1.4 Classical contract theory has three related threads. First, a contract is a bargain, which means a reciprocal agreement between the parties, almost invariably an exchange of promises (I promise to do X and you promise to do Y in return). So a one-sided gratuitous promise is not a contract. Second (and not always entirely consistent with the first thread), contracts are the product of the will of the parties, so that it is the parties’ intention to ‘bind’ themselves that justifies legal recognition of enforceable contractual rights and obligations. In contrast with other areas of law, for example the law of tort, the role of the courts is not to prescribe the content of contractual obligations but to give effect to the intention of the parties. Third, freedom of contract is paramount. Everyone is free to decide whether or not to contract at all, with whom they are willing to contract, and on what terms. Once again, the law must interfere as little as possible, ensuring only that improper tactics by one party, such as fraud or coercion, did not compromise the other party’s negotiating freedom.

1.5 In many respects, the classical theory remains a good explanation of much of the current law of contract, though as is often pointed out, it is not a perfect model and does not explain many aspects of the law and contemporary practice. The first thread is challenged, since many contracts do not involve an agreement in the form of a bilateral exchange of promises. For example, you will encounter unilateral contracts, where one party promises something if the other party acts in a specified way, and formal contracts contained in a ‘deed’, which are binding even though gratuitous and with no element of bargain. Many simple bilateral contracts are made and performed instantaneously, so each party’s notional promise to perform looks like an artificial legal construct. More fundamentally, it is pointed out that contracts made on printed standard terms, such as where a consumer acquires a car on hire purchase terms or books a package holiday, bear no resemblance to a negotiated bargain.

1.6 Similar objections are levelled at the second thread, that contractual obligations are consensual and based on the intention of the parties. Critics point to the prevalence of the printed standard form and the frequent insertion of ‘implied terms’ into contracts, some justified as giving effect to the intentions of the parties but others, like the implied conditions that goods sold in the course of the seller’s business are of satisfactory quality and fit for their purpose, are inserted by statute regardless of intention. Contracts are sometimes described as requiring a ‘meeting of minds’, but even in the nineteenth century, this was misleading. This is because the parties’ intention is judged objectively—how would their words and actions have appeared to a reasonable person? So, although questions about the formation, contents, and interpretation of a contract are resolved by reference to the parties’ intentions, this is not really an enquiry into what the parties subjectively intended or wanted. After all, as Rix LJ pointed out in Procter & Gamble v Svenska Cellulosa Aktiebolaget SA (2012), ‘when it comes to a dispute the [subjective] question of actual intention is likely to be submerged in wishful thinking.’

1.7 The third thread, the principle of freedom of contract, receives the most critical scrutiny. Even in the nineteenth century, absolute freedom of contract did not exist, but was constrained, for example, by rules about illegal contracts and contractual incapacity, while the twentieth century was marked by restrictions, practical and legal, on all aspects of freedom of contract. The freedom whether or not to contract at all is inhibited by legal devices (like statutory rights for tenants to obtain a new lease or to purchase their council houses) and practical pressures (anyone who wants to have a phone or use public transport must make a contract). The freedom to choose with whom to contract is restricted by statutes outlawing various forms of discrimination and where monopoly (and, at one time, nationalised) suppliers provide the only source of a particular product or service. Finally, the freedom to choose the contents and terms of a contract is qualified in a number of ways, by statutory controls on certain sorts of ‘undesirable’ terms (for example, the protective regimes in the Consumer Credit Act, the Unfair Contract Terms Act, and the Consumer Rights Act) and, once again, by the prevalence of non-negotiable printed standard contract terms, often almost identical across the particular market sector. All in all, the classic Victorian image of contract, perhaps involving two gentlemen negotiating and eventually shaking hands over the sale of a horse, does not look very promising as a model for the twenty-first century.

