Three questions on contract law

1) What are the differences between the doctrines of misrepresentation and common law mistake?

Both misrepresentation and mistake regulate the consequences of reliance in the formation of a contract upon false information. It is the character of the false information and the manner of and intent behind its communication that gives rise to different consequences at law. Due to three of the basic requirements for the formation of a contract – offer, acceptance and certainty – where parties are genuinely at “cross purposes” in their negotiations, a contract cannot come into being. This has been said^[1] to be a species of mistake. However, there is a further acknowledged category of mistake at common law which occurs where the nature of the mistake is such as to nullify consent. This has been referred to in earlier authorities as “mutual mistake” and is generally now known as “common mistake”. This occurs where both parties have reached agreement in reliance upon an understanding which is objectively shown to be false after agreement is concluded. However, the mistake by the parties must be “fundamental” to their respective decisions to enter into the contract^[2]. This may involve mistake as to subject matter as in Strickland v Turner^[3] in which a contract for an annuity was held to be void because, unbeknown to the parties, the person to whose life the annuity related was already dead at the formation of the contract. Similarly, mistake as to ownership of the subject matter as in Cooper v Phibbs^[4] resulted in a contract being held to be voidable. In the leading case on the third category of common mistake – that of mistake as to quality (which must be sufficiently fundamental) – Bell v Lever Bros^[5] Lord Atkin held that the contract should be regarded as void and not merely voidable.

The mutuality required to establish mistake does not exist in actionable misrepresentation. This occurs where a party makes to the claimant an unambiguous statement of fact (as opposed to opinion or future intention) which induces the claimant to enter into the contract. The representation must be material^[6], known to the representee^[7], be intended to be acted upon^[8] and actually acted upon^[9]. It is important to distinguish between fraudulent misrepresentation in which a statement or a failure to disclose information is deliberate and dishonest and negligent misrepresentation^[10]. This distinction has been historically important since it was formerly the case that the remedies of rescission and damages were only both available in cases of fraud. Section 2(1) of the Misrepresentation Act 1967 imposes a burden upon the misrepresentor in disproving negligence which requires him to demonstrate that the facts represented were true “up to the time the contract was made”. Thus, there is a fundamental difference between the doctrines of misrepresentation and common law mistake in that while both require reliance upon false information, in the case of mistake, the contract may become void as a result of the entirely innocent misunderstanding of both parties, misrepresentation requires a finding of fault on the part of one party either in the form of outright fraud or, at the very least, in the form of a reckless or negligent approach in representing the facts upon which the other party relies with the misrepresentor being penalised by rescission and in damages.

2) How does the statutory regime of the Unfair Contract Terms Act 1977 differ from the Unfair Terms in Consumer Contracts Regulations 1999?

Both the Act and the Regulations regulate exemption clauses and unfair terms in contracts. An exemption clause is one which seeks to exclude a parties liability in the event of a breach of contract or limit the consequences of such a breach. The Act applies to liability for acts done “in the course of a business”. Business is broadly defined and relates not only to ordinary recognisable commercial activity but applies also to the activities of local authorities, government departments and the professions. The rationale behind the Act appears to be to exclude occasional consumer contracts although these may be said to fall within “the course of a business” if performed with sufficient regularity. By contrast, the Regulations (which give effect to EC Directive 93/13) apply to “unfair terms in contracts concluded between a seller or supplier and a consumer”. The former is defined by reg.3(1) as “any natural or legal person who…is acting for purposes relating to his trade, business or profession” whereas a consumer as defined as a “natural person” acting outside such purposes. Therefore, the Regulations are demonstrably narrower than the Act since they apply only to consumer contracts and cannot apply to contracts made between two companies. “Consumer” is defined more generously in the Regulations than in the Act. In R & B Customs Brokers Co Ltd v United Dominions Trust Ltd^[11], it was established that the mere fact that a party was a business did not necessarily mean that every contract entered into was “in the course of a business”. The Court of Appeal held that a transaction is only made in the course of a business if it is integral by nature to the function of that business or, if only incidental to such a function, sufficiently regular that it should be regarded as integral.

