Introduction to Contract Law
A. Overview
• Important to keep in mind the relevance of European law/the European dimension in English contract law (especially
for consumer protection).
• A contract is an enforceable promise (or agreement):
o Promise: one-sided focus
o Agreement: bilateral/multi-lateral focus, emphasises the consensus between the contract parties as to their future
rights and liabilities
o Recognition by the law: (1) it is the state which provides the legal apparatus to enforce contracts; foundation of
the modern capitalist economy, (2) whatever the parties intend, if a disagreement lands the parties in court, it is
contract law that determines (i) whether, when and what the parties have agreed, (ii) whether one party can
escape from the contract, (iii) how breach should be remedied, and (iv) what happens when the contract is silent
or uncertain on a disputed matter.
o “It is contract law as moulded and applied by the courts that defines how the practise of making agreements
should be conducted; how the contracting game should be played.”- Chen-Wishart
• Sources of contract law: common law and legislation
B. Equity in Contract Law
• Contract law includes but can also be contrasted with equity. Before the late 19th century there were two separate
systems of courts: the courts of law (common law courts) and the courts of equity (Chancery). Every legal system
must contain elements of certainty, predictability and stability on the one hand, and elements of flexibility, fairness
and justice in the individual case, on the other.
• In English law, these competing sets of values were institutionalised in two separate systems of law. In its original
role of controlling the activation of proceedings in the (common law) courts, Chancery took increasing account of
factors which were not considered by the common law and so alleviated the rigidities of the common law. Moreover,
someone dissatisfied with a result obtained from a court of law could appeal to the Chancellor, the King’s deputy,
for discretionary relief on the grounds of natural justice and fairness. Elements of discretion crept into the common
law; but over time rules grew up to govern the Chancellor’s discretion, and equity itself became rigid/inflexible.
• Examples of elements of equity today: Courts’ ability to set aside “unconscionable bargains”, ability to rectify written
documents (under common law written documents are regarded as conclusive of the parties’ legal rights) so that they
conform with the parties “common intention”.
• Judicature Act 1875 fused the two courts together.
o Judicial latitude: (1) making certain fact findings and (2) selecting the legal principle to be applied by
highlighting certain facts of the case and minimising or ignoring others, thereby determining the outcome. “The
degree of flexibility and indeterminacy in the system is such that a range of fact-findings is possible and a range
of rules can be applied without the courts being demonstrably wrong.”
• Idea of “backward reasoning”: from the desirable solution to the selection of the most suitable legal principle and the
finding of the necessary facts. (legal analysis justifies, rather than explains, the outcome)
• CLS school: deny that the law is largely scientific and determinate;
• Hart: “nothing can eliminate [the] duality of the core of certainty and a penumbra of doubt when we are engaged in
bringing particular situations under general rules.”
• Hard cases may often be decided either way, and considerations of policy will often be determinative.
• Contract law both facilitates and regulates the practise of voluntarily undertaken obligations.
C. Classical model of contract law (late 19th and early 20th century)
• Reflects the dominance of laissez-faire economic attitudes in the 19th century
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,• Assumption that personal freedom and wealth creation go hand in hand
• Contract parties are sovereign: it is up to them to decide whether, when and on what terms they wish to contract.
• The law should impose minimal restrictions: its primary function is simply to give effect to the parties’ agreement.
• The law has a non-interventionist role, ideally confined to identifying and enforcing the parties’ agreement. Outcomes
should be respected as the expression of the parties’ exercise of freedom.
• Classical contract law theory emphasises the subjectivity of values: idea that it is impossible for courts to assess the
fairness of exchanges because individuals value things differently.
• Tendencies of and parallels with idea of Social Darwinism: grossly unbalance exchanges are instances of foolishness
and carelessness from which parties should not be protected, lest their incentive to be more careful in the future is
removed.
• Contract law’s role is confined to procedural fairness.
• Contract law rules should be few, clear and consistent with commercial expectations.
• A contract should be interpreted within its four corners, without reference to the external context. (parole evidence
rule)
• Particular paradigm of contracting in which (1) there is presumed equality between the parties, (2) the contract is
negotiated, freely agreed and therefore fair, (3) the contract is discrete in the sense that its boundaries are clear and
performance more or less instantaneous, and (4) contract parties only act out of self-interest and adopt an adversarial
stance.
D. Neo-classical contract law (modern)
• Move towards doctrines and statutory provisions that regulate the practise of contracting in the interests of fairness
and flexibility.
• Recognition that inequalities in resources, knowledge and competence can result in oppressive or undesirable
outcomes that should not be supported by the law. Increasing recognition of the need to protect weaker parties.
Increasing recognition of the contract parties’ unequal bargaining power ( the law’s increasing, albeit piecemeal,
legal control over the fairness of exchanges).
• Application of general standards such as reasonableness, fairness, good faith (structured discretions)
• The ability to make contracts is not unlimited, but is a power to be exercised for worthwhile purposes. (Collins)
• Concern not only with procedural fairness, but substantive fairness also. Some discretion.
• Specialist regimes that apply different rules to different kinds of contracts (consumer contracts and commercial
contracts for example). Special treatment of certain kinds of contract: consumers-traders, employees-employers,
landlords-tenants.
