Freedom of Contract

Freedom of Contract A contract is an agreement between 2 or more parties, giving rise to obligations which are enforceable at law. It may be in the form of writing, by word of mouth, by conduct or by any combination of such. The factor which distinguishes contractual obligations from other legal obligations is that they are based on the agreement of the contracting parties. Section 10 of the Contracts Act 1950 defines a contract as “all agreements made with the free consent of parties competent to contract”. One of the most essential features of a contract is the freedom of contract, in which contracting parties must be allowed to enter into a contract freely. The parties must be permitted to enter into agreements of their own choice and on their own terms. The doctrine of freedom of contract also states that nobody shall have contractual obligations imposed upon them without their consent. Therefore, with this doctrine, parties should be as free as possible to make agreements on their own terms without the interference of the courts or Parliament and their agreements should be respected, upheld and enforced by the courts. The purpose of contract law basically is to form rules to determine whether or not there is a contract and what that contract requires of each party. There are two approaches to the analysis of the validity of contract. The first is the generally accepted classical approach, known as the “objective” test, which refers to how a reasonable person would interpret a party’s intention from his conduct in all the circumstances. This test systematically searches for the various elements that are seen to be the origin of a valid contract. These elements include an offer, acceptance, consideration, intention and so forth. With the objective test, contracting parties are free to sign on anything as they know that the courts will honour the contract and will not interfere. Thus, this test is said to provide certainty and predictability. The second way to solve a contract problem is to adopt the “subjective” test, which is a fairly modern approach that was suggested by Lord Denning. The subjective test attempts to ascertain the actual intention of the contracting parties, regardless of the appearances. It looks into the mind of a party and aims to discover what that party actually intended. Through this test, judges are allowed to interfere into the contract and decide the validity of it based on reasonableness and fairness. “The freedom of contract has allowed courts to elevate the needs of certainty and predictability above those of reasonableness and fairness” I completely agree with the statement mentioned above as I think that the main purpose that leads people to enter into contract is the certainty and predictability of it. A

contract is formed when both contracting parties agreed to perform all the terms stated inside the contract. If one party changes his mind and refuses to perform his duty, he should be held liable even though he thinks that the original contract may not be fair to him. When two parties to a contract have arrived in court, they are no longer of the same mind. They may deny that there was ever an agreement between them at all or, while accepting that there was an agreement, they may disagree to its terms. This situation is difficult to be resolved. When this happens, the courts cannot rely solely on what the parties now say was in their minds at the time the contract was made, even if they are very convincing. Thus, the subjective approach cannot always be exercised. In fact, the courts adopt an objective approach to decide whether there was an agreement and what the terms truly were. They will look into what was said and done between the parties from the point of view of a reasonable person and try to decide what such a person would have thought was going on. Therefore, the courts should always decide based on the actual intentions of the parties by looking at what is agreed between them, regardless of reasonableness and fairness. From the modern law cases illustrated below, we can clearly identify the differences between a subjective test and an objective test. Through these cases, we learn how the courts have resolved arguments by applying an objective test and we also realize the significance of this test to the contracting parties. In the case of Smith v Hughes, a buyer thought he was buying “old oats” for his horse but in fact they were new oats. He refused to pay and the seller sued him for breach of contract, for the amount of oats delivered and also the amount still to be delivered. Usually, a mutual mistake negates consent and no agreement is said to have been formed at all. However, Smith v Hughes established that the intentions of the contract are “objective” whereby a reasonable man would believe that he was assenting to the terms proposed by the other party. The court held that the agreement is not void because the contract was for the sale of “oats” without specifying whether it’s new or old. The use of objective test in this case is appropriate as judgement should be made based on what the parties say and do in the contract and not what they meant. With this test, the contractual terms are to be interpreted as what a “reasonable man” would understand them to mean, even if this is not what one party actually did intend. Although the seller is aware of this mistake, yet he is not under an obligation to inform the buyer that he has made a mistake. The responsibility lies within the buyer to ensure that the oats are what he intends to

purchase. He cannot escape from what is a bad bargain for him by arguing that it is the responsibility of the seller to inform him of his mistake. Therefore, this is a case of mutual mistake, in which the courts placed a reasonable interpretation on the behaviour of the parties, rather than seeking a meeting of minds. The Paal Wilson & Co A/S v Partenreederei Hannah Blumenthal was a case concerning the sale of a ship; provide that any dispute arising out of the sale should be settled by arbitration in London. In 1972, the buyers commenced arbitration proceedings. This was followed by a long delay, until 1980, the buyers proposed to fix a date for arbitration. The sellers issued a writ seeking, declaring that the arbitration agreement had been discharged by the buyers’ repudiation of it, or by frustration arising out of an agreement to abandon the arbitration. The House of Lords held that, because there were mutual obligations to avoid delay, neither party could rely on the other’s conduct as amounting to a repudiation. The agreement was not frustrated, because there had been no external change of events affecting the performance of the arbitration agreement, nor had the delay occurred without the fault of either party. Lord Brightman defined the objective test in the following terms: “If one party „O‟ so acts that his conduct, objectively considered, constitutes an offer, and the other party „A‟, believeing that the conduct of „O‟ represents his actual intention, accepts „O‟‟s offer, then a contract will come into existence, and on those facts it will make no difference if „O‟ did not in fact intend to make an offer…” He thought that, to enable the seller to rely on abandonment, they must show that the buyers so conducted themselves as to entitle the sellers to assume, and that the sellers did assume, that the contract was to be abandoned sub silentio. Thus, an objective test is applied in this case, whereby the court would stand in the seller’s shoes and ask what the reasonable man would have concluded from the events. The sellers would be allowed to assume the contract was abandoned if the reasonable man would think it abandoned. Therefore, this approach is objective from the viewpoint of the sellers, whereby a reasonable man watches the buyer’s conduct through the seller’s eyes. Besides, the objective test is also applied in the case of Centrovincial Estates plc v Merchant Investors Assurance to decide whether promises exchanged and expressed by both parties amounted to an agreement. B had let several floors of an office building to C, who