1.8 However, the reality is a lot more complex than just a simple choice between abandoning or advocating the classical model. For example, the model of contract as a bargain consisting of exchanged promises remains, as we will see, a central notion in legal reasoning today, as does the fact that, fundamentally, contracting is an expression of the free will of the parties. Just because, away from the core meaning of contract, there are cases that do not entirely resemble the core (and perhaps shade into other legal concepts, like tort), is no reason to dismiss the core model as useless. It is undeniable that the courts continue p. 4to emphasise the significance of the parties’ intentions and, when it is understood that the objective test involves not a substitution of the judge’s own ideas about what a reasonable solution would have been, but that of a reasonable person placed in the position of the parties and understanding the conventions and usage of that particular market, this seems a wholly appropriate way to approach contractual questions.

1.9 Freedom of contract, too, remains a central concept. It has been pointed out that, in economic and political terms, the pendulum has swung back in the direction of freedom of contract in the last few decades, matching the individualist, free market philosophy of recent governments. And it is certainly still the starting point of many judges and commentators, who treat the ‘inroads’ into freedom of contract discussed earlier as exceptions to the norm, not evidence of a different norm. Moreover, many of these inroads are tailored to a very specific problem, that of consumer protection. Consumer contracts raise particular problems, but these are generally (and better) controlled by targeted statutory provisions, not general common law restrictions (as, for example, the history of the common law ‘doctrine of inequality of bargaining power’ tells us: see para 12.24). Where contracts between businesses are concerned, the assumption is that the parties should be free to make the deals and on the terms they regard as desirable for their businesses, with access to legal advice on both sides and thus with minimal interference from the law later. So, duly qualified, the classic model remains a good basis on which to approach the rules and ethos of the law of contract, at least where commercial contracts are concerned. Indeed, recently the courts have explicitly relied on freedom of contract as a fundamental value in commercial contracts, when grappling with the conundrum of what should happen where the parties’ original written contract contains a provision (known as a ‘no oral modification’ clause) prohibiting any agreed variation of the contract unless it is also made in writing, but where the parties have subsequently orally agreed to vary their original deal. This conundrum shows that the notion of freedom of contract is itself not straightforward. Citing freedom of contract, the Court of Appeal in MWB Business Exchange Centres Ltd v Rock Advertising Ltd (2016) upheld the subsequent oral variation, even though paradoxically this meant disregarding a sensible commercial term, designed to prevent difficult arguments about whether the contract had been changed by an informal conversation. When the case went on appeal (MWB Business Exchange Centres Ltd v Rock Advertising Ltd (2018)), the Supreme Court disagreed with the Court of Appeal and gave effect to the no oral modification clause, rendering the subsequent oral modification ineffective, yet by reference to the same basic notion of freedom of contract and party autonomy. As Lord Sumption said, ‘Nearly all contracts bind the parties to some course of action, and to that extent restrict their autonomy. The real offence against party autonomy is the suggestion that they cannot bind themselves as to the form of any variation, even if that is what they have agreed’. The MWB litigation is discussed further in paras 5.62–5.70.

1.10 Closely related to these basic threads are two features of the English law of contract, both of which you will come across throughout your reading. The first is the so-called individualist ethos and the second is the commercial importance of clear, ‘bright-line’ p. 5legal rules. The individualist ethic means that contracting parties are expected to look after their own interests, not those of the other party. English law assumes an adversarial stance, with each party seeking, within the confines of permissible tactics, to make the best possible bargain in the short term. A number of contractual rules can be seen in this light. For example, although the law is scrupulous about false statements made in the run up to contracting (generally allowing the other party to escape from the contract), it imposes no active duty of disclosure of relevant information. One party can keep quiet, even if they know that the other party is mistaken as to some quality of the contractual subject matter—they are not forced to give up what is regarded as their negotiating advantage. And English law (unlike, for example, French and German law) has traditionally had no general doctrine of ‘good faith’ between the parties, either before or after contracting. One party can pull out of negotiations at the last minute for any or no reason, insist on strict adherence to the terms of a contract, and exercise a contractual right for whatever motive he pleases—there is no notion of ‘abuse’ of contractual rights.

1.11 This individualist stance is not universally accepted. Even putting to one side the consumer-welfare ethos now plainly operating in the regulation of consumer contracts, critics argue that it would not be disastrous for English law as a commercial system to acknowledge that contracting parties have some minimal obligations to cooperate with and accommodate each other. For example, civilian systems do not grind to an inefficient halt by virtue of recognising pre-contractual and contractual duties of good faith. Critics (including some judges) also point out that many contracts are not isolated, one-off transactions, but either are long-term ventures, more like a relationship than an adversarial bargain, or at least represent one transaction forming part of an ongoing course of dealing between the parties. In such circumstances, it is argued that limited duties of cooperation and good faith would better reflect the parties’ assumptions when contracting and, paradoxically, might be a better basis on which to promote self-interest in the long term (by reassuring potential contractors and thus encouraging risk-taking). Finally, important empirical research has shown that commercial parties do not necessarily think or act as the individualist ethos presupposes, often favouring renegotiation and accommodation, rather than an insistence on strict legal rights backed up by legal action. The Canadian Supreme Court in Bhasin v Hrynew (2014) decided that Canadian contract law is subject to a general organising principle of good faith, although in reality this decision was not as radical as it might sound, since its application was confined to requiring the parties to behave honestly towards each other, which is usually an implied contractual term in any event. And, as we will see (see para 7.100–7.103) English courts have recently begun to recognise a generalised implied term of good faith in particular sorts of long-term collaborative contracts (often called ‘relational contracts’), though not more generally.

1.12 On the other hand, English law’s individualist ethos has much to recommend it. For example, a rule requiring disclosure of material information would require the better-prepared, more knowledgeable party to give up his negotiating advantages for nothing, discouraging research and penalising what ought to be rewarded. A general principle of good faith might lead to uncertainty—what does it mean to be in bad faith and by whose standards? Plus, such a principle may well be unnecessary, since English law already penalises specific instances of bad faith (such as duress and misrepresentation) and has p. 6numerous piecemeal devices at its disposal (like implying terms, applying principles of contractual construction, and insisting on mitigation of loss) to tailor ‘good faith’ solutions in appropriate cases. Finally, the empirical evidence that some commercial parties act in a relational, cooperative manner does not necessarily tell us anything about what the ‘default’ legal regime should be if their cooperative approach fails. After all, we would not consider changing the criminal law to reflect widespread ignorance (or flouting) of it and it may be that cooperative behaviour works best when understood as a concession, not a legal requirement. As Morgan (2013) shows, collaborative parties prefer to contract with a strict legal regime as the default, the ultimate way to break a deadlock; when the law tries to incorporate relational norms, this can paradoxically reduce cooperation between such parties.

1.13 Whatever your view on the individualist ethos, it is important to appreciate the undoubted advantages of clarity and certainty in the law of contract. Every area of the law experiences tension between the need for clarity and certainty, so that conduct can be regulated by reference to predictable rules, versus the desirability of flexibility, giving the courts enough discretion to respond to the merits of a dispute. In the law of negligence, for example, this tension is seen as the courts recognise the advantages of an objective standard of care but baulk at applying it across the board. In contract, this tension is particularly evident, but in most cases there is everything to be said for clarity and certainty, even if this means some harsh decisions on the merits. Commercial parties need to know where they stand and, on balance, would prefer to be the loser today if that means that, next time, they know precisely what to do to avoid being the loser again.

1.14 The most important thing to remember is that the law of contract is very definitely not just concerned with litigation and resolving disputes after the event, although (perhaps inevitably) the focus of commentators is on case law, which is, by definition, the product of litigation. It is also facilitative, a set of ground rules to enable parties to make and perform their desired bargains, and needs to be clear and accessible as such to practitioners drafting contracts and advising clients in negotiations. Concepts like ‘good faith’ and ‘abuse of rights’ are inherently (and deliberately) hard to define and thus problematic for those seeking clear advice in advance about their contracts and conduct.

