Episode 25 – Contracts

TRANSCRIPT

STEPHEN PARKER

Imagine a world where no one could be held to their promises.  Imagine you could never use the law if someone went back on their word.  You were on your own.

STEPHEN BOTTOMLEY

Several consequences could be predicted in such a contract-free world.  You would have to take far more precautions to check out the honesty of the person you were dealing with. 

You would prefer immediate exchanges of things or services, rather than ordering them for the future, because at least you see what you are getting in the here and now. 

And when someone does let you down, you might be tempted to retaliate,  giving rise to numerous social tensions.

STEPHEN PARKER

A contract-free world would be inefficient, stifle business transactions and stir up conflict.

However, imagine the opposite world, where every promise you make could be enforced by the law.

STEPHEN BOTTOMLEY

Social agreements, such as arranging to meet for a drink the following day, could lead to a claim for compensation if one of you didn’t turn up. 

Such a world would encourage legal disputes over very minor things, and reward people who take offence too easily and like to act on their grievances. 

STEPHEN PARKER

Somewhere between these two worlds, a functioning society has to be able to enforce agreements that were made in seriousness, so as to encourage exchanges and transactions which collectively we all need.

STEPHEN BOTTOMLEY

And this in-between world would also have to incentivise people to take reasonable precautions to protect their own interests, but equally not to have to take so many precautions that agreements  actually cost more than they are worth.

STEPHEN PARKER

So, somehow you need to limit circumstances where one party can get out of a contract just because they now regret it, and you want the law to supply automatically some terms in typical contracts, such as contracts to sell things, so that people don’t have to spell out long routine clauses each time.

STEPHEN BOTTOMLEY

Many contract lawyers, especially in common law systems, such as Australia, Canada, New Zealand, the UK and the USA, argue that their law of contract strikes these balances in a sensible way.

STEPHEN PARKER

Let’s start with the basics.  In law, a contract is formed where the parties intend to create one – they intend to have a legal relationship.  They want to have a mutual exchange where each side is offering something to the other, usually called “consideration”. 

Normally they need to be able to point to an agreement, and for this the law typically wants to see that an offer has been accepted.  If there is offer, acceptance, intention to create legal relations and consideration, then usually there will be a contract.

STEPHEN BOTTOMLEY

There can be contracts in some other circumstances – for example if the parties go to the trouble of entering into a formal document called a deed, then strictly the law does not require consideration.  It might be a deed of gift, where one party gives nothing in return.  This would normally be enforceable despite there being no consideration.

The offer of a reward is another example.  You don’t know who is going to claim the reward, so you don’t at the outset intend to make a contract with a specific person, but you make the offer, and if they do what is required, they have accepted it, and a contract comes about.

STEPHEN PARKER

In reality, many negotiations go backwards and forwards.  There might be telephone calls, emails, online chats, letters that cross each other in the post, and so on.  And there might be the usual bluff and bluster, like a poker game. 

So, if I offer to sell my Fender Telecaster guitar for $4000 (which is a snip by the way, dear listeners, so let me know if you’re interested!), they might say there is no way they are paying that much but they would pay $3,500.  At this point they have rejected my offer and have made a counter-offer.  There is no contract. 

STEPHEN BOTTOMLEY

Offers and counter-offers can be revoked at any time before acceptance, and in fact a counter-offer is treated as a rejection of the original offer. 

So if Steve rejects their counter-offer, they can’t say fair enough, they were just testing Steve’s nerve, they’ll take it for the original offer price, because that has now been revoked.  They would have to make their own offer for $4000, and then it would be for Steve to decide whether to accept it.  Maybe Steve sees now how keen they are, and will only now sell it for $4,500.  Contract law does not require anyone to play nice.

STEPHEN PARKER

Real life situations can sometimes make it very difficult to work out at what time a contract was formed because it’s not easy to define the particular moment where an unequivocal offer was unconditionally accepted.  And this can matter.  If we were in different countries, we might need to know who the acceptor is, to know which court system can be used.

Or what looks like a term of a contract, might actually be too late.  If I check into your hotel, and the contract is made at the reception desk, any sign in my room which limits the hotel’s liability has no effect because the contract was already made before I went to my room.

STEPHEN BOTTOMLEY           

Sometimes these complex situations have been litigated so many times before that the law comes up with a ready-made answer. 

Take an auction, for example.  The auctioneer might start the ball rolling with a low price and then hope that competition between bidders drives it higher.  The common law decided that the auctioneer is not making an offer here – they are merely issuing an invitation to treat, as it is sometimes called.  Each bidder makes their own offer, and only when the hammer falls does the contract exist with the highest bidder.  It is the auctioneer who does the accepting, on behalf of the seller.

STEPHEN PARKER

Many people think that a contract needs to be in writing.  That is sometimes true – especially if it is a contract for the sale of land – but many contracts are made orally. 

