Fairness in contracts

Fairness plays a role in the formation stage of contracts and can also be introduced through statutory intervention.

THE fact that any legal system must embody fairness can hardly be denied. The Oxford Advanced Learner’s Dictionary defines “fair” as “acceptable and appropriate in a particular situation” and in terms of “dealing with people equally” but then qualifies this on the basis of it being subject to rules and the law.

As far as the legal system goes, the opportunity to consider whether a term or principle of law is fair depends on the circumstances. In the case of laws that are contained in the statute, it is for the law-makers to decide at the time that the law is enacted.

However, as statutes are intended for broad use, the consideration of fairness has to be looked at in a different manner. This is because it would not be on the basis of what is fair to an individual or a specific number of people, but what is fair in the context of balancing the individual’s interest as against the broader public interest.

In the area of contract law where two or more individuals enter into and are involved in a transaction, the situation is different. Here the law provides the parameter boundaries within which the parties may undertake and define their obligations and rights.

Contracts

In the arena of contract law, it often happens that a party to a transaction may at a certain point of time find itself facing consequences which it feels are unfair. This is a natural consequence of the basic underlying principle of freedom to contract. In this area of law, parties are free within the defined limits prescribed, exceeding which makes a contract void or voidable.

It often happens that as a transaction proceeds, unfairness may appear on the horizon. This is because there may have crept into the contract elements which cause unfairness. This is not totally unexpected. As was said by Mahlon Pitney in Coppage vs Kansas: “... wherever the right of private property and the right of free contract co-exist, each party when contracting is inevitably more or less influenced by the question whether he has much property, or little, or none; for the contract is made to the very end that each may gain something that he needs and desires more urgently than that which he proposes to give in exchange.”

However, in the context of contractual relationships, it is often said that the aspect of fairness is generally irrelevant. What is important is what was agreed to and not necessarily what is fair. As said by Oliver Wendell Holmes in Day vs United States: “One who makes a contract never can be absolutely certain that he will be able to perform it when the time comes, and the very essence of it is that he takes the risk within the limits of his undertaking. The modern cases may have abated somewhat the absoluteness of the older ones in determining the scope of the undertaking by the literal meaning of the words alone. But when the scope of the undertaking is fixed, that is merely another way of saying that the contractor takes the risk of the obstacles to that extent.”

Furthermore, the principle that underlies the elements and requirements for contract formation are based on the assumption that parties are of equal bargaining strength. This can sometimes be a myth. As said a long time ago by Harlan Fiske Stone in Morehead vs N.Y. ex rel. Tipaldo: “There is grim irony in speaking of the freedom of contract of those who, because of their economic necessities, give their service for less than is needful to keep body and soul together.”

Three levels?

When fairness is considered in the context of contract, it is not true to say that the law of contract is oblivious to the issue of fairness. It requires looking into whether fairness was sought at the contract formation stage. The other aspect is whether the outcome must be fair. Finally, fairness can be brought about by specific rules. Thus it is too simplistic to talk about contract fairness generally.

In the contract formation stage, the element of fairness is imported not directly but through compliance with stipulated requirements. This will justify the court holding the contract as enforceable. Among these are the principles that relate to capacity to contract, misrepresentations, fraud, duress and undue influence, among others. Thus the need to be fair is injected at the formation stage without referring to or relying on a specific doctrine.

The other aspect is whether the outcome is fair and not whether the contract is fair. Here our law as well as the law in most Commonwealth countries does not require that the substance of the contract must be fair, and if not whether there are genuine grounds for judicial intervention.

There are on occasions intervention by the courts to mitigate the harshness that may be the result of an unconscionable bargain. However, this depends on the facts. On other occasions, the court may seize an opportunity to temper the operation of specific provisions in standard form contracts against those who formulated them and seek to rely on them.

Otherwise there is with rare exception no basis for the court to make a decision which is not in accord with what has been specifically agreed. An opportunity for ensuring fairness or mitigating harshness, lies in the hands of the legislators through statutory intervention.

It is the case as stated in the words of Kirsky P in Biotechnology Australia Pte Ltd vs Pac that a court will not adjust a contract between willing contracting parties on the basis that in hindsight the bargain appears to be unevenly weighted as regards the interest of the parties or even grossly disadvantageous to one of them.

Conclusion

Thus the existence of fairness is not totally absent in the context of a contract viewed generally. However, the outcome of what is agreed to may not be as anticipated.

Finally, the fact remains that not all those who enter into contracts are always free men in the true sense of the word. As said by Lord Thomas Henley, an English jurist, in Vernon vs Bethell: “Necessitous men are not, truly speaking, free men, but, to answer a present exigency, will submit to any terms that the crafty may impose upon them.”