• The same treatment is not necessarily equal treatment; “there is no greater inequality than the equal treatment of
unequals”.
• More relational (as opposed to self-interested, antagonistic) approach to contracting; Macneil: (1) all contracts must
be interpreted in the context or ‘social matrix’ in which they are made, (2) many contracts involve long-term or
continuing relationships which affect the way they should be interpreted (emphasis also on relational norms: co-
operation, trust, altruism).
• Contract law does not reside at either pole. Its complexity results in large part from the simultaneous presence and
interaction of both sets of values; the tension between the interventionist and the individualist strands of contract law
is the constant theme.
• Adams and Brownsword argue that the rules and principles of contract law should be interpreted in the light of the
ideologies of (1) Market-individualism and (2) Consumer-welfarism. “Contract law is an evolving compromise of
conflicting ideals which is informed by, and which in turn informs, social views about contract’s role in society.”
E. Why are contracts enforced? (Theories page 17-26)
• Promise-keeping/will theories: emphasis on respect for voluntarily assumed obligations and the corresponding
voluntarily created rights. Self-imposed obligations (as opposed to externally imposed: i.e. tort). Fried: morality of
promise-keeping
• Reliance theory: contractual liability arises where A makes an express or implied promise to B and B suffers loss by
relying on it. Contractual obligations are accordingly aimed at ensuring that people are not made worse off by relying
on others’ reliance-inducing conduct.
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,• Welfare maximisation/efficiency theory: Contract law as the means to the proper end of maximising total welfare.
Welfare is broadly and subjectively defined as encompassing ‘everything that an individual might value – goods and
services that the individual can consume, social and environmental amenities…etc’ (happiness, efficiency). Idea that
by pursuing self-interest, people make themselves and, by extension, society in general, better off.
• Promoting distributive justice: Idea that the notion of individual autonomy, taken by itself, provides no guidance on
which of the many forms of advantage-taking possible in exchange relations should be permitted. Idea that
distributive justice not only ought to be taken into account in designing rules for exchange, but must be taken into
account to render contract law morally acceptable (Kronman).
• Transfer theory: Contracts are likened to property. Idea that the ability to create property rights (to obtain the
exclusive use and possession of something) and to transfer property rights is a necessary pre-condition of individual
autonomy. Contract law facilitates the creation of present ownership of the right to the promisor’s future performance
and this right is held by the promisee as part of his present wealth.
• Positive autonomy: Idea that “it is the goal of all political action to enable individuals to pursue valid conceptions of
the good and to discourage evil or empty ones” (Raz). To support contract-making is to support people in making
worthwhile (positive) choices. Positive/ worthwhile personal autonomy.
F. Limits on contract law’s reach
• Family and social arrangements (contract law in this area would constitute and intrusion into the private lives of
citizens, and could subvert the values of the relationship)
• Specialist areas: Many areas are subject to specialist statutory regimes and therefore outside the remit of contract
law.
• Empirical studies which indicate the limited relevance of contract law in real life: some studies show that in practise,
even business people do not always think in terms of the legal ramifications of their contracts, or in term of their
legal rights. Rather, the importance of establishing and preserving long-term business relationships favours
flexibility, compromise and resort to customs or non-legal sanctions. (Relational contract theory)
Some more general points
• Contract law gives rise to personal rights (rights in personam) that can be enforce against the specific party with
whom there is an interaction. This is to be distinguished from property rights, for example, which are potentially
enforceable against the whole world. (rights in rem)
• Emphasis is always laid on contractual duties being self-imposed. However, contractual liability may often arise
independently of a voluntary undertaking (e.g. for breach of implied terms, especially where that liability cannot be
excluded). Many features of modern contracting are not fixed by the parties but by the courts and the legislature.
Some of these default rules may be modified by the parties (e.g. the remedies for breach), others may not be changed
at all (e.g. when contracts are vitiated).
G. External influences on contract law
• The advent of greater international trade, instantaneous electronic communications, multinational enterprises, and
the creation of free trade blocks such as the EU, means that sources of contract law external to domestic law can
affect the legal significance of contracts.
• UK’s membership of the EU: The Council of the European Union can adopt measures that have as their object ‘the
establishment and functioning of the internal market’ (Art.100A Treaty of Rome). The aim is to facilitate the
European internal market by reducing the deterrent effect on contracting resulting from variations between the
contract laws of member states. (harmonisation idea) Example: consumer protection – Unfair Terms in Consumer
Contracts Regulations 1999 (UTCCR).
• International commercial law: Primary mechanism is the production of non-binding statements of principles or model
contracts. (Example: UNIDROIT Principles; play an important role in international commercial arbitration) There is
also a growing number of international standard form contracts (Example: INCOTERMS, FIDIC).
• Human rights law: Example: Non-enforcement of a contract of slavery; Wilson v First County Trust Ltd (No.2) 2003
shows that courts will be slow to use their powers under the HRA 1998 to undermine modern regulation of contracts
in the name of protecting property rights and freedom of contract. This case relates to s.127(3) of the Consumer
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, Credit Act 1974, which makes a consumer credit agreement unenforceable by the creditor if the contract is not made
in the prescribed form.
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