Buying an item over the counter is a classic example.  Because it is usually a quick transaction you might not even think of it as a contract, but it is one.  And you would be glad of it if the item is faulty and you can rely on a term implied by the law that the item is fit for purpose and of merchantable quality.

STEPHEN BOTTOMLEY

The law of contract has developed over many centuries and the rules seem to be well settled.  Some law students really like the subject, because everything seems clear, and the whole thing slots together as an intricate set of rules.  It appeals to the tidy mind.

STEPHEN PARKER

And some people like the balances it strikes. 

By and large, if you get something wrong in the lead-up to the formation of the contract because you don’t take enough care, you only have yourself to blame.  But if you relied on a false statement by the other party – a misrepresentation – then you might be allowed out of the contract. 

If you both make a mistake – for example, you both think it is a genuine painting but it is a forgery – then there are ways out. 

If unforeseen circumstances arise, for example you are an opera singer but you go down with an unexpected throat infection, the contract to perform that evening might be “frustrated” and so not binding on you.

STEPHEN BOTTOMLEY           

With each of these escape routes there are complex rules that a lawyer must learn, designed to ensure that types of excuse don’t get out of hand.  Again, the law over the centuries has been panel beaten into a shape that seems to serve the economy and everyday transacting well.

STEPHEN PARKER

Some people also like the image of the world that contract law conjures up.  Sturdy individuals, acting out of self-interest, make up their own mind.  You negotiate.  Sometimes you win.  Sometimes you lose.   You stand on your own two feet and will only be rescued in a limited number of circumstances where you are not at fault. 

This is also a world designed to encourage profit.  If one party breaches a contract, the amount of damages the other party can claim is the amount which they stood to gain rather than the amount they were giving in return.  In other words, the party in default has to cover the other party’s profit element, rather than just compensate for the immediate loss suffered.

STEPHEN BOTTOMLEY

The “classical” law of contract, as it is sometimes called, had its heyday in the era when capitalism and commerce exploded – the 1800s.  Those were the days of caveat emptor – let the buyer beware.  People talked of the “sanctity of contract”.  It was hallowed as the vehicle by which wealth was created, some of which somehow was supposed to trickle down to the poorest.

STEPHEN PARKER

This reverence for contract was especially true in the common law world, where the focus was on the importance of bargains in society, and less true in the civil law world, where the focus was more on the moral element in keeping your promise. 

Overall, however, the rise of western economies was associated with a clear and unforgiving law of contract.

STEPHEN BOTTOMLEY

The last hundred years or so has seen doubts creep in about the fairness of such a world, and also about the realities of unequal bargaining power and one-sided knowledge: asymmetries, as they are sometimes called. Consumer protection laws now exist in many countries which override the common law rules of contract.  This might relate to advance disclosure requirements or cooling off periods, for example.  Some legislation can now be used to attack what are called unfair contract terms; that is, the focus on the substance of the bargain and not merely the process that led up to it.

And legislation might create a remedy which doesn’t fit one of the common law categories, for example if one party has behaved unconscionably or their conduct has been misleading and deceptive.

Legislation also sits on top of many typical forms of contracts, such as sale of land, residential tenancies or employment contracts, with ready-made terms that cannot easily be taken out.

Even international law may be relevant, for example in civil aviation, shipping and international trade.

STEPHEN PARKER

These days no one can be a contract lawyer without also knowing the many layers of legislation and regulation that override the classical approach of caveat emptor.

But also, in the background, lurks an area of law we discussed in episodes 13 and 14: Equity. 

You may remember that equity developed as a body of law to knock off the harsh edges of common law rules.  Various doctrines such as undue influence or the existence of a fiduciary relationship can provide a remedy where there is vulnerability or one side is taking unfair advantage and knows it.

One doctrine, that we haven’t yet come across, is called estoppel; which prevents someone from enforcing a contract – estopping them – if to do so would be unconscionable; for example because they led the other party into believing they would not enforce it, or that they would now behave differently, and then that other party relies on the assurance so that they would now suffer a detriment if the original terms were strictly adhered to.

Equity is a sleeper, ready to be woken up by a sympathetic judge.

STEPHEN BOTTOMLEY

All this is well and good, but even these protections still require someone to know enough about the law, to engage a lawyer and to have the funds to go to court – a whole area we discussed in chapter 6 on Access to Justice.

And there is quite a lot of sociological work about the realities of contracting today.  So much of it is take it or leave it.  Every day we click something saying we accept the terms and conditions of an app or webpage.  Does anyone have the time and ability actually to read them?   Even if you did  and found something you didn’t agree with, you have no bargaining power – your only choice is not to complete the purchase.

Wherever there is inequality of bargaining power, knowledge or time, there is the potential that the party with the upper hand can take advantage of it, either because the law allows them to do so or because the weaker party can’t afford to use a law that prohibits it.

STEPHEN PARKER

That’s the law of contract – in context.