The Inequality of Bargaining Power Doctrine: The Problem of Defining Contractual Unfairness”
Author: Yash Dodani( student)
NALSAR University of Law
ISSN: 2582-3655
Abstract
Freedom of contracts has been one of the fundamental questions that have been incessantly trialed on the pedestal of justice. The foundational essence of contracts comes from the mere freedom it provides to the parties entering into a contract to determine the terms and conditions of a contract. However, it is not something that can go unchecked. The paramount kernel of this very freedom of contracts is based on the principle of free-market which strives for an equal opportunity for all. However, the truth is that the free market only appears to be free and fails to juggle between the bunch of institutional, historical, and latent inequalities. This paper highlights the importance of not only promoting a free market but a free and fair market. It indicates where a line needs to be drawn to put a cap in this freedom in order to prevent it to become an instrument of exploitation by the dominant and the privileged. It stresses the importance of evening out the bargaining power of the participants of the contracts. In this paper, I intend to review an article written by Spencer Nathan Thal who in his article has given a different approach as to how the courts can recognize Inequality of Bargaining Power.
Introduction
Law of Contracts is based upon the notion that the parties have the freedom to decide the terms and conditions of the contract which they are entering into. In other words, we can say that it is a private contract. It is not the same as public laws, such as criminal laws or laws on taxation which encounter a lot of state intervention. But when it comes to the Contract law, the state has a minimal role to play. This is known as ‘The Doctrine of Freedom of Contracts’.
This concept of the ‘liberal’ nature of contract has been derived from the concept of the ‘free market’. The doctrine says that individuals have an option to enter into any contract. We have also seen the way doctrine of consideration plays its role in the current commercial world, in the sense that the adequacy of the consideration is immaterial in contract law so as to enable smooth enforcement of the contract.
We know that the notion of the ‘free’ market was brought to give equal opportunities to all the people. However, I ask the question if this is actually happening? It is submitted that the idea of ‘free’ market has brought with it a chunk of inequalities such as inequalities in opportunity, resources and ultimately the conditions in which the contract itself has been entered into. This is when the law comes into the picture and tries to regulate the fundamental Doctrine of Contracts. It regulates the doctrine by looking into the fairness of the contract. The article chosen for review tries to answer questions as to the current state of the fairness of contract, the ideal position of the doctrine, and the method of this very limitation.
Analysis
The article chosen for this paper is titled “The Inequality of Bargaining Power Doctrine The Problem of Defining Contractual Fairness” authored by Spencer Nathan Thal.[1]
When someone discusses the inequality of bargaining power, it also involves the ‘Freedom of Contract
Doctrine’. These are the two doctrines that require a balance and the author has also talked about these two doctrines in his paper, but he presumes that the reader has some general information about these doctrines. He has not defined them in the entire piece. Even though it is slightly difficult to define inequality of bargaining power doctrine, the author has made no attempt to even give any general idea of it. Understanding this doctrine is essential to understand the whole article.
The Two Underlying Doctrines
It is pertinent to understand the general idea of these two doctrines. The doctrine of freedom of contracts basically means that individuals have the ultimate power to decide on the terms and conditions of any contract. Not only terms and conditions, but it also includes bargaining power based on the skills of the parties. This doctrine evolved due to the nature of the free market. The judicial system has a minimal role to play in the formation. The author has rightly pointed out that the ‘role of courts is merely to enforce the contracts”[2]. It means that the court should not look at the fairness of the contracts. But it is important to note that if this factor is not taken into consideration then a mere agreement to become a slave for an inadequate consideration would mean valid enforcement of the contracts.
However, there is another doctrine that puts a direct threat to the Doctrine of Freedom of Contracts and that is the Inequality of Bargaining Power doctrine. It gives a direct threat to the freedom of contract doctrine because the courts can set aside a contract by looking at the fairness of the contract. If I were to put it in other words, the courts can set aside a contract by looking if there is an inherent bargaining power available to any of the parties to a particular contract. J.S Mill has said that “Government does not limit their concern with Contracts to simple enforcement. They take upon themselves to determine what contracts are fit to be enforced.”[3]
According to the doctrine of inequality of bargaining power, the courts can directly equate the contract with taking into consideration the fairness of the contract to determine the validity of the contract, the same has been equated by the author in his article. This consideration is, however, missing when we purely apply the doctrine of freedom of contracts. Thus the article has tried to reach a midway where we can create a balance between these two doctrines.
I would like to unpack in a very short manner as to how this article is framed in. The article has three parts- the first gives us a brief idea as to how the doctrine of inequality of bargaining power is taken into consideration when it comes to England. The second part deals with why a law should limit the doctrine of freedom of contracts, alternatively, why should the courts look at the fairness question while deciding the validity of any contract. The third part deals with to what extent it is good/bad to limit the doctrine of freedom of contracts if the courts are not getting more judicial power to decide the validity of a contract. Will this doctrine be called really a ‘freedom’ of contract doctrine?
Part-I Consideration of Fairness by the Courts in determining Contractual Validity
This part deals with to what extent the courts are considering the question of fairness of contracts in determining the contractual validity, particularly in England. The author here makes an assumption that the freedom of contract is a well-established principle in the modern free-market world. Thus, the article discusses an idea as to how to limit the above doctrine. Adding to the presumptions by the author, it has also been presumed that the freedom of contracts is being more effectively used in a capitalist market. This doctrine will not stand in a socialist or communist market.
It is submitted that the assumptions taken by the author can be agreed upon. However, through many cases, it can be inferred that the courts are not willing to enter into the debate of adequacy of consideration. In one such case of Bolton v Madden, Blackburn J said the following lines: “the adequacy of consideration is for the parties to consider at the time of making the agreement, not for the courts when it is sought to enforce.”[4]
This above explanation of the courts can be seen in further cases as well. One such case is Mountford v Scott[5] where the court has said that even a consideration of one pound is a valid consideration.
This above principle can also be very well looked into in Indian law where explanation 2 of the Contract law[6] very well states that merely due to the fact that the consideration is inadequate, it will not make the contract void, but the courts should look at whether the consent of the parties is free or not. If the consent is not free, the courts can set aside the contract under Sections 15, 16, 17 or 18 of the said law.
Considering these observations, we can say that the Doctrine of Freedom of Contracts is accepted to a large extent in England and the author thus talks about how the doctrine of inequality of Bargaining power is a non-recognized doctrine in English law. The article shows how well the author has substantiated this point. He has also brought the lines by prominent scholars like Guest and Treitel. He has backed the point by citing the cases decided by English courts. The case of NatWest v Morgon[7] is cited by the author where Lord Scarman has said the following lines: “The fact of unequal bargain will, of course, be a relevant feature in some cases of undue influence. But it can never become an appropriate basis of the principle of equitable doctrine….and I question whether there is any need in the modern law to eract a general principle of relief against inequality of bargaining power.”[8]
But then he argues that even if this doctrine is not recognized, there is an implicit recognition of fairness being used as a criterion to determine the cases on contractual validity. This also was well-substantiated in cases such as Avon Finance v Bridger[9] where fairness was taken into consideration while determining the validity of contracts. Even though the two judges took a traditional approach of undue influence, fairness was considered an important tool. Thus, the courts through the doctrines of undue influence or economic duress implicitly consider the question of fairness.
An important point that developed was the manner in which the differences in the opinions of the two judges [Dennings and Sacraman ] influenced the development of law. The other observation is that he hints on the realism school of thought and tries to state how things can change when the judges do not consider what the law actually says. In real times, the law considers fairness, but it is not accepted by judges as a doctrine.
This means that the personal bias of the judges always comes into play in determining the cases. We can’t ignore this point when we read any case. Despite these substantiations, he does not go into the question of why the law does not openly admit that the inequality of bargaining power would be a well-established doctrine.
Part-II Reasons for limiting the doctrine of freedom of contract
In the second part, the author has given justification as to why the freedom of contract doctrine should be limited. He has given a twofold justification to it. The first one gives problems with giving a lot of importance to this doctrine. The second relates to the limitation of the doctrine and not its complete destruction. The author has given justification and has explained the first justification well, but has only touched the second, and has not elaborated it much.
To cite some of the lines of the author in the first justification, he says “laisez-faire ideal is plagued with moral difficulties. Individuals began with different endowments of money and opportunities which manifests itself in the form of unequal bargaining positions in the market. The freedom of contract doctrine sanctions every transaction, however unequal the starting point however unequal the outcome.”[10]
Yes, I agree with the author. The doctrine of freedom of contract must be limited. This doctrine may sometimes go against the general principles of law. How can such doctrine not be limited in the modern world where the exploitation of people is inherent? And there should be a check on it in the cases where the court can see that the terms are unfair on the face of it.
But too much reliance on fairness is not good. It harms the basic principles of contract law. If the law will affect the doctrine of freedom of contract completely, the basic notion of a contract will be affected as well. To this point the author has not given many points, he just assumes that the elimination of freedom of contract is harmful.
Part-III Extent of Limitation
The duty of the law is to create a balance between the contravening doctrines. The answer which the article gives is not whether the doctrine should be limited but to what extent it should be so. The author has however acknowledged the fact that it is more difficult to do so. He has explained it through various examples.
The author has also said that the contracts can be declared void on the basis of unfairness in the procedure followed or the unfair outcome. The author has rebutted Lord Dennings on the part where he discusses the outcome, by saying that the outcomes which are unfair are subjective matters. The courts are not entitled to give any rule for the same. This was also stated in the case of Jones v Star Credit Corporation[11] that the outcome being unfair is not conclusive to set aside a contract.
The author has pointed out that the courts should only look to the unfair procedure and not the unfair outcome. It, of course, has some problems. But the problem with this is that the outcome and procedure are related to each other. They are interlinked. This interlinkage was also put forward by Atiyah. This will again be unfair if the outcome is fair but the process is unfair. However, it can be said that if the parties are themselves desiring that the outcome would be unfair then the case will be different. This line has examples of fiduciary relationships etc. but the disadvantages of this particular statement given by the author were not discussed to a substantial length.
The author has developed a two-stage test to determine fairness. If there is unfair bargaining power, it will enter into the next stage. The second stage has two distinctions, first is when there is a strength-based inequality and second is when there is a weakness-based inequality. The condition of strength/weakness is consumer-centric. The author says that the contracts where there is weakness-based bargaining power would be declared void by the courts. In the cases of undue influence, this doctrine is used. The author has thus tried to give a different approach to the cases of this nature where the contract is formed out of unequal bargaining power.
Conclusion
Thus, the article has tried to provide a different alternative to the cases of unequal bargaining power by giving well-reasoned arguments to explicitly recognizing the doctrine of inequality of bargaining power. He has also given well stated reasons as to why the doctrine of freedom of contracts should be limited and to what extent it should be limited. However, some points were not substantiated adequately. But overall a well-substantiated article has been penned down by Thal.
[1] Spencer Nathan Thal, The Inequality of Bargaining Power Doctrine: The Problem of Defining Contractual
Fairness 8 OXFORD JOURNAL OF LEGAL STUDIES 17 (1988).
[2]Ibid p. 21.
[3]Principles of Political Economy, p. 481 (1848).
[4]Dr.Avtar Singh, Contracts and Specific Relief 124 [11th ed. 2103].
[5] [1975] All ER 198.
[6] The Indian Contract Act, 1872. Act IX of 1872.
[7] [1985] 1 All ER 821.
[8] Ibid.
[9] [1985] 2 All ER 281.
[10] Supra n. 1. P 22.
[11] 298 NYS [2d] 264 [1969].