Do Courts Ensure Fairness of Contracts

To what extent, if any, can the courts ensure the fairness of contracts by inserting implied terms?

Fairness of contracts can be defined in two ways. Firstly, fairness can be defined in a way such that both parties follow strictly on what they have agreed or intended to agree in the contract terms provided that the terms are set under normal circumstances. Secondly, it can be looked at in a different perspective concerning the consideration exchanged by both parties in a contract. I.e. is it fair for a person to buy a house for only ten pounds? Contract law mainly focuses on the first kind of fairness. One example, which supports this kind of fairness but not the other, is the doctrine of consideration which states that consideration must be sufficient but it need not be adequate.

Although it is commonly said that the courts are not in the business of writing agreements for contracting parties, it does not mean that they do not have the power to supplement an agreement i.e. to complete an incomplete agreement. It just means that any supplementation of the agreement through implied terms must not be inconsistent with the parties’ intentions. Terms may be implied on the basis of statute, custom and case law. However, the golden rule throughout implied terms is that they cannot be read in where they would be inconsistent with the express terms of an agreement.

Terms implied by custom

Parties contracting in a particular line of business will often not spell out the terms of their contract in fine print, because by established custom in the trade, or by long mutual dealings. They assume they are contracting on certain usual terms. A court may deem a contract to incorporate any relevant custom of the market, trade or locality in which the contract is made, unless the custom is inconsistent with the express terms of the contract or with terms necessarily implied in the contract otherwise than by custom.

For example in the case Hutton v Warren (1836)[1], a tenant was bound to farm his land in certain manner. On quitting the tenancy of his farm the tenant claimed to be entitled to fair allowance for seed and labour on the arable land. The court held that the lease should be construed in the light of this custom which was proved to exist.

In this case, the custom proved is not under much controversy, in other words it can be generally accepted without question; therefore we can say that by inserting this particular implied term to allow the tenant to claim compensation ensured the fairness in this contract. However, in some other cases, the custom cannot be proved in such a straightforward manner. Different experts in the areas might have different opinion or ways of interpretation of the custom. How can the court deal with this inconsistency of custom in reality? The court relies on the subjective opinion on certain experts in that business area, this might not necessarily ensure fairness in the contract.

Terms implied by statute

It is sometimes obvious from the nature of the transaction that certain terms must be assumed to apply. For example when a person buys a new electronic product at market price, it may reasonable be supposed that he expects the product to function normally for the very least. The Sale of Goods Act 1979[2], and other statutes, imply terms into a contract, e.g. that goods must be of satisfactory quality, and fit for the purposes for which they are sold.

In theory, the terms implied by statute should be based upon the intentions of the parties. In reality, it is not always true because we can easily imagine that sellers and phurchasers will not intend to undertake extra obligations set out in the Act.  Although terms will not be implied if the contract specifically excludes them or if the terms would be inappropriate in the circumstances of the contract a certain degree of unfairness still exists.

Fairness has been ensured in the sense that contract Law is designed to facilitate and support market exchange and to regulate trading practices. In many cases, people will take advantage of their freedom and exploit the other party. Contract law set rules to restrict these behaviour. For example the use of Unfair Contract Term Act 1977 which aims to provide some protection for the expectation of purchasers, particularly consumers. However, it could be argued that these implied terms by statute are very unfair to sellers. As when forming a contract, a reasonable person will assume that he or she is only bound to the terms set in the contract. The implementation of implied terms will give sellers an extra burden i.e. if they want to exclude themselves from a certain obligation stated in the Act, he or she need to state an extra express term; if not, he or she will be automatically bound by these terms. This is rather unfair to the sellers because they are automatically obliged to certain terms if not stated clearly in the express term; while buyers are not or the obligations imposed on buyers are less significant compared to those set upon sellers in most cases.

Terms implied at Common Law

Terms implied at Common Law can be split into two different categories.

(a)Terms implied in Fact

The aim of the implied term is to give effect to what the court thinks to be an obvious but unexpressed intention of both parties. Such implications are made when it is necessary to imply a term to give efficacy to the contract and make it a workable agreement. The court applies different tests e.g. the ‘officious bystander’ test, the ‘business efficacy’ test when considering should they apply implied terms. This prevents the court to ‘make’ the contract for the parties and ensure that it must base on the parties intentions on making the implied terms.

