THE LAW OF COMMERCIAL CONTRACT Contractual Theories

THE LAW OF COMMERCIAL CONTRACT

Contractual Theories


“It is not enough to lambast the courts for reaching results that one intuitively finds absurd. One must burrow beneath the results to find the flaw in the theory or doctrine that produced the outcome. For, until we discover the theoretical or doctrinal error, we can never be completely sure that it is the result rather than our intuitions that are mistaken.”

- Professor R.E. Barnett Cornell Law Review (July, 1992)


The Promise Theory One has an obligation to keep ones promises The contract

The offer is a promise The acceptance is a promise The consideration is a promise (to give

something of value)


Freedom of Contract Persons should not have contractual obligations

imposed upon them without their consent Persons should have the power to alter their

legal relations by consent


Freedom of Contract“If there is one thing more than another which public policy requires, it is that men of full age and competent understanding shall have the utmost liberty in contracting, and that their contracts, when entered into freely and voluntarily, shall be held sacred and shall be enforced by Courts of Justice”

Printing and Numerical Registering Co v Sampson (1875) LR 19 Eq 462 per Sir George Jessel MR


Promise Theory & Freedom of Contract Creation of contract arises from voluntary acts of

promisors rather than from third parties like the State

Contracts should be interpreted according to the terms of the promise rather than by imposing terms on the parties


Promise Theory – Justification Moral Reliance Theory Detrimental Reliance Theory Efficacy Rationale


Moral Justification An individual is morally bound to keep

their promise To renege is to abuse a confidence he

was free to invite or not and which he intentionally did invite


Moral Justification – Problems Involves the State in enforcing virtue Commits courts to enforcing promissory

commitments that the parties themselves may never have contemplated

If the moral behaviour of the promisee is relevant to the issue of enforcement then other behaviour that may argue against enforcement must be taken into account


Promise Theory – Other Problems How do you fill in the gaps in the promise Implicitly authorises a variety of gap-filling rules

based not on the parties explicit or implicit consent but on policy determined by the Courts and Parliament


Reliance Theory People are compelled to perform their promise

because others have relied, or will rely, upon it.

Detrimental Reliance Theory People are compelled to perform their promise

because others have acted to their detriment in reliance upon it.


Reliance Theory – Problems People are compensated for damage suffered

as the result of action or inaction Same as Tort Undermines Freedom of Contract People bound even when no intention to be

bound Difficult to set limits


Efficacy Rationale An exchange of promises is enforceable

because both parties are made better of than before the contract

Advanced by economists


Efficacy Rationale – Problems Permits contract to go un-enforced when

presumption of gain on pre-contract position is undermined by other factors such as: Inequality in bargaining position Disparities of information

Why assess benefit by reference to pre-contract status and not post-contract status? Bad bargains would be unenforceable


Consent Theory Predates Promise Theory Prevalent before 20th Century Have the parties manifested their intention to create or

alter their legal relations i.e. to be legally bound

The existence of a bargain frequently corresponds to the existence of a manifest intention to be legally bound

So, in practice, there is little difference between promise theory and consent theory


Modern Developments Consumer Protection Equity and Unconscionability

Estoppel Economic Duress Unconscionable conduct Unjust enrichment


Consumer Protection ‘National Review of the Law of Negligence’ (the

Ipp Review,2002) recommended a number of changes to the Trade Practices Act.

There was concern that the Act should not be used to circumvent state reforms to tort laws that addressed damages for injury or death.

Amendments to the TPA were recommended The amendments have been opposed by the

ACCC and legal groups


Consumer Protection Suppliers of recreational services to consumers

can exclude their implied contractual liability for death or personal injury where the services are supplied without due care and skill.

This has been implemented via the Trade Practices Amendment (Liability for Recreational Services) Act - came into effect in December 2002.


Consumer Protection The IPP Report recommended that the TPA be amended

so that: individuals could not bring actions for damages for

personal injury and death under the ‘unfair practices’ provisions of the TPA; and

the power of the Commission to bring representative actions for damages for personal injury and death resulting from a breach of the consumer protection provisions be removed.

The legislation is currently before the Senate.


Consumer Protection The IPP Report also recommended that the

‘unconscionable conduct’ restrictions on liability of manufacturers and importers for defective goods, and liability of manufacturers and importers for unsuitable goods provisions of the Act, which otherwise would apply to claims of negligently caused personal injury or death


Consumer Protection The Pendulum is swinging

Consumer Protection

Let the Buyer

Beware


Equity and Unconscionability Estoppel Economic Duress Unconscionable conduct Unjust enrichment


Equity and Unconscionability“The underlying values of equity centred on good conscience will almost certainly continue to be a driving force in the shaping of the law unless the underlying values and expectations of society undergo a fairly radical alteration…“

Chief Justice Sir Anthony Mason “The Place of Equity and Equitable Remedies in the Contemporary Common Law World” (1994) 110 Law Quarterly Review 238, 258


Equity and Unconscionability“If the present trend continues, the element of uncertainty which is associated with the greater emphasis on good conscience will be dissipated by an increase in the number of decisions on a wide range of fact situations…”

Sir Anthony Mason “The Place of Equity and Equitable Remedies in the Contemporary Common Law World” (1994) 110 Law Quarterly Review 238, 258

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THE LAW OF COMMERCIAL CONTRACT Contractual Theories