It is important to emphasise that this narrow approach to unfairness is not evident in all common law jurisdictions. The inclusion of a clause relating to ‘unconscionability’ in the United States Uniform Commercial Code is perhaps the most widely cited example of an attempt to develop a general doctrine. Under the code, the courts are required to examine the commercial setting of the contract, and it has been said there that the doctrine attempts for the prevention of oppression and unfair surprise. The concept of good faith which sits alongside the notion of unconscionability as a macro doctrine designed to capture a variety of different types of unfairness has also become more commonplace elsewhere. For instance, the French and German civil codes require that agreements are to be performed in good faith as does the American Uniform Commercial code. It imposes a positive duty on contracting parties to ‘play fair’ and engage in open dealing. In a practical sense, this would mean, for instance, that terms are expressed fully, clearly and legibly, and that notice should be given of particularly onerous terms. Acting in good faith might also include not taking advantage of someone’s lack of experience or weak bargaining position.
These ideas are not totally alien to the English legal system. The idea of a general standard of good faith has attracted some support amongst the judiciary (see, for instance, Bingham LJ in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd, 1989) and amongst academic writers. Moreover, certain types of specialist contracts such as those used in the insurance industry make use of the notion of good faith. Finally, the Unfair Terms in Consumer Contract Regulations 1999 use a test of whether a term is contrary to good faith and there are many modern developments, such as negligent misrepresentation, which encourage good behaviour in the pre-contractual period.
However, despite these innovations, English lawyers have remained suspicious of a general doctrine of good faith and the judiciary’s preference for pragmatic rather than principled decision-making has mitigated against the progression of the idea. Concerns that the introduction of this standard would introduce uncertainty into the law and call for difficult inquiries into contractual terms and negotiations have been widely expressed. Others have argued that the piecemeal solutions to specific instances of unfairness offer as adequate a solution as a general requirement. Adams and Brownsword (2007) outline the dilemmas:
For, what precisely does ‘good faith’ mean? Does it simply mean that a party must act with a clear conscience or are there some external standards of good faith dealing? If the latter, are these external standards set by a particular commercial community, or is there a critical moral benchmark for good faith? Moreover, where are the boundaries of a good faith requirement to be drawn? (p. 110)
A conservative judicial approach was much evident in the case of Walford v Miles (1992). In that case, the claimants were in negotiations with the defendant over the purchase of a business and during the course of their discussions it was agreed that the sellers would not negotiate with another party. When the sellers broke off the discussions, the buyer claimed that there was a collateral contract to negotiate in good faith but the House of Lords rejected the argument. Indeed, Lord Ackner went so far as to say that the concept of a duty to carry on negotiations in good faith is inherently repugnant to the adversarial position of the parties in pre-contractual negotiations. The toleration of such opportunism clearly makes it difficult to introduce general standards of acceptable behaviour.
Commentators have suggested that the adoption of a general principle would allow the English judiciary to avoid the excessive contortion of specific doctrines to achieve fairness, a factor which has characterised much development in the field. More fundamentally, it has been suggested that discrete common law doctrines are ill-suited to regulate contracts and that a new approach is essential. Resistance to the concept of good faith is likely to be challenged as model contracts for international trade which contain good faith clauses are adopted and European legislation requires the adoption of such standards. Moreover, it is clear from the empirical studies visited in Chapter 4 that good faith is already an accepted norm within the business community where co-operative behaviour is much more common than Lord Ackner would have us believe, especially where a contract is likely to be long term. Collins (2002) has argued that, rather than imposing uniformity, ‘open textured’ standards, such as good faith, allow the judiciary to explore such conventions within the business community with a view to bridging the gap between formal law and practice.
PROCEDURAL AND SUBSTANTIVE FAIRNESS
Before going on to discuss the specific doctrines which have emerged to deal with particular types of unfairness, it is important to say a little about how instances of unfairness, unconscionability or inequality of bargaining power may be classified. In their treatment of the notion of unfairness, commentators have tended to make distinctions between two different types of unfairness which might manifest themselves in the field of contract. The first of these is procedural unfairness. This deals with unfairness during the making of the contract: what Leff (1967) has called bargaining naughtiness. Concerns about this type of unfairness are reflected in the doctrines of misrepresentation which allow relief to parties who have been deliberately or recklessly misled about the quality of the thing they are trying to obtain.
The second type of unfairness is substantive. Here, commentators have been concerned with the fairness of the deal which has come about as a result of the bargaining. We have already seen that, on the whole, the courts are not concerned with whether adequate consideration has been given. Peel and Treitel (2007) has explained: