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Bargaining Power and Law of Contract

Bargaining Power and Law of Contract

Introduction:

Over the past few decades, an opinion has been embraced about the contract law that the bargaining power is irrelevant to the law of contract. This statement represents that a contract is not affected by the transaction cost or unbalanced information that is the parties in a contract are risk neutral. However in reality, the static and dynamic patterns of bargaining power are frequently raised in the industry by critics. Therefore this statement needs to be analyzed and unpacked because what happens in reality is entirely different. There are cases in history as evidences that show that inequality of bargaining power is clearly not irrelevant to contract law and can affect a contract or agreement. There are examples of cases that represent that if there is a significant variation in the parties to bargain, then it may prevent the enforcement of contract. On the other hand, in some cases a significant inequality in bargaining power fails to pose any affect on the contract agreement.

The aim of this paper is to identify the effect of bargaining power on contract design by providing explanations of the major terms and to bridge the gap between the assumed theory and reality. Moreover, the purpose of this paper is to define and explain the expressions and basic concepts of contract law such as reasonable man: its use and application, objection intention, inequality of bargaining power, unfair contract terms and consumer protection act.

Discussion:

In English law, unconstitutionality is an area of law of contract and the law of trusts that prevents the enforcement of consent based obligations. The same concept or standard is expressed by another term known as “Inequality of bargaining power” (Barnhizer:2005). It can further be broken down into cases on duress, undue influence and exploitation of weakness (Baker: 1979). A case or contract is considered unconscionable to the courts, if it brought someone’s consent to bargain through duress i.e. to coerce someone into doing something through violence or threats. Such a case is considered contrary to good conscience. In such a case, one can claim back the goods or money transferred subject to certain defenses.

The question whether for a voidable consent based obligation, a defendant must exercise an “iniquitous pressure” has always been a subject of controversy.  In the case of undue influence, it is quite clear that the person who may lose the contract need not to put pressure. It is a matter of ongoing debate where an obligation should be voidable in the presence of circumstances because the person might be pressurized entirely by the circumstances and not from the defendant (Corbin et al: 1993).

To understand the effects of inequality of bargaining power on the contract terms and law, it is essential to analyse what law of contract actually is. The law of contract is a wide subject that sets all the rules, regulations, terms and conditions and legal remedies for a contract to be made. It provides a set of guidelines so that any two parties binding in a contract work within the legal boundaries and fulfill the conditions prescribed by the laws. There are many terms and conditions that need to be explained in order to understand the contract law. A contract is generally made between any two parties that are willing on a common ground or set of grounds or promises (Baker: 1979).

There are some conditions and formalities that need to be fulfilled at the time of contract formation. For example, it must express the consent. The consent is made to rule in favor of a legal act, in the broad sense, and particularly, any agreement, contract. Consent is the fundamental effect generated by the doctrine of autonomy: one who undertakes, which makes a debtor obligation, must be consented (Corbin et al: 1993). The contract, as the main source of legal obligations, have adopted the theory of autonomy is particularly marked by the idea, and is ideally a consensual legal instrument through the decisive place left to consent. Even when the contract is a legal obligation, consent is still required, even though one might think that the law can substitute for consent. There is nothing, and cases in which consent is not possible are very rare and motivated for reasons of public order (Kennedy: 1981).

Consent is precisely the willingness isolated which either sufficient to itself in the case of the unilateral act or in one or more meet to form the Convention. It is in this second sense that the Civil Code retains “the consent of the obligated party” as one of four essential conditions for the validity of an agreement (Barnett: 1986). Likewise there are other conditions in the absence of which there is nullity of the contract. Consent to a contract must be from an objective point of view: it distinguishes the offer, or politicization, of acceptance. In the absence of offer or acceptance, there is no meeting of minds, and therefore no contract.

Consent must also be valid. Consent to a contract must be loosely (another person determines consent) and integrates taken knowingly. Otherwise, there will be a vice of consent (Simpson: 1987).

There may be many reasons of nullity of contracts including error, abuse, improper, unlawful influence, and the most used the incorrect statement. It is called the breach of contract and occurs if anyone of the parties fails to perform any term of contract without legal cause or excuse. There are remedies recognized by the law that can be made to deal with such issues (Barnhizer:2005).

Some differences, especially taking into the spirit of Anglo-Saxon law, must be emphasized. The English judge focuses much more on the same formulation of contractual clauses and terms of the contract, without seeking the common intention of the parties beyond the contractual provisions (Baker: 1979). Judges have a tradition of narrow interpretation of contracts as laws. This respect “absolute” of the parties’ also appears in the reluctance of the English court to use “implied terms” may contain an agreement under the legislation or the use and preference for the “express terms”, as accurate and comprehensive as possible. Nevertheless, the intention of the parties is not totally absent in English law or any other law for the formation of a contract (Kennedy: 1981).

Nevertheless, the intention of the parties is not totally absent in English law or any other law for the formation of a contract. Two conditions are required at the formation and validity of the contract, an offer and acceptance. The two additional conditions include: the parties intended to create a legal relationship binding and enforceable (otherwise, the agreement will have the value of a gentlemen’s agreement, which will prevent the parties to go to court for breach of the Agreement), and the consideration (” consideration “) of the pledge. There is also a tendency to develop a doctrine called “purposive interpretation of contracts” leading to try to interpret a factual situation (Barnett: 1986).

It should be noted that English law adopted Conventions Rome and Brussels on the conflict of laws and jurisdiction in international contracts. Finally, the Arbitration Act 1996, which came into force on 31 January 1997, sets the rules applicable to arbitration and limits the role of the English courts in the assistant ship in case of difficulty(Baker: 1979). This law applies only to written agreements and has a residual value and leaving the parties great freedom that can choose an “ad hoc” procedure and determine the rules of the applicable law themselves or use procedure provided for in Regulation an international institution such as the Arbitration Rules of the London Court of International Arbitration (Simpson: 1987).

There are several prominent examples of cases in the area of inequality of bargaining power. One of the most famous is the Lloyds Bank Ltd v Bundy in which it was advocated by Lord Denning to govern the entire area by a general principle (Trebilcock: 1976). That concept or general principle was termed as “inequality of bargaining power” by him whereas it was termed as “unconscionability” while a famous American case Williams v. Walker-Thomas Furniture Co. But later the House of Lords in National Westminster Bank v Morgan rejected the approach of Lord Denning (Yan & Gray: 1994).

Other examples include,

  • James v Morgan(1663) 83 Eng Rep 323 refused to enforce contract to purchase horse on the basis of calculating price of the horse: for first nail in horse’s shoes it was 2 pence which was doubled for each of additional 31 nails.
  • Vernon v Bethell
  • Fairbanks v. Snow, 145 Mass. 153 (1887) It was held by Holmes J that a married woman could not avoid the contract she signed as a promissory note without being aware of that her husband had been threatened. There is no doubt about the fact that if the defendant had been forced to sign the note by forcibly taking her hand and compelling to hold the pen and sign and that note had been taken and delivered then definitely the delivery and signature would not have been her acts and ultimately no contract would have been made, whether the plaintiff was aware of it or not.
  • Earl of Chesterfield v Janssen (1751) 28 Eng Rep 82, 100, unconscionability is an obvious feeling or expression from the inherent nature and subject of the bargain itself; such as no honest man, also termed as a “reasonable man” in his senses would make on the one hand or would accept inequity and unconscientious act (Yan & Gray: 1994).

Another case is the case of “double dealing” that is when one party is running both sides of a contract. If such evidence is found then the contract can sink. Such cases happen in corporate law when a corporate company is dealing with another company and some of the negotiators for one of the company are interested in the well being of the other and so are playing double game. In such a case, share holder of the first company can challenge the agreement (Kennedy: 1981).

In a case where the bargaining power of the parties is persistently unequal then mandatory terms are implied in contracts by law to serve the inequality of bargaining power or the court can prevent enforcement of the contract (Barnhizer:2005).

In conclusion, contract law best works when a contract is made and there is no need to go to the courts in search for a remedy because each of the parties know their rights and duties and the contract fulfils all the conditions set by the law (Simpson: 1987). However, if the agreement seems impossible to perform or the agreement is affected by an unexpected event, then the parties are allowed to get themselves released from the contract obligation by the court. The other reason could be if one party simply breaches the contract’s conditions. In a case when the contract is not significantly performed the party that is innocent can claim for its damages to put itself into position as it would be if the contract were performed. But that party cannot claim for the damages that occurred due to remote consequences of the contractual breach. But in English law, remedies are based on the principle that full compensation should be made for all pecuniary or non pecuniary losses (Trebilcock: 1976).

Furthermore, in some cases the law moves further and a wrongdoer is required to return all the gains from breaching a contract and may be claimed for some specific performance of the agreement rather than monetary compensation. A contract can possibly become voidable due to insufficient disclosure of one of the parties or misrepresentation by them during negotiations. Agreement that is unconscionable if one of the parties is under duress or undue influence or was exploited can be escaped (Yan & Gray: 1994).

Conclusion:

Inequality of bargaining power, therefore, can prevent the enforcement act and is somehow relevant to the contract law. In consumer contracts, unreasonable conditions do hold some legislative protection. Moreover, the example of the case, Lloyds Bank v Bundy, in some cases a significant difference in bargaining power of one party from the other may affect and prevent the contract enforcement. An agreement or a contract is legally binding even when one of the parties has a better position than the other that is it has more options that the other party. For example, wars are usually ended like this when a peace contract is made between them. There is definitely an inequality of bargaining power when one country is much stronger than the other but they bind in a peace contract. In such a case, the weaker party could not be able to back of later and cannot claim that they were coerced to sign the agreement especially when their comparative weakness is the only evidence they have.

References

Baker, J. H. (1979). An introduction to English legal history (Vol. 2). London: Butterworths.

Barnhizer, D. D. (2005). Inequality of Bargaining Power. U. Colo. l. Rev., 76, 139.

Barnett, R. E. (1986). A consent theory of contract. Columbia Law Review, 86(2), 269-321.

Corbin, A. L., Perillo, J. M., Kniffin, M. N., Holmes, E. M., Bender, H. H., McCauliffe, C. M., … & Giesel, G. M. (1993). Corbin on contracts (pp. 1-4). West.

Kennedy, D. (1981). Distributive and paternalist motives in contract and tort law, with special reference to compulsory terms and unequal bargaining power. Md. L. Rev., 41, 563.

Simpson, A. W. (1987). A History of the Common Law of Contract: The Rise of the Action of Assumption (Vol. 1). Oxford University Press.

Trebilcock, M. J. (1976). The doctrine of inequality of bargaining power: Post-Benthamite economics in the House of Lords. The University of Toronto Law Journal26(4), 359-385.
Yan, A., & Gray, B. (1994). Bargaining power, management control, and performance in United States–China joint ventures: a comparative case study. Academy of Management journal, 37(6), 1478-1517.

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