Principle of Reasonableness in Contracts - Case Study Example

PRINCIPLE OF REASONABLENESS IN CONTRACTS Contracts are essential legal documents for conduct of formal relations between individuals and organization. The financial component of a contract underlines the loss or gain accruing thereof. Since the validity of contracts is generally over protracted periods, circumstances arise or may be created which have not been envisaged while drafting it, leading to disputes. In resolution of disputes, the issue of consenting minds between two parties will have to be decided by English judges based on the principle of reasonableness. MAIN ESSAY Contracts are a common legal form of interaction in business, social and personal fields. Being a human interaction there is a certain element of moral subjectivity in every legal contract. A contract essentially denotes consent between two or more parties. Consent implies voluntary acceptance of the proposal and a concord.1 It is an act of reason and involves deliberation by a person possessing mental capacity of which he is in full control.2 It is an act which is not affected by fraud, duress or an error. