Contents of Commercial Contracts

Terms Affecting Freedoms

Paul S Davies, Magda Raczynska

• Publisher: Hart Publishing
• Year: 2020
• ISBN:
  9781509930500
• Edition: 1
• Topic: Law
• Subtopic: Law Theory & Practice
• Index: Law

Freedom of contract is a great strength of English law: indeed it is a key reason why English law is often the law of choice. But the terms of commercial contracts often restrict freedom of action. This book considers such terms. Leading commentators take stock of recent developments such as increased reliance on good faith/discretion and the rise of smart contracts. Insodoing, they make original contributions to ongoing debates concerning the limits to parties' freedom of contract. This important subject will interest drafters of commercial contracts keen to ensure that contracts are clear and enforceable; litigators disputing the meaning, scope and validity of terms; and academics interested in the purpose and nature of the exercises involved.

1

Freedom of Contract and Terms Affecting Freedoms

MAGDA RACZYNSKA AND PAUL S DAVIES

Freedom of contract is a principle of paramount importance. It underpins the existence of all kinds of commercial activity, ranging from more traditional commercial practice areas such as trade, carriage and insurance, through to finance and technology. Freedom of contract embodies the idea that the content of the parties’ contractual obligations is a matter of choice for the parties, rather than imposed by the law,¹ and that the obligations voluntarily undertaken by the parties are enforced by courts.² The principle is probably most famously expressed in the following words of Sir George Jessel MR in Printing and Numerical Registering Co v Sampson:

It must not be forgotten that you are not to extend arbitrarily those rules which say that a given contract is void as being against public policy, because if there is one thing which more than another public policy requires it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts when entered into freely and voluntarily shall be held sacred and shall be enforced by courts of justice. Therefore, you have this paramount public policy to consider – that you are not lightly to interfere with this freedom of contract.³

This passage, like most discussion about freedom of contract,⁴ directs our attention to the limits of the principle. Party autonomy is clearly not absolute. For example, an agreement to commit a crime is unenforceable,⁵ and a contract concluded at gunpoint, or induced by a misrepresentation, is voidable. But to say that interference with party autonomy should not be made lightly is question-begging (when is an interference ‘light’? what should the effect of interference be?) and offers little guidance on when courts should (not) interfere.

This book examines a range of commercial contract terms purporting to affect the freedoms of parties that have recently proved problematic. In so doing, it illuminates why there are limits to freedom of contract, and what role contracts and contract law play generally. For the purposes of this volume, we interpret ‘terms affecting freedoms’ broadly, without any attempt to construct a conceptual or technical legal category. Such terms are interesting to us for two main reasons. First, it is in relation to these sorts of terms that courts or Parliament have tended to consider whether freedom of contract should be interfered with. Looking at such terms helps us to see how much freedom of contract English law has. Second, examining how such clauses operate in practice informs our understanding of the role of contract law; it teaches us what freedom of contract is for. The discussion of those issues is particularly interesting in the context of commercial contracts⁶ because of the importance generally attached to freedom of contract by commercial parties.

‘Terms affecting freedoms’ can be understood in various ways. For present purposes, they can be separated into three loosely-formulated groups:

(a)Terms that restrict parties’ freedoms to act, by requiring parties to behave or not behave in a particular way. Examples of typical clauses that fall into this group are: no-oral-variation clauses,⁷ non-assignment clauses,⁸ non-disclosure clauses⁹ and negative covenants.¹⁰ Less obvious clauses that are also addressed in this book are ethical clauses¹¹ (eg requiring a party to pay fair wages to its workers, or not to manufacture products using ozone-depleting substances or processes), and, in the context of services providing speech platforms, clauses implicitly requiring users to exercise their free speech in a particular way by enabling the service operator to suspend its users.¹² Clauses controlling interpretation,¹³ express or implied duties of good faith and controls of contractual discretions,¹⁴ as well as clauses excluding good faith,¹⁵ are also discussed as part of this category.¹⁶

(b)Terms that seek to limit or extend a party’s liability. Examples of such clauses are liquidated damages clauses,¹⁷ warranties in insurance contracts¹⁸ and clauses limiting the liability of the carrier for misdelivery.¹⁹ Entire agreement clauses and non-reliance clauses²⁰ and clauses affecting the availability of unjust enrichment claims²¹ can also fall within this category since their effect is often to limit the extent to which one party may hold the other liable.

(c)Terms that seek to limit or preclude the parties’ freedom to seek the usual assistance from the courts in exercising controls available under English law, or indeed any legal control at all over contracts. An innovative example of an attempt to exclude any legal control may be clauses purporting to ensure that smart contracts be enforceable without the need for the structures of a legal system.²² Arbitration clauses²³ and choice-of-law as well as choice-of-forum clauses²⁴ could also be included in this category. However, in the context of private international law, party autonomy may be understood as a freedom to choose between different freedoms under different laws, which serves a function different from contractual party autonomy.²⁵

Traditionally, the limits on freedom of contract imposed by courts and Parliament have been greater in relation to clauses in group (b) than in group (a). But the essays in this book show that there is some movement towards greater limitation of party autonomy in relation to clauses that restrict parties’ freedoms to act (group (a)).

Before we look at specific clauses, we should consider four broad trends in English contract law that might suggest the principle of freedom of contract is becoming more limited. The first relates to the way in which courts interpret contracts and thus determine the content of commercial contracts. Ever since Lord Hoffmann’s judgment in Investors Compensation Scheme v West Bromwich Building Society (No 1),²⁶ it has been clear that agreements should be interpreted contextually. If the content of the contract is based on courts’ contextual interpretation, and somewhat vague notions of ‘commercial common sense’, then the meaning of the contract is not just a question of the language the parties have chosen. The extent to which courts should resort to ‘background factors’ in the interpretative process has been controversial and generated a great deal of litigation.²⁷ In an effort to provide greater certainty to contracting parties, Richard Calnan has argued that parties should consider making use of a clause controlling contractual interpretation.²⁸ The primary purpose of such a clause is to limit the amount of context the court takes into account when determining the content of the contract.

The second trend to note is the rise in cases where contracts are characterised as relational and terms of good faith implied into contracts. This looks surprising given that English law is generally thought not to require parties to exercise their contractual rights and powers in ‘good faith’.²⁹ Closely related is the third trend, which concerns the control of contractual discretions (via ‘Braganza-type’ duties).³⁰ Magda Raczynska shows that the debate on good faith in English law conflates various meanings of good faith and risks impelling this jurisdiction to travel in a wrong direction. A distinction needs to be made between the general power of the courts to apply and develop existing legal principles and doctrines (which in some instances have a similar effect to the operation of good faith doctrines in other jurisdictions, suggesting that English law already has a doctrine of good faith), and the power to impose a particular standard of behaviour on the parties.³¹ English courts do not and should not have a general power of the latter kind, although one specific area where controls should apply are contractual discretions. Paul Davies addresses some concerns that imposing a ‘good faith’ standard entails and argues that parties might consider expressly excluding terms from their contracts.³² Similar to terms controlling contractual interpretation, ‘no-good-faith’ clauses would be based on party autonomy. Davies argues, however, that exclusion of some controls relating to contractual discretions is likely to be much harder.

The fourth trend is different in kind, and results from the developing concept and use of smart contracts. In the extreme, it probably appears at first as limiting the role of contract law whilst expanding party autonomy. Sarah Green and Adam Sanitt identify various types of smart contract, ranging from those where a regular contract contains a short section of a self-executing code that implements a single clause to those that consist only of code and expressly exclude any other language and all contractual oversight.³³ Smart contracts of the latter kind seek to remove all contractual oversight but, as Green and Sanitt argue, they are not likely to eliminate it. The effect of smart contracts on the limits of party autonomy is likely to attract greater attention in the future.

Turning to specific terms that restrict one or both parties’ freedoms, it is important to...

Table of contents

• Cover
• Title Page
• Foreword by Lady Arden
• Acknowledgements
• Contents
• List of Contributors
• 1. Freedom of Contract and Terms Affecting Freedoms
• 2. Binding Our Future Selves
• 3. Anti-Oral Variation Clauses: Rock-Solid or Rocky?
• 4. Controlling Contractual Interpretation
• 5. Good Faiths and Contract Terms
• 6. Excluding Good Faith and Restricting Discretion
• 7. The New Override of Bans on Assignment of Receivables
• 8. The Boundaries of a Borrower’s Freedom to Act: Negative Covenants in Loan Agreements
• 9. ‘Ethical Clauses’ in Global Value Chain Contracts: Exploring the Limits of Freedom of Contract
• 10. Smart Contracts
• 11. Disproportionate Penalties in Commercial Contracts
• 12. Opting for ‘Documentary Fundamentalism’: Respecting Party Choice for Entire Agreement and Non-Reliance Clauses
• 13. Planning for Failure: Contract Design, Ineffective Bargains and Restitution
• 14. ‘All Watched Over by Machines of Loving Grace’? The Inevitable Conflict between Contract Law and Free Speech in Cyberspace
• 15. Private Law and Public Concerns: Non-Disclosure Agreements in English Contract Law
• 16. Professional Ethics and NDAs: Contracts as Lies and Abuse?
• 17. Choice of Court and Choice of Law Agreements: Freedom of Freedom of Contract
• 18. Illegality in English Arbitration Law after Patel v Mirza
• 19. The Reform of Insurance Warranties: Looking Beyond the Past
• 20. The Right to Delivery of Goods under Contracts of Carriage
• 21. The Contents of Commercial Contracts: Terms Affecting Freedoms – A Response
• Index
• Copyright Page