Freedom of upholding freedom and whether this is rationalised

Freedom is a primary and requisite feature of a contract, as
exemplified by Fridman’s definition of contracts being ‘agreements freely
entered into by the parties’.1
The legislature and judiciary play a crucial role in ensuring the policy of law
to ‘uphold the freedom to contract’2;
yet there are instances, predominantly in business to consumer contracts, where
they must encroach on this to avoid tenable predicaments that may arise from
unconditional freedom to contract. There remains the highly controversial argument
regarding the way in which exclusion clauses curtail the practicability of upholding
freedom and whether this is rationalised by the need to overcome the ‘inequality
of bargaining power’3
and assure fairness between two parties.

The judiciary and legislature lay down extensive rules which
must be met in order for exclusion clauses to be viable; these controls are
pertinent to the negligence liability element of exclusion clauses to make this
area more confined. One requirement is to ensure that the information is ‘incorporated
into the contract’4,
including being in accordance with the ‘red hand’ rule5
for ‘exclusion clauses which are regarded by a court as unusual and onerous’6.
The draconian approach by the judiciary surrounding negligence liability often
results in a decision that ‘the words of the exemption clause were not clear
enough to exclude the defendants’ liability in negligence’7,
resulting in the exclusion clause not being considered as incorporated. Alongside
incorporation, the exclusion clause is required to cover the breach and not
fall foul of any statute in order to be considered valid.8
A further rule which is applicable to exclusion clauses is the contra proferentem
rule; however this ‘has a very limited role’ with regards to ‘parties of equal
bargaining power’9
and, therefore, is seldom used unless there is ‘genuine ambiguity’10.
All of these factors demonstrate how exclusion clauses can restrict the freedom
to contract yet there are additional limitations surrounding negligence
liability enacted by the judiciary and legislature; namely the Unfair Contract
Terms Act 199711
(UCTA), the Consumer Rights Act 2015 (CRA) and Canada Steamship Lines Ltd v The King 195212
(Canada Steamship). Despite their further
constraints on parties’ freedom, it can be argued each of these restrictions
can be justified on the grounds of their necessity.

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Lord Morton’s three-limbed test13,
set out in Canada Steamship, focuses
on whether, for negligence, the exclusion clause covers the breach. This
highlights how the courts aim to overcome the issue of ‘inequality of
bargaining powers of contracting parties’14,
namely in business to consumer contracts, due to the fact that ‘true freedom of
contract can only exist where the parties are on equal terms’.15
The fact that ‘consumers are “weaker parties”‘ would lead to an ‘imbalance
of economic power’ which could easily result in the ‘weaker parties’ being
subjected to unfair terms.16
Therefore, the judiciary seeks to ameliorate this by using the common law to
restrict the validity of exclusion clauses.

Despite the efforts of the courts to protect the weaker
party from being disadvantaged, their approach has been met with objection by
many due to their ability to intervene in contracts which should be ‘freely
entered into’17.
By interfering with the original contract made between contracting parties, it
has been argued that ‘Courts should be slow to interfere’18
to ensure the basis of the contract is not exempt due to said arbitration. The
antithetical view was shown in the Australian case of Schenker v Malpas 199019
where the Supreme Court ruled that ‘where the parties are not of unequal
strength … the courts should treat the parties as free to apportion the
risks as they think fit’20
as supported by the principle of equality. This approach works in conjunction
with the aforementioned argument of non-intervention as ‘there would rarely be
a finding of an unjust contract without there being procedural unfairness’21;
yet legislation in Australia emphasises the parameters of when freedom should
be limited to assure fairness for consumers. 
These boundaries are adhered to by the courts as they do not allow for
‘terms excluding or restricting liability for negligence’22
and only further encroach upon the freedom of the parties when it is deemed
necessary to do so based upon the common law and the principles of fairness and
equality.

The Australian stance, initially, seems radically different
to the UK approach as laid out in Canada
Steamship as the judiciary appears to be far less stringent regarding encroaching
on the freedom of contracting parties should they feel they justify this
decision sufficiently. However, since the case of Persimmon23
where, due to ruling out liability for negligence, an exemption clause was
found to be valid, the position in Canada
Steamship has begun to diminish suggesting a shift from the previous
‘judicial dislike of exemption clauses’24.
Despite Persimmon25
seemingly bringing to light this change from the more traditional approach of
the courts, the earlier case of HIH
Casualty26  reiterates this idea of Canada Steamship ‘not laying down a code’ but merely providing
‘helpful guidance’.27
This expansion of freedom of parties entering into the contract may not,
however, be solely due to changes in judicial standpoint but related to more
arduous curtailment being enforced as a result of consumer protection
legislation, like that of the Australian judiciary. Based on this, it seems
evident that the courts have not strayed from the rules laid down in Canada Steamship owing to them
retracting from their obligations; rather because they rule within the
parameters set out in the legislation provided by the authoritarian Parliament.
This has, justifiably, reduced the freedom of contracting parties. The judiciary
also, in accordance with legislation, has the power to restrict freedom further
by implementing and interpreting the statutes on a case-by-case basis; it is
here that the three-limbed test of Canada
Steamship provides ‘helpful guidance’. Therefore it seems the Australian
approach is not as estranged from that of the UK as it may appear.

Next to discuss is the UCTA, which exerts statutory control
in relation to exemption clauses, honing in on restricting negligence liability
in business to business contracts.28
This ‘conceptual focus’29
results in the act having a ‘requirement of reasonableness’30
for loss or damage and, arguably most importantly, ensuring ‘liability for
death or personal injury resulting from negligence’31
is not precluded. With regards to the ‘requirement of reasonableness’32,
Schedule 2 and section 11 of the UCTA indicate what is necessary in order to
satisfy this provision. Legislation and statutory guidance regarding the
freedom to contract is uncommon in the UK, showing that, for Parliament to have
legislated on this contested area of law, it is pertinent to prevent ‘imposing
… a disadvantageous burden or risk’33
which the legislature has done by introducing this ‘new set of controls’34.
Through understanding the risks the parties are exposed to, it can be seen as
justifiable for the legislature to restrict freedom to such an extent in order
to ensure the ‘fundamental concept of equality’35
and upholding the principle ‘grounded on fairness’36  for both of the contracting parties.

The UCTA covers a wide scope of this area of law by trying
to include all exception clauses which aim to limit liability of negligence;
this emphasises the intention of the act to restrict the freedom of contract
through legislation. The extent of the act is substantiated by way of standard
form contracts being included37
in areas where the freedom of the contracting parties can be limited as, due to
little negotiation in their formation and performance, ‘the idea of freedom of
contract is more mythical than real’.38
This can be because of an ‘inequality of bargaining powers of contracting
parties’39
which can easily lead to one party not having ‘sufficient bargaining strength
to refuse to accept’40
entering into the contract under the specified terms. In instances like these
where, regarding exclusionary clauses, ‘one party is … unaware as to what
they mean, or possesses insufficient bargaining power to negotiate’41
the intervention of the UCTA is embraced by the judiciary, as well as the
parties concerned with these issues. Despite this, to regulate the risks and
ensure fairness for the contracting parties, the courts may have to interfere
too much regarding the freedom of contract as ‘for the act to apply, it is not
necessary for the whole of the contract to be “on the others’ written
standard terms of business”’42.
The introduction of the UCTA demonstrates how the freedom of the contracting
parties can be infringed upon by the legislature – by incorporating standard
term contracts into the act, the freedom to contract is diminished even more
than before. In spite of the limitations of the terms upon which the parties
can freely enter into, these restrictions can be seen to be justified in cases
where there is an ‘inequality of bargaining powers of contracting parties’43.
This is due to such circumstances otherwise resulting in the enforcement of a standard
form contract which would limit the party’s freedom to negotiate regardless.

The UCTA also sets out a vague framework with regards to the
test of reasonableness and leaves an essential role for the judiciary in the
interpretation of this guide by allowing the courts ‘to work out the direction
and detail of the reasonableness requirement’.44
This does not, on the other hand, undermine the significance of the ‘general
legislative framework’45
provided by the act which explicitly limits the ‘general freedom to determine
the contract’46. However,
due to both the judiciary and legislature playing a vital role with regards to
the reasonableness test, when there is contention with the interpretation,
uncertainty arises. Confusion is evident, specifically in respect of the
validity of exclusionary clauses which seek to limit negligence liability; this
can ultimately limit the freedom of parties further because the parties ‘cannot
be certain when their exemption clauses will be effective, and when they will
not be’.47 Nonetheless,
it can be argued that this restriction of freedom is no longer as problematic
as it was at the time of the act being introduced as, since this point, the
judiciary has ‘softened their approach’48
in relation to exemption clauses. The curtailment of freedom, as laid out by
the UCTA, is not only enforced by the legislature but the courts also play a
significant role in limiting the freedom when they interpret the statute when
ruling in cases. Although the UCTA does encroach on the freedom to contract, this
can be justified as it protects parties entering into contracts from being subjected
to inequality or unfairness.

The next statute to consider with regards to the limitation
of freedom within contract formation is the CRA which concerns business to
consumer contracts. Akin to the UCTA, Section 65 of Part 2 of the CRA provides
the unfair terms within contracts with consumers and restrictions surrounding
negligence liability where death and personal injury are not excluded.49
Based on this statute, courts can determine effectively which exemption clauses
are viable and which are void, appertaining to consumer contracts. Despite the
apparent infringement on freedom as a result of the CRA, this can be justified
based on the protection of the consumer to ensure they are not subject to
‘hidden terms’50
incorporated by the business with whom they are entering into the contract;
where there is ‘inequality of bargaining powers of contracting parties’51.

The scope of the CRA also creates a wider discretion of
where and when the freedom of contracting parties, in relation to exclusion
clauses for negligence liability, is being restricted. Those encapsulated
within the definition of a consumer for the purposes of the CRA has ‘slightly
widened’52 which
is beneficial for increased fairness, as it allows as many people as possible
to be protected by the legislation. Whilst it can be argued that as ‘companies
cannot be consumers’53
it is unfair not to offer them this protection, as they practically are often consumers, this is not an issue. This is because
there are still statutory provisions in place, within the UCTA, which regulate
business to business contracts and, therefore, could cover the situations where
they are acting as consumers.

The CRA also works in favour of the consumer with regards to
negotiating powers within exclusion clauses as ‘consumers are “weaker
parties”’54
so the CRA seeks to address this by excluding liability for negligence,
regardless of whether the terms were ‘individually negotiated’55
or not. The evident ‘inequality of bargaining power’56
results in the consumer often being pressured into entering a contract without
changing the terms proposed by the business party. Therefore, it is crucial
that the CRA works to ensure that freedom of contract is not ‘more mythical
than real’57
but rather exemplify that it is ‘genuine and should be preserved’.58
In order to do this, the CRA aims to, perhaps incongruously, limit the freedom
of the business to uphold the, already curtailed, freedom of the consumer to
prevent any further issues from arising. For this to be successful, the CRA has
reduced the exclusion of negligence liability and sought to protect all
consumers by including all consumer contracts within the legislation. Despite the
efforts of the legislature through the introduction of the CRA, some academics
still insist that the most important issue to overcome is to draw the ‘main
features to the attention of the consumer’ to ensure ‘an informed purchasing
decision’.59 However,
this could result in the freedom to contract being curtailed too much and
become problematic surrounding the efficiency of the contractual procedure,
without much benefit to the consumer.

The CRA provides a framework for the courts to rely upon in
order to determine whether, within consumer contracts, an exemption clause for
liability of negligence is unfair or not. It is essential for consumers to be
able to make an ‘informed choice’ but, in order to do so, there must be
transparency within the contract.60
The judiciary has acknowledged that, where parties are of a similar size and
equal bargaining power’61,
freedom to contract should not be infringed upon as the parties must assess the
risks themselves before entering into the contract; or else the courts would
experience surplus cases as any contractual relationship could be called into
question. In spite of this, the courts also acknowledge that they must
intervene in circumstances where it is pertinent to do so, in order for the
consumer to be protected; including upholding the good faith principle as set
out by Bingham LJ.62
Overall, despite the limits the CRA does place on the freedom of the
contracting parties, the aim of the statute is to assure the consumer’s
protection by ensuring they are not subjected to unfairness or inequality;
therefore the act is justifiably encroaching on said freedom.

In conclusion, it is evident that there are restraints
regarding the freedom of contracting parties enforced by both the legislature
and the judiciary and it may appear as though ‘the idea of freedom of contract is
more mythical than real’.63
However, these restrictions, specifically those surrounding exclusionary
clauses limiting negligence liability, are justified due to their ultimate aim
of ensuring equality and fairness for all parties.

1 G.
H. L. Fridman, Freedom of Contract, 2 Ottawa L. Rev. 1 (1967).

2 Esso Petroleum Co. v. Harper’s Garage
(Stourport) Utd. 1967 1 All E-R. 699, at 712.

3 Queen Mary Law Journal
Volume VIII – Spring 2017, pages 83-98; Mindy Chen-Wishart, Contract
Law (5th edn, Oxford University Press 2015), page 289.

4 Simon Whittaker,
‘Distinctive Features Of The New Consumer Contract Law’ (2017) 133 Law
Quarterly Review (Jan) 47.

5 Denning
LJ, J Spurling Ltd v Bradshaw
1956 1 WLR 461, 466.

6 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd
2004 211 ALR 342, 54.

7 E.
Barendt, ‘Exclusion Clauses: Incorporation and Interpretation’ (1972) 35 MLR
644.

8 Richard Stone and James
Devenney, The Modern Law Of Contract (6th edn, 2005), pages 243-244.

9 Persimmon Homes Ltd v Ove Arup and Partners
Ltd 2017 EWCA Civ 373, 52.

10
A. Shaw-Mellors, ‘Negligence Construction: Does Anything Remain of Canada
Steamship?’ 2017 (7) JBL 610-. 616; W. E. Peel, ‘Contra Proferentem
Revisited’ (2017) 133 Law Quarterly Review 7.

11
Unfair Contract Terms Act 1977 as amended by the Consumer Rights Act 2015.

12 Canada Steamship Lines Ltd v The King
1952 AC 192.

13 Canada Steamship Lines Ltd v The King
1952 AC 192, 208.

14 Maud Fritz, ‘The Effect Of
The Consumer Protection Act On Contractual Freedom’ 2014 University of
Pretoria.

15
G. H. L. Fridman, Freedom of Contract, 2 Ottawa L. Rev. 1 (1967).

16 Simon Whittaker,
‘Distinctive Features Of The New Consumer Contract Law’ (2017) 133 Law
Quarterly Review (Jan) 47.

17
G. H. L. Fridman, Freedom of Contract, 2 Ottawa L. Rev. 1 (1967).

18
J. Adams and R. Brownsword, ‘The Unfair Contract Terms Act: A Decade
of Discretion’ 1988 Law Quarterly Review, Vol. 104.

19 Schenker & Co (Aust) v Malpas Equipment
and Services Play Ltd 1990 VR 834.

20 Ibid, McGarvie J, 846.

21 Chris
Willett, ‘The Functions Of Transparency In Regulating Contract Terms: UK and
Australian Approaches’ (2011) 60 International And Comparative Law Quarterly.

22 Ibid.

23 Persimmon Homes Ltd v Ove Arup and Partners Ltd 2017 EWCA Civ
373.

24
E. Barendt, ‘Exclusion Clauses: Incorporation and Interpretation’ (1972) 35 MLR
644.

25 Persimmon Homes Ltd v Ove Arup and Partners Ltd 2017 EWCA Civ
373.

26 HIH Casualty v Chase Manhattan Bank 2003
UKHL 6; 2003 1 C.L.C. 358.

27 Ibid, 11.

28
Unfair Contract Terms Act 1977, s2(4).

29
James White, Defining “Exclusion” Clauses and Excluding “Defining” Clauses: The
Need to Clarify the Scope of the Unfair Contract Terms Act 1977 (2016) 5 JBL
373.

30
Unfair Contract Terms Act 1977, s2(2).

31
Unfair Contract Terms Act 1977, s2(1).

32
Unfair Contract Terms Act 1977, s2(2).

33 Queen
Mary Law Journal Volume VIII – Spring 2017; Director
General of Fair Trading v First National Bank 2001 UKHL 52, 17.

34
A. Shaw-Mellors, ‘Negligence Construction: Does Anything Remain of Canada
Steamship?’ 2017 (7) JBL 610-. 616.

35 Maud
Fritz, ‘The Effect Of The Consumer Protection Act On Contractual Freedom’
2014 University of Pretoria.

36 Queen
Mary Law Journal Volume VIII – Spring 2017.

37 Sean
Brannigan QC and Claire Packman, ‘It’s Not Fair’ (2016) 27 6 Construction Law
Journal 26.

38
G. H. L. Fridman, Freedom of Contract, 2 Ottawa L. Rev. 1 (1967).

39 Maud Fritz, ‘The Effect Of
The Consumer Protection Act On Contractual Freedom’ 2014 University of
Pretoria.

40
The Law Commission and The Scottish Law Commission’s Second Report on Exemption
Clauses 1975, at paragraph 11.

41 Law Commission’s Report (1975), para. 11; James White, Defining
“Exclusion” Clauses and Excluding “Defining” Clauses: The Need to Clarify the
Scope of the Unfair Contract Terms Act 1977 (2016) 5 JBL 373.

42 Pegler Ltd v Wang (UK) Ltd (No.1) 2000
70 Con LR 68, at paragraph 73.

43 Maud Fritz, ‘The Effect Of
The Consumer Protection Act On Contractual Freedom’ 2014 University of
Pretoria.

44
J. Adams and R. Brownsword, ‘The Unfair Contract Terms Act: A Decade
of Discretion’ 1988 Law Quarterly Review, Vol. 104, p. 94.

45 Ibid.

46 Simon Whittaker,
‘Distinctive Features Of The New Consumer Contract Law’ (2017) 133 Law
Quarterly Review (Jan) 47.

47 J.
Adams and R. Brownsword, ‘The Unfair Contract Terms Act: A Decade of
Discretion’ 1988 Law Quarterly Review, Vol. 104, p. 94.

48 Persimmon Homes Ltd v Ove Arup and Partners
Ltd 2017 EWCA Civ 373, 56.

49 Consumer
Rights Act 2015, s65(1).

50 Elizabeth Ovey, ‘The
Consumer Rights Act 2015: Clarity And Confidence For Consumers And Traders?’ (2015)
JIBFL 504 30 Journal of International Banking & Financial Law.

51 Maud Fritz, ‘The Effect Of
The Consumer Protection Act On Contractual Freedom’ 2014 University of
Pretoria.

52 Elizabeth
Ovey, ‘The Consumer Rights Act 2015: Clarity And Confidence For Consumers And
Traders?’ (2015) JIBFL 504 30 Journal of International Banking & Financial
Law.

53 George
Mallet, ‘The Consumer Rights Act 2015: Unfair Terms’ 2015 Henderson Chambers.

54 Simon Whittaker,
‘Distinctive Features Of The New Consumer Contract Law’ (2017) 133 Law
Quarterly Review (Jan) 47.

55 Ibid.

56 Queen Mary Law Journal
Volume VIII – Spring 2017, pages 83-98; Mindy Chen-Wishart, Contract
Law (5th edn, Oxford University Press 2015), page 289.

57
G. H. L. Fridman, Freedom of Contract, 2 Ottawa L. Rev. 1 (1967).

58 Simon Whittaker, ‘Distinctive
Features Of The New Consumer Contract Law’ (2017) 133 Law Quarterly Review
(Jan) 47.

59 Elizabeth
Ovey, ‘The Consumer Rights Act 2015: Clarity And Confidence For Consumers And
Traders?’ (2015) JIBFL 504 30 Journal of International Banking & Financial
Law.

60 Chris
Willett, ‘The Functions Of Transparency In Regulating Contract Terms: UK and
Australian Approaches’ (2011) 60 International And Comparative Law Quarterly.

61 A.
Shaw-Mellors, ‘Negligence Construction: Does Anything Remain of Canada
Steamship?’ 2017 (7) JBL 610-. 616.

62 Interfoto
Picture Library Ltd v Stiletto Visual Programmes Ltd 1989 QB 433, CA at
439; Director General of Fair Trading v
First National Bank 2001 UKHL 52, 17.

63 G.
H. L. Fridman, Freedom of Contract, 2 Ottawa L. Rev. 1 (1967).

x

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