There are cases in our books in which the courts will set aside a contract, or a transfer of property, 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.' Lord Denning Lloyds Bank v Bundy 1974 (ECWA 8) With reference to the above quote, focus on a specific area of contract law you have studied, and discuss the attempts the law has made to deal with problems created by inequality of bargaining power. To what extent do these attempts correspond with the notion of freedom of contract?

Introduction

Unequal bargaining power in contract represents a scenario where one party to the contract is in a position of dominance over the other party. Procedural unfairness is seen in contracts involving undue influence, fraud, etc. Any of these elements can vitiate the contract. There are other scenarios that do not directly involve procedural unfairness, but the contract may still involve unequal bargaining powers, such as standard form contracts. These contracts may not always be unfair, but there may still be cases which will require the courts to intervene.

In Lloyds Bank v Bundy, 1 Lord Denning made the following statement:

There are cases in our books in which the courts will set aside a contract, or a transfer of property, 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.

He made this statement in the context of the particulars of the case, which were briefly this. The defendant Mr. Bundy had been made to sign a guarantee for his son’s debts with the plaintiff bank on the advice of the Bank manager, whose was the only counsel the defendant got. He made over the guarantee on 11000 pounds. If son’s company failed to pay the debts, Mr. Bundy stood to lose his home in his old age. Mr Head did not leave the forms with Mr Bundy, nor did Mr Bundy receive any independent counsel from any other person. The question of undue influence arose in this case. In this context, Lord Denning made the statement in his judgement.

This essay analyses standard form contracts in the context of the words of Lord Denning, where standard form contracts are also the result to a great extent of an unequal bargaining power between the parties concerned. The essay argues that the courts have tried to balance freedom of contract with the concerns of unequal bargaining powers in standard form contracts. The essay uses the jurisprudence on exclusionary clauses to demonstrate how the courts have tried to create a level playing field between both parties in standard form contracts.

Unequal Bargaining Powers: Standard Form Contracts and Jurisprudence of Courts

Lord Denning’s judgement sought to consolidate the principles relating to unequal bargaining powers in contract, due to which the intervention of the courts was justified. Lord Denning named five such categories: duress of goods, unconscionable transaction, undue influence, undue pressure and salvage agreements. 2 He said that through all these cases runs a single thread, which is that they all rest on the inequality of bargaining power. Moreover he explained the word ‘undue’ to not necessarily mean that proof of wrongdoing would be required. Anything that created an unequal situation as between two parties to the contract where the weaker party would not be in a position to bargain on fair terms would be undue. In fact, the following words of Lord Denning from the judgement are most pertinent:

The one who stipulates for an unfair advantage may be moved solely by his own self-interest, unconscious of the distress he is bringing to the other. I have also avoided any reference to the will of the one being 'dominated' or 'overcome' by the other. One who is in extreme need may knowingly consent to a most improvident bargain, solely to relieve the straits in which he finds him- self. Again, I do not mean to suggest that every transaction is saved by independent advice. But the absence of it may be fatal.

It is pertinent that Lord Denning makes it clear that a person in need may knowingly consent to an unfair bargain. In standard form contracts, it is seen that the person providing the contract is in a position to say that his goods, services, etc would be available as per the uniform conditions contained in the contract. There is in fact no negotiation in standard form contracts. That is not to say that all standard form contracts are evident of unfair advantage. However, in such contracts sometimes the inequality of bargaining power is so apparent and the need of the other party so great as to make the other party to consent to the terms. Here the courts have played a more proactive role in order to ensure freedom of contract.

In Suisse Atlantique Société d’ Armement Maritime SA v NV Rotterdamsche Kolen Centrale, 4 the exemption clauses in standard form contracts were considered. Lord Reid was the most concerned about the fact that ordinarily the customer has no time to read the standard conditions, and even if he did read them he would not understand them. A matter of even more concern is that even if such a customer went to another supplier, he would probably receive the same standard form contract. Lord Reid said that: “Freedom to contract must surely imply some choice or room for bargaining.” 5 Thus, utmost importance was that there must be some room for fair bargaining as between the parties.

The application of the idea of relative bargaining strength can be seen in the statutory regimes that regulate the validity of exclusion clauses nowadays, for example in the U.K.’s Unfair Contract Terms Act 1977 (UCTA). Where the validity of a controlled exemption clause is at issue, the statutory guidelines in Schedule 2 of the UCTA make the relative bargaining strength of the parties a relevant factor to be considered by the courts. 6 In George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd, 7 the Court held that the point of the statutory guidance in the UCTA is to check the bargaining position in each particular case. The “reasonableness test” under the UCTA, also provides that where parties are presented with a ‘take it or leave it’ conditions of dealing, even in purely commercial disputes, then the inequality of bargaining strength is likely to be a factor which would weigh against the validity of the conditions. 8 In other words, there is no presumption that the contract is fair and reasonable if it is dictated in a one-sided manner. It is the unilateral bargaining in such contracts that is found to be offensive.