1.15 Thus far, we have considered in very general terms some of the theoretical issues you will need to think about when studying the law of contract. But let us now put some flesh on the bones and consider, in the light of all the theory, how the law treats a fairly typical commercial contract. Imagine X is a soft drink manufacturer and Y is a commercial grower of tomatoes. X wishes to ensure a supply of tomatoes to make tomato juice, sales of which peak at Christmas time. So X makes a contract with Y in June, to purchase from Y a hundred tons of tomatoes to be delivered in October at an agreed price per p. 7ton—the price to be paid on delivery of the tomatoes. Both parties, being rational, make the contract for a good reason—X to feel secure about a supply of tomatoes in October at a price it is happy with, Y because it wants to make a profit and is confident that the cost of growing and harvesting the tomatoes will be less than the price. The contract allows both forward planning and risk allocation.

1.16 Notice a number of important features straight away. First, it does not matter whether the contract is made orally or in writing—with very limited exceptions (such as contracts for the sale of land or guarantee contracts), English law does not require writing, signature, or other formalities for a valid contract. Second, even if Y made a mistake in its final calculations and offered a lower price per ton than it intended, this will not affect the validity of the contract. Y will generally be held to the terms to which, objectively, it appeared to be agreeing, regardless of its innermost intentions. Third, many of the terms of the contract (such as obligations about the quality of the tomatoes) will be included automatically, by virtue of the Sale of Goods Act, not because of the express intentions of the parties. Fourth, notice the gap between the date the contract is made (June) and the date it is to be performed (October). The contract is valid and binding immediately in June, even before any part of the contract has been performed or any sums spent in preparation to perform the contract. So if X changes its mind the day after making the contract and pulls out, Y could in theory sue him for damages. As we will see, this theory is subject to the very important qualifications that Y must have suffered some loss and must act reasonably to keep that loss to a minimum (‘mitigation’), but crucially notice the meaning of loss here. In contract, you suffer ‘a loss’ merely because you expected to be better off had the contract been performed but, as a result of the breach, you are not better off to the same extent (though you may be no worse off). This feature has been subjected to heavy criticism—why should one party be able to sue for damages when it seems to be no worse off as a result of the breach? But, as we will see, it reflects the essence of what is wrong with breaching a contract, which is that the party in breach has not done what he or she promised to do. Furthermore, commerce is built on the understanding that contracts create enforceable obligations and corresponding expectations immediately, not at some unidentifiable later date when the other party first acts or incurs expenditure in reliance.

1.17 If we enlarge on the facts slightly, other features can be illustrated. Imagine that there is an unexpectedly cold summer, Y’s crop does very badly and he does not have a hundred tons of tomatoes to sell in October. Other tomato growers experience the same difficulties, so that by October the market price of a ton of tomatoes has risen way above the contract price. Y will wish to escape from his contractual obligation to deliver the tomatoes to X, but (assuming X and Y have not negotiated a right for Y to do so in circumstances of this kind) he stands little chance. Contractual obligations are generally strict—‘You promised it, you do it!’—so it is irrelevant that Y is not ‘at fault’ in the tort sense of the word. Moreover, English law takes an extremely restrictive view of when unexpected external circumstances provide an excuse for escape from a contract. This may seem ‘hard’ on Y, but think back to the reasons why the parties wanted to make a contract in the first place. Y took the risk that he could perform for less than the contract p. 8price, hoping to make a profit (which he would have done if the market price had moved down instead of up). X made the contract to allow for forward planning, for the security of not having to worry about the risk of the market price moving up, for reasons like problems with the tomato harvest (and was prepared to take the risk of the market price moving down to achieve this security). So it is crucial that the law holds the parties to their contract in these unexpected conditions—otherwise, why bother to make a contract at all? X might just as well have taken his chances in October. As we will see in Chapter 14, this strict approach means that unexpected events occurring after the contract was made (such as Brexit or the Covid-19 pandemic) rarely give the parties grounds to escape their contract.

1.18 This simple example has raised a number of distinctive features that mark the law of contract off from other areas of the law of obligations. Finally, we should briefly explore the boundaries between the law of contract and these other areas. First, consider the differences between tort and contract, which in classical theory represent a very sharply delineated boundary. Traditionally, the law of contract is concerned with voluntarily assumed obligations, while the law of tort involves obligations imposed by law, regardless of the intention of the parties (it is pointless to drive around with a sign on the bonnet of your car, stating that you do not agree to owe a duty of care to your fellow road-users!). Tort is primarily concerned with fault, whereas contracting parties can, and frequently do, commit themselves to strict contractual obligations; damages for breach of contract protect financial expectations, whereas tort remedies are geared to compensating harm, usually to persons or property.

1.19 As you will discover, while the core contractual situation and the core tort situation are fundamentally different, the edges of the two concepts are not quite as sharp as this might suggest. Developments in the law of negligence relating to financial harm have muddied the distinction, with liability under Hedley Byrne v Heller (1964) justified because one party has ‘undertaken responsibility’ for the other, in a relationship resembling, but just falling short of, contract. For example, recovery under White v Jones (1995) uses tort to protect expectations of financial gain because contractual remedies are regarded, rightly or wrongly, as deficient. On the other side of the coin, many contractual obligations exactly reproduce tortious duties, as where professionals contract to take reasonable care, and the law now recognises concurrent liability in such cases (especially significant for procedural reasons, because the rules of limitation, or time limits for bringing a claim, are more favourable to claimants suing in tort rather than for breach of contract). Concurrent liability leads to its own difficulties, such as whether p. 9a defence of contributory negligence should be available in a contractual action and whether the tort or contract rules on foreseeability of loss should apply. Many situations dealt with in books on the law of contract, such as the effect of false statements, duress, undue influence and ‘estoppel’ representations that induce detrimental reliance, might equally rationally be regarded as part of the law of tort. More fundamentally, it has been pointed out that certain implied contractual terms, imposed by operation of law without reference to the parties’ intentions, are closer to tort duties than consensual contractual obligations—for example, a bus company’s relationship with its passengers is contractual, with terms and conditions ‘incorporated’ into the contract via wording on a notice or the ticket, but is it really very different in kind from the tort duties that the bus company, via its driver, owes to other road-users and pedestrians?

1.20 Another important border is between the law of contract and the law of restitution, with the latter frequently said to be based, not on consensual obligations, but on the legal imperative to reverse unjust enrichment. It is often pointed out that the obligation to repay money paid under a mistake, historically justified by artificially implying a ‘promise’ to repay it, is now understood instead as based on a legal obligation to reverse unjust enrichment. And it is usually stressed that restitution is subservient to contract, so that restitution cannot be claimed when there is a subsisting contract governing the situation. But once again, the boundary between restitution and contract is not as distinct as this suggests and, indeed, it may not even be appropriate to think in terms of boundaries at all. A better metaphor might be a ‘turf war’, since it is not uncommon to find a particular legal issue being ‘claimed’ by some commentators as part of the law of restitution and by others as part of the law of contract. One example which we will consider in this book is what happens where one party does work for someone else pursuant to a very loose arrangement that it is to be paid for. For some, that situation is so far away from ‘contract’ that payment can only be justified on the basis of restitution; others have a broader concept of ‘contract’ that can stretch to such a case.