The Regulations are narrower than the Act in that they apply only to terms which are “not individually negotiated”. By contrast, they may be said to be wider in that they apply to unfair terms in general. However, it should be noted that the Regulations expressly exclude those terms which define the main subject-matter of the contract (“core terms”). In the first case on the predecessor Regulations to those of 1999, Director General of Fair Trading v First National Bank plc^[12], it was argued that a term in a consumer loan agreement which provided for interest to be paid after any judgment on the debt was an incidental term dealing with the consequences of default and did not go to the heart of the agreement namely the bank’s ability to earn remuneration in consideration of making the loan. Accordingly, it was held not to be a “core” term within the ambit of the Regulations.

3) Why don’t the UK courts recognise a doctrine of “Inequality of Bargaining Power”?

Despite the best efforts of Lord Denning, the UK courts have shied away from embracing an American-style principle of “inadequate bargaining power”. This is partly because of the manifestly unjust consequences of the application of such a doctrine. For example, in the USA decision of Jones v Star Credit Corp^[13] it was held that a consumer could keep goods after paying only part of the price on the basis that the seller’s profit was regarded as excessive. English law refrains from protecting parties who are sui juris and dealing at arms length from the consequences of a bad bargain. Partly it is a recognition of the statutory protection that is in place by virtue of legislation such as the Unfair Contract Terms Act 1977 and the Consumer Credit Act 1974. In Lloyds Bank Ltd v Bundy^[14], Lord Denning attempted to propound a UK version of the doctrine:

“…English law gives relief to one who, without independent advice, enters into a contract upon terms which are very unfair…when his bargaining power is grievously impaired…coupled with undue influence or pressures brought to bear upon him by or for the benefit of the other.”

However, the other members of the Court of Appeal eschewed such an approach and relied solely upon the equitable doctrine of undue influence. In Pao On v Lau Yiu Long^[15], the Privy Council held that a contract was not voidable for duress and went on to reject the argument that it was invalid because it had been procured by “an unfair use of a dominant bargaining position”. Lord Scarman declined the invitation to treat such a principle as available and distinct from the relief already available under the principles relating to duress stating that this would be “unhelpful because it would render the law uncertain.”

Similarly, in National Westminster Bank plc v Morgan^[16] Lord Scarman questioned “whether there is any need in the modern law to erect a general principle of relief against inequality of bargaining power”. He pointed out that legislation such as that described above already dealt with certain specific situations. In addition to this statutory protection, contracts have been held voidable on the ground of duress in situations in which a party has sought to exploit the vulnerability of a party to the commercial consequences of a breach of contract to extort a reduced contract price (D & C Builders v Rees^[17]) or payment of an additional sum (B & S Contracts and Designs Ltd v Victor Green Publications Ltd^[18]). Thus it might be concluded that the reason why the UK courts do not recognise a general common law doctrine of inequality of bargaining power is not due to a lack of sympathy for the plight of a commercially inferior party but rather because the existing battery of equitable reliefs and statutory remedies adequately embraces such situations without the need for the development of further controls.

Bibliography

Beale, H., Bishop, W., Furmston, M, Contract, Cases & Materials, (4^th Ed., 2005)

Beatson, J., Anson’s Law of Contract, (28^th Ed., 2002)

Bradgate, R., Commercial Law, (3^rd Ed., 2003)

McKendrick, E., Law of Contract, (6^th Ed., 2005)

Poole, J., Textbook on Contract Law, (7^th Ed., 2004)

Treitel, G., The Law of Contract, (11^th Ed., 2003)

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Footnotes

^[1] Poole J., Textbook on Contract Law, (7^th Ed., 2004), p.298

^[2] Associated Japanese Bank International ltd v Credit du Nord [1989] 1 WLR 255, per Steyn J

^[3] (1852) 7 Ex 208

^[4] (1867) LR 2 HL 149

^[5] [1932] AC 161

^[6] Smith v Chadwick (1884) 9 App Cas 187

^[7] Clef Aquitaine SARL v Laporte Materials (Barrow) Ltd [2000] 3 WLR 1760

^[8] Peek v Gurney (1873) LR 6 HL 377

^[9] Atwood v Small (1838) 6 Cl & F 232

^[10] Hedley Byrne & Co v Heller & Partners Ltd [1964] AC 465

^[11] [1988] 1 WLR 321

^[12] [2001] UKHL 52

^[13] 298 NYS 2d 264 (1969)

^[14] [1975] QB 326

^[15] [1980] AC 614

^[16] [1985] AC 686

^[17] [1966] 2 QB 617

^[18] [1984] ICR 419