The classical contract theory distinguishes between procedural fairness, that is, fairness in the process of forming a contract and substantive fairness, that is, fairness in the outcome or terms of the contract. The notion of freedom of contract that is an essential aspect or freedom of contract former makes procedural fairness relevant to the courts, while substantive fairness does not enjoy the same relevance. This may be the reason why the courts’ jurisprudence on fraud, misrepresentation, coercion, undue influence and mistake as vitiating factors is so well developed. Here the focus is on the bargaining process, which may become tainted by unfairness due to fraud for instance, rather than the bargain or the outcome, which may display inequality of bargaining power but may not be so tainted by unfairness. 9 A good example of this in the standard form contracts, which are undoubtedly the result of an unequal bargaining power, but are by and large allowed by the courts. The courts do however strike down such provisions of standard form contracts that are found to be completely unfair or unconscionable. In many cases, however, such as seen in business contractor relationships, the courts see the balance in favour of the contract.

In L’Estrange v Graucob Ltd, 10 an unskilled business contractor was caught out by the small print employed by a standard form dealer, but the courts could give him no respite.

Standard form contracts, inequality of bargaining power and consumer protection are three themes which underlie many developments in modern contract law. 11 This has been seen in the jurisprudence of the courts as well as legislative attempts to curb inherently unfair or unconscionable bargains. This indicates that the discussion on standard form contracts in relation to inequality of bargaining power is indeed relevant at this time. Freedom of contract analysis indicates that there is some justification for the viewpoint that those contracts that involve any kind of inequality of bargaining power, must be treated differently than others. Lord Denning’s judgement in Lloyds Bank v Bundy, 12 also reflects that view point to some extent. Standard form contracts have become inevitable in the age of mass production and distribution. As large scale organisations deal with a multitude of parties at the same time, there is no time to negotiate terms of contract with each and every party. The organisations come with uniform contracts. These are uniform documents that must be accepted by those who wish to deal with large scale organisations. 13 In Schroeder Music Publishing Co Ltd v Macualay, 14 Lord Diplock had observed that the modern standard form contract was not the result of negotiations between the two parties, or even approved by an organisation that represented the interest of the weaker parties. They were in fact formulated by the stronger party who was in a position to say- “If you want these goods and services at all, these are the only terms on which they are obtainable. Take it or leave it.”

The courts have taken cognisance of the factors of inequality and have developed some jurisprudence to correct as far as possible the position of the weaker parties. This is relevant especially in the cases involving exemption or exclusion clauses in standard form contracts. The courts have struck down the validity of exclusion clauses where the other party has not been informed clearly of the clause. In Parker v South Eastern Railway Co., 16 it was held that the party wanting to enforce the exclusion clause should have taken adequate steps to bring to clause to the notice of the other party. Similar principle was also laid down by the court in McCutcheon v MacBrayne, where the court held that exclusion clause must be displayed or informed prominently. 17 Therefore, for an exclusion clause to be validly incorporated, it must be displayed prominently to the other party, leaving no room for ambiguity and doubt.

For an exclusion clause to be valid it must be an integral part of the contract making it clear that the intention of the parties was to be bound by the contract as was held in White v Blackmore 18 . Therefore, the an exclusion clause must be shown to be intended by the parties to be contractual in nature and not in the nature of a mere receipt.

The exclusion clause must be apprised to the party before entering into the contract and not after. A good example of this is found in Thornton v Shoe Lane Parking co., 20 where the parking company gave parking tickets to the customers through a machine after the customer had paid the fee into the machine slot. Once the customer bought the ticket, he found that the parking company had inserted a clause excluding its liability for any loss or personal injury. The court held that this was not a valid exclusion clause as the customer would know of it only after paying the fee for parking and not before.

An important measure that has been taken to balance the unequal bargaining position of the parties in standard form contracts is The Consumer Rights Act 2015 (CRA), which has reformed and consolidated the unfair contract terms in consumer contracts regime. Part 2 of the CRA amends the Unfair Contract Terms Act 1977 (in relation to business to consumer contracts) and revokes the Unfair Terms in Consumer Contracts Regulations 1999. An important point under the regime that is enforced by both the CRA and UCTA is that no exclusion or limitation for liability for death or personal injury arising from negligence will be valid. Under s.65(1) of the CRA 2015, it is provided that: “trader cannot by a term of a consumer contract or by a consumer notice exclude or restrict liability for death or personal injury resulting from negligence.”

If the exclusion clause in the standard form contract relates to a fundamental term of agreement, it will have no effect. Here the doctrine of fundamental breach is applicable and its focus is not on the term that is breached, but on the effect of the breach on the contract. If the breach is of such nature, that is destroys the whole contract, the exclusion clause will not save the defendant from liability. 21 In such cases, the doctrine of strict construction will not apply. In the US as well as in many common law countries, rules regarding inequality of bargaining powers as between parties in standard form contracts are now evolving. In the US, these rules are now well entrenched and legislative measures as well as case law reflects that.

Conclusion

The case law indicates that the courts have balanced the freedom of contract doctrine with the modern day requirements of standard form contracts. At the same time, considering the unequal bargaining powers of the parties involved; the courts have created a fair playing field. Thus standard form contracts that exclude liability are not allowed unless the other party is given complete information well in advance and even so, fundamental conditions of contract cannot be excluded from liability.

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