1.21 It is also increasingly common for public law issues to arise in contractual disputes, where one or both of the parties is a public or quasi-public body. For example, in Hampshire County Council v Supportways Community Services Ltd (2006) the council terminated its contract with a company providing contracted-out housing services for it, having concluded that the services were too expensive. The Court of Appeal had to decide whether the company could seek the public law remedy of judicial review, or whether the appropriate remedy was a private law contractual remedy for breach of contract. Sometimes a public body makes a contract that obliges it to act ‘reasonably’, and the courts have to decide whether that means ‘reasonably’ in the public or private law meaning of the word (see Krebs v NHS Commissioning Board (2014)). Public and private law principles arise alongside each other where a public body seeks tenders from private companies with a p. 10view to awarding a contract for public works. In addition, the courts must consider the Human Rights Act whenever a contract made by a public authority is in issue. Moreover, in all cases the courts themselves, as public authorities, must act in a way that complies with the Human Rights Act, for example when exercising their discretion to grant or refuse the remedies of specific performance or an injunction.

1.23 Now that the United Kingdom has left the European Union, and the transition period is over, what impact has this had on contracts? Here we need to distinguish between the commercial activity of making contracts and the underlying law of contract. The former has experienced considerable change, with new tariff regimes and the ending of free movement of goods and persons, but the underlying law of contract remains largely unaffected. The EU’s influence on the law of contract was generally limited, but it did enact Directives in particular contractual fields (such as consumer protection and agency), which member states were required to implement, to provide a minimum harmonised level of protection. For example, the Unfair Terms in Consumer Contracts Directive (93/13/EEC) was implemented into UK law by what is now the Consumer Rights Act 2015 (this is considered in more detail in Chapter 8). Measures of this kind, originating in the EU but implemented into UK national legislation, along with all ‘EU-derived domestic legislation’, are now categorised as ‘retained EU Law’ pursuant to the European Union (Withdrawal) Act 2018 and remain in force post-Brexit. It remains to be seen how straightforward, or otherwise, this retained legislation regime will be, but scholars in the field are anticipating all sorts of complexities as the two regimes develop from now on.

1.24 Regardless of Brexit, the EU has for many years been researching the possibility of shared principles of contract law across European systems. In 2009 a Draft Common Frame of Reference (DCFR) was published, followed by a Green Paper from the European p. 11Commission on ‘Policy Options for Progress towards a European Contract Law for Consumers and Businesses’ (COM (2010) 348), which launched a public consultation on the DCFR. Even putting Brexit to one side, the DCFR is a controversial proposal across the EU member states. At the weaker end of the scale, it might be used simply as a ‘toolbox’, a reference resource for the Commission when drafting future legislation or revising existing measures; or it could be offered as an optional alternative code for member states to adopt voluntarily; or for contracting parties to select as the applicable law of their contract. At the other end of the spectrum, the nuclear option would be to make the new rules mandatory and replace existing national contract law systems, even for purely domestic transactions. Now, of course, Brexit means that the UK will not implement the DCFR initiative in any form, though it remains a significant matter for any UK individual or company contracting in future with a party from an EU member state. (For further discussion of the potential implications of Brexit on domestic contracts, see para 14.27.)

1.25 In addition to EU sources, there are a number of international examples of non-binding statements of principle and optional model terms in use in international commerce. The best known examples are, first, the Vienna Convention on International Sales of Goods, a hugely successful set of terms for business-to-business sales of goods, created by the United Nations Commission on International Trade Law, which applies by default whenever the parties have not chosen to apply another law. Secondly, there is a set of model rules for sale of goods and provision of services called the Principles of International Commercial Contracts created by UNIDROIT (the International Institute for the Unification of Private Law), which has also been very successful, as a resource for legislators and for contracting parties looking for acceptable terms and conditions.

1.26 So, overall, throughout your reading of this book, be aware of the very important and often wholly distinct core notion of a contract, but also keep a critical eye out for qualifications and exceptions, as well as the tension at borders with other areas of the law and potential international involvement in the contractual regime. (It might be worth coming back to this chapter at the end of your reading, armed with some information on which to formulate your own views about the questions raised!)