In the Moorcock (1889)[3], the ‘business efficacy’ test was used so that the proposed term is so obvious that it goes without saying. The judge held that there was an implied undertaking by the defendants that the river bottom was, as far as reasonable care could provide, in such a condition as not to endanger the ship. In this sort of cases, implied terms play an important role in ensuring fairness and prevent sellers to escape liabilities which they should obviously bear. It is clear that a court will imply a term only if both parties intended it, it will fail to imply a term where one of the parties did not know that the term which was alleged must be implied. If both parties intended the implied terms there should be complete fairness.  However in another case, Mosvolds Rederi A.S v Food Corpn of India[4], the judge held that a proposed implied term was not necessary to make the contract workable. The judge accepted it on the basis that a reasonable man in the same circumstances would undoubtedly have assented to the term if the fact that they had not mentioned it had been drawn to their attention. This application of an objective reasonable test might not bring fairness to a contract. As one of the parties might not have intended the implied term although it is said that the term will be accepted by a reasonable men. This brings in debates about whether the court is indirectly creating new contractual terms into contracts in which they are not supposed to do so merely because they want to promote the second type of fairness (mentioned in paragraph one) into the contract.

(b)Terms implied in Law

Terms implied in Law may be implied into all contracts with a definite category of contractual relationship which are of common occurrence, such as the relationship between landlord and tenant, employer and employee, seller and buyer etc. In these relationships the courts have imposed obligations on one party or the other, these obligations are not founded on the intention of the parties unlike terms implied in fact; they are based on more general considerations. In these contracts, the court do not have to apply the ‘officious bystander’ test, judges can imply a term based on necessity or even reasonableness although the House of Lord rejected the test on reasonableness in the case Liverpool City Council v. Irwin[5].

In this case, Lord Denning proposed that the court could imply terms where it is reasonable to do so. However, traditional view opposed his idea and holds that the courts are authorized to imply terms only where it is necessary to do so in order to effectuate the parties’ intention. The Court of Appeal, Lord Denning applied a test of reasonableness and held that the council was under an implied obligation to take reasonable steps to maintain the common parts of the building, but there was no breach of contract. The house of Lord applying a test of necessity for implied terms reached the same decision. Given that the rival approaches led to identical interpretations of the contract, it can be thought that it is perfectly proper to imply terms as reasonable provided that this is presented as a matter of necessary implication. In this way, the court can pretend that they are not ‘making’ or ‘creating’ a new term for the contractual parties, however, in reality they are actually implying a maintenance obligation to the defendant which allocated extra responsibility to them. The first type of fairness is then promoted in this situation while the court sought to improve the situation of the tenants by creating new terms. Of course, the second type of fairness has been hindered, as it is clear that the council was presumably reluctant to agree to an obligation to maintain the common premises.

The tensions between the two approaches are seen in other cases such as Scally v Southern Health and Social Services Board[6]. The judge clarified that the criterion to justify the implication was necessity, not reasonableness. And in that case the implication was not merely reasonable, but necessary to imply an obligation on the employer to take reasonable steps to bring the term of the contract in question to the employee’s attention so that he may be in a position to enjoy its benefits. It is true that in some cases the two approaches will lead to identical results. However, this will not always be the case. The point is that the traditional approach picks up the individualist ethic of maket-individualism by disallowing any implication which a self-interest party would not have agreed to. By contrast, the reasonableness approach allows judges to apply consumer-welfarist principles, despite the opposition of self-interested parties.

If the court can apply the necessity test strictly, it can be argued that fairness can be ensured to a reasonable standard because the power for the courts to create new terms which is not intended by the parties are restricted by the test.

Courts aim to incorporate a fair and practical allocation of risks when they imply a term into a contract. However, in reality this cannot always be achieved. As we can see from the cases above, the courts always tend to be slightly biased towards the weaker party to prevent them to be exploited by the stronger party. This inhibits the courts to follow the intentions of both parties strictly, therefore in some cases the stronger party loses out in implied terms. Fairness is therefore not entirely ensured by implied terms.

[1] Hutton v Warren (1836) 5 LJ Ex 234, 2 Gale 71, 1 M & W 466, Tyr & Gr 646

[2] The Sale of Goods Act 1979 was amended by the Sale and Supply of Goods Act 1994, but the basic structure and many of the sections remain unchanged

[3] The Moorcock (1889) 14 PD 64, 58 LJP 73, 6 Asp MLC 373, 37 WR 439, [1886-90] All ER Rep 530, 60 LT 654, 5 TLR 316

[4] Mosvolds Rederi A/S v Food Corpn of India (1986) 2 Lloyd’s Rep 68

[5] Liverpool City Council v Irwin (1977) AC 239, [1976] 2 All ER 39. [1976] 2 WLR 562, 74 LGR 392, 32 P & CR 43, 13 HLR 38

[6] Scally v Southern Health and Social Services Board (1992) 1 AC 294, [1991] 4 All ER 563, [1991] 3 WLR 778, [1991] ICR 771, [1991] IRLR 522