underlet one floor to D at a rent of $68, 320 per year. The contract consists of a rent review clause, which states that the rent paid by D should be increased at a later date (25 December 1982) to the current market value. On 22 June 1982, a firm of solicitors wrote to D, on behalf of B and C, inviting D to agree to a figure of $65, 00 per year as the correct rental value at the review date. D accepted the proposal on the following day. On 28 June, D received a phone call saying that the letter on 22 June contained an error and that B had intended to propose a rent of $126,000 per year. D refused to agree to this corrected proposal and claimed that there was an contract concluded by the two letters of 22 and 23 June. However, C claimed that the parties had failed to reach agreement on the current value and that the matter should be referred to an independent surveyor, as provided for in the rent review clause. C also denied that the exchange of letters had resulting in a binding error and argued that there was no meeting of the minds due to the error.

Whenever a mistake occurs, the courts are usually prepared to make the contract void or voidable. But in this case of unilateral mistake, the objective test came into place and the contract in fact became valid. The court held that an offeree may accept an offer in the sense which a reasonable man would give it, despite clear evidence that the offer did not represent the offeror's true intention, and had not in any way been acted upon by the offeree. I believe that, the objective test applied here is aimed to give certainty to the law and prevent any one party to suddenly turn around and say that the terms that were agreed upon were not intended or was a mistake. If subjective test were to be taken, C may be allowed to escape from a bad bargain by claiming that his real intention is not what he meant in the letter dated on 22 and 23 June. This would definitely create a lot of confusion on the validity of contract. Therefore, the real intention or the subjective intentions of the parties would be irrelevant when deciding if there is a contract.

Somehow, in certain cases that involve misrepresentation, undue influence, exclusion and limitation clauses, and economic duress, where a party may avoid a contract, the courts would adopt the subjective test in resolving them.

In the case of Hartog v Colin and Shields (1939), the defendant offered to sell 3000 Argentinian hare skins at a fixed price per pound, and the offer was accepted by plaintiff. The defendant made a mistake in the pricing of goods. He had intended to offer the hare skins at the same fixed price per piece, which is a rather different offer because 3 pieces amount to a

pound. The plaintiff’s claim for damages for breach of contract is rejected by the court. It was held that the plaintiff must have realized and knew that the defendant’s offer was a mistake as it concerned a term of the contract. Thus, the plaintiff should not be permitted to enforce the contract and the contract should be void. Although the plaintiff did not admit his knowledge of the mistake, yet he should have recognized it from the previous verbal negotiations and written letters, in which prices had always been discussed per piece.

In other words, Hartog v Colin and Shields established that, when the buyer knows that the seller had made a mistake as to price, there is no contract. The buyer is prevented from “snatching a bargain” that he must have known was not intended for him. Mistakes as to terms known to the other party can void the contract, whereas mistakes as to fact cannot. Therefore, a subjective approach is applied in this case of unilateral mistake, whereby the court only looked into the actual intention of both parties but not examining their actions from the point of view of a reasonable man.

Moreover, the subjective test is also applied in the case Scriven Bros & Co v Hindley & Co. The plaintiff instructed an auctioneer to offer a number of bales of hemp and tow for sale and placed samples on view before the sale. The catalogue did not explain the difference in nature of the goods and whilst the samples were marked with different number of the lots it was not specified which was hemp and which was tow. The defendant was examining the hemp but not the tow, as he was not intending to buy the tow. When the lots representing the tow were put up for sale in the auction room, defendants' buyer made a bid which was an extravagant price for tow, and the lots were at once knocked down to him. The auctioneer realised the defendant was mistaken in some way but merely thought his mistake was in respect of the value of tow. The plaintiff sued to recover the amount of the defendant’s bid.

The court held that the defendant is not liable as there was no binding contract. A mutual mistake occurs, whereby the plaintiff had intended to sell tow and the defendant had intended to buy hemp. Therefore, there is no meeting of minds between the parties, not even consensus or agreement. In this case, we know that the courts have applied the subjective test to determine the validity of a contract. Although a bid has been made, yet the judge looked into the minds of the parties to discover what they actually intended. The courts then came to a decision that there is no contract at all so that they could be fair to both parties.

In conclusion, I think that the freedom of contract has allowed courts to elevate the needs of certainty and predictability above those of reasonableness and fairness. Through the freedom of contract, contracting parties should be as free as possible to enter into agreement of their own terms. The contract should always be respected, honoured and upheld by the courts, despite of the reasonableness and fairness of it. Hence, I personally think that the subjective test should not be exercised at all. This test does not coincide with the freedom of contract. With the existence of subjective test, the parties can never enter into a contract freely as they cannot expect or predict the validity of it when it is sent before court. It allows the courts to interfere and decide what is fair to the parties. The contract may not be enforceable and the terms may be always subjected to change. People would not want to enter into contract when it does not provide certainty and predictability. Therefore, the objective test is very important in determining the validity of a contract and in resolving all the contract problems.