English contract law

A contract is an agreement enforceable in court. Contract law regulates all sorts of transactions, from buying a tube ticket to computerised derivatives trading.

English contract law is a body of law regulating contracts in England and Wales. With its roots in the lex mercatoria and the activism of the judiciary during the industrial revolution, it shares a heritage with countries across the Commonwealth (such as Australia, Canada, India[1]), and to a lesser extent the United States. It is also experiencing gradual change because of the UK's membership of the European Union and international organisations like Unidroit. Any agreement that is enforceable in court is a contract. Because a contract is a voluntary obligation, in contrast to paying compensation for a tort and restitution to reverse unjust enrichment, English law places a high value on ensuring people have truly consented to the deals that bind them in court.

Generally a contract forms when one person makes an offer, and another person accepts it by communicating their assent or performing the offer's terms. If the terms are certain, and the parties can be presumed from their behaviour to have intended that the terms are binding, generally the agreement is enforceable. Some contracts, particularly for large transactions such as a sale of land, also require the formalities of signatures and witnesses and English law goes further than other European countries by requiring all parties bring something of value, known as "consideration", to a bargain as a precondition to enforce it. Contracts can be made personally or through an agent acting on behalf of a principal, if the agent acts within what a reasonable person would think they have the authority to do. In principle, English law grants people broad freedom to agree the content of a deal. Terms in an agreement are incorporated through express promises, by reference to other terms or potentially through a course of dealing between two parties. Those terms are interpreted by the courts to seek out the true intention of the parties, from the perspective of an objective observer, in the context of their bargaining environment. Where there is a gap, courts typically imply terms to fill the spaces, but also through the 20th century both the judiciary and legislature have intervened more and more to strike out surprising and unfair terms, particularly in favour of consumers, employees or tenants with weaker bargaining power.

Contract law works best when an agreement is performed, and recourse to the courts is never needed because each party knows her rights and duties. However, where an unforeseen event renders an agreement very hard, or even impossible to perform, the courts typically will construe the parties to want to have released themselves from their obligations. It may also be that one party simply breaches a contract's terms. If a contract is not substantially performed, then the innocent party is entitled to cease her own performance and sue for damages to put her in the position as if the contract were performed. She is under a duty to mitigate her losses and cannot claim for harm that was a remote consequence of the contractual breach, but remedies in English law are footed on the principle that full compensation for all losses, pecuniary or not, should be made good. In exceptional circumstances, the law goes further to require a wrongdoer to make restitution for their gains from breaching a contract, and may demand specific performance of the agreement rather than monetary compensation. It is also possible that a contract becomes voidable, because, depending on the specific type of contract, one party failed to make adequate disclosure or they made misrepresentations during negotiations.

Unconscionable agreements can be escaped where a person was under duress or undue influence or their vulnerability was being exploited when they ostensibly agreed to a deal. Children, mentally incapacitated people and companies, whose representatives are acting wholly outside their authority, are protected against having agreements enforced against them where they lacked the real capacity to make a decision to enter an agreement. Some transactions are considered illegal, and are not enforced by courts because of a statute or on grounds of public policy. In theory, English law attempts to adhere to a principle that people should only be bound when they have given their informed and true consent to a contract.

History

The Court of Common Pleas (here in 1480) was, with the Court of King's Bench, the common law court that heard early cases about broken agreements in debt. Until 1602 it resisted hearing cases without claimants risking perjury.

The modern law of contract is primarily a creature of the industrial revolution and the social legislation of the 20th century. However, the foundations of all European contract law are traceable to obligations in Ancient Athenian and Roman law,[2] while the formal development of English law began after the Norman Conquest of 1066. William the Conqueror created a common law across England, but throughout the middle ages the court system was minimal. Access to the courts, in what are now considered contractual disputes, was consciously restricted to a privileged few through onerous requirements of pleading, formalities and court fees. In the local and manorial courts, according to English law's first treatise by Ranulf de Glanville in 1188, if people disputed the payment of a debt they, and witnesses, would attend court and swear oaths (called a wager of law).[3] They risked perjury if they lost the case, and so this was strong encouragement to resolve disputes elsewhere.

The royal courts, fixed to meet in London by the Magna Carta 1215, accepted claims for "trespass on the case" (more like a tort today). A jury would be called, and no wager of law was needed, but some breach of the King's peace had to be alleged. Gradually, the courts allowed claims where there had been no real trouble, no tort with "force of arms" (vi et armis), but it was still necessary to put this in the pleading. For instance, in 1317 one Simon de Rattlesdene alleged he was sold a tun of wine that was contaminated with salt water and, quite fictitiously, this was said to be done "with force and arms, namely with swords and bows and arrows".[4] The Court of Chancery and the King's Bench slowly started to allow claims without the fictitious allegation of force and arms from around 1350. An action for simple breach of a covenant (a solemn promise) had required production of formal proof of the agreement with a seal. However, in The Humber Ferryman's case a claim was allowed, without any documentary evidence, against a ferryman who dropped a horse overboard that he was contracted to carry across the River Humber.[5] Despite this liberalisation, in the 1200s a threshold of 40 shillings for a dispute's value had been created. Though its importance tapered away with inflation over the years, it foreclosed court access to most people.[6] Moreover, freedom to contract was firmly suppressed among the peasantry. After the Black Death, the Statute of Labourers 1351 prevented any increase in workers' wages fuelling, among other things, the Peasants' Revolt of 1381.

Merchants trading within the North European Hanseatic League followed a law of the merchant, or lex mercatoria, whose principles were received into the English law of contract.

Increasingly, the English law on contractual bargains was affected by its trading relations with northern Europe, particularly since the Magna Carta 1215 had guaranteed merchants "safe and secure" exit and entry to England "for buying and selling by the ancient rights and customs, quit from all evil tolls".[7] In 1266 King Henry III had granted the Hanseatic League a charter to trade in England. The "Easterlings" who came by boats brought goods and money that the English called "Sterling",[8] and standard rules for commerce that formed a lex mercatoria, the laws of the merchants. Merchant custom was most influential in the coastal trading ports like London, Boston, Hull and King's Lynn. While the courts were hostile to restraints on trade, a doctrine of consideration was forming, so that to enforce any obligation something of value needed to be conveyed.[9] Some courts remained sceptical that damages might be awarded purely for a broken agreement (that was not a sealed covenant).[10] Other disputes allowed a remedy. In Shepton v Dogge[11] a defendant had agreed in London, where the City courts' custom was to allow claims without covenants under seal, to sell 28 acres of land in Hoxton. Although the house itself was outside London at the time, in Middlesex, a remedy was awarded for deceit, but essentially based on a failure to convey the land.

The resolution of these restrictions came shortly after 1585, when a new Court of Exchequer Chamber was established to hear common law appeals. In 1602, in Slade v Morley,[12] a grain merchant named Slade claimed that Morley had agreed to buy wheat and rye for £16, but then had backed out. Actions for debt were in the jurisdiction of the Court of Common Pleas, which had required both (1) proof of a debt, and (2) a subsequent promise to repay the debt, so that a finding of deceit (for non-payment) could be made against a defendant.[13] But if a claimant wanted to simply demand payment of the contractual debt (rather than a subsequent promise to pay) he could have to risk a wager of law. The judges of the Court of the King's Bench was prepared to allow "assumpsit" actions (for obligations being assumed) simply from proof of the original agreement.[14] With a majority in the Exchquer Chamber, after six years Lord Popham CJ held that "every contract importeth in itself an Assumpsit".[15] Around the same time the Common Pleas indicated a different limit for contract enforcement in Bret v JS,[16] that "natural affection of itself is not a sufficient consideration to ground an assumpsit" and there had to be some "express quid pro quo".[17] Now that wager of law, and sealed covenants were essentially unnecessary, the Statute of Frauds 1677 codified the contract types that were thought should still require some form. Over the late 17th and 18th centuries Sir John Holt,[18] and then Lord Mansfield actively incorporated the principles of international trade law and custom into English common law as they saw it: principles of commercial certainty, good faith,[19] fair dealing, and the enforceability of seriously intended promises.[20] As Lord Mansfield held, "Mercantile law is not the law of a particular country but the law of all nations",[21] and "the law of merchants and the law of the land is the same".[20]

'governments do not limit their concern with contracts to a simple enforcement. They take upon themselves to determine what contracts are fit to be enforced.... once it is admitted that there are any engagements which for reasons of expediency the law ought not to enforce, the same question is necessarily opened with respect to all engagements. Whether, for example, the law should enforce a contract to labour, when the wages are too low or the hours of work too severe: whether it should enforce a contract by which a person binds himself to remain, for more than a very limited period, in the service of a given individual.... Every question which can possibly arise as to the policy of contracts, and of the relations which they establish among human beings, is a question for the legislator; and one which he cannot escape from considering, and in some way or other deciding.’

JS Mill, Book V, ch 1, §2

Over the industrial revolution, English courts became more and more wedded to the concept of "freedom of contract". It was partly a sign of progress, as the vestiges of feudal and mercantile restrictions on workers and businesses were lifted, a move of people (at least in theory) from "status to contract".[22] On the other hand, a preference for laissez faire thought concealed the inequality of bargaining power in multiple contracts, particularly for employment, consumer goods and services, and tenancies. At the centre of the general law of contracts, captured in nursery rhymes like Robert Browning's Pied Piper of Hamelin in 1842, was the fabled notion that if people had promised something "let us keep our promise".[23] But then, the law purported to cover every form of agreement, as if everybody had the same degree of free will to promise what they wanted. Though many of the most influential liberal thinkers, especially John Stuart Mill, believed in multiple exceptions to the rule that laissez faire was the best policy,[24] the courts were suspicious of interfering in agreements, whoever the parties were. In Printing and Numerical Registering Co v Sampson Sir George Jessel MR proclaimed it a "public policy" that "contracts when entered into freely and voluntarily shall be held sacred and shall be enforced by Courts of justice."[25] The same year, the Judicature Act 1875 merged the Courts of Chancery and common law, with equitable principles (such as estoppel, undue influence, rescission for misrepresentation and fiduciary duties or disclosure requirements in some transactions) always taking precedence.[26]

The essential principles of English contract law, however, remained stable and familiar, as an offer for certain terms, mirrored by an acceptance, supported by consideration, and free from duress, undue influence or misrepresentation, would generally be enforceable. The rules were codified and exported across the British Empire, as for example in the Indian Contract Act 1872.[27] Further requirements of fairness in exchanges between unequal parties, or general obligations of good faith and disclosure were said to be unwarranted because it was urged by the courts that liabilities "are not to be forced upon people behind their backs".[28] Parliamentary legislation, outside general codifications of commercial law like the Sale of Goods Act 1893, similarly left people to the harsh realities of the market and "freedom of contract". This only changed when the property qualifications to vote for members of parliament were reduced and eliminated, as the United Kingdom slowly became more democratic.[29]

Unidroit, based in Rome and established in 1926 under the League of Nations to unify private law, maintains the influential Principles of International Commercial Contracts of 2004.[30] A similar effort is the Principles of European Contract Law of 2002.[31]

Over the 20th century, legislation and changes in court attitudes effected a wide-ranging reform of 19th century contract law.[32] First, specific types of non-commercial contract were given special protection where "freedom of contract" appeared far more on the side of large businesses.[33] Consumer contracts came to be regarded as "contracts of adhesion" where there was no real negotiation and most people were given "take it or leave it" terms.[34] The courts began by requiring entirely clear information before onerous clauses could be enforced,[35] the Misrepresentation Act 1967 switched the burden of proof onto business to show misleading statements were not negligent, and the Unfair Contract Terms Act 1977 created the jurisdiction to scrap contract terms that were "unreasonable", considering the bargaining power of the parties. Collective bargaining by trade unions and a growing number of employment rights carried the employment contract into an autonomous field of labour law where workers had rights, like a minimum wage,[36] fairness in dismissal,[37] the right to join a union and take collective action,[38] and these could not be given up in a contract with an employer. Private housing was subject to basic terms, such as the right to repairs, and restrictions on unfair rent increases, though many protections were abolished during the 1980s.[39] Nevertheless, the scope of the general law of contract had been reduced. It meant that most contracts made by people on an ordinary day were shielded from the power of corporations to impose whatever terms they chose in selling goods and services, at work, and in people's home. Nevertheless, classical contract law remained at the foundation of those specific contracts, unless particular rights were given by the courts or Parliament. Internationally, the UK had joined the European Union, which aimed to harmonise significant parts of consumer and employment law across member states. Moreover, with increasing openness of markets commercial contract law was receiving principles from abroad. Both the Principles of European Contract Law, the UNIDROIT Principles of International Commercial Contracts, and the practice of international commercial arbitration was reshaping thinking about English contract principles in an increasingly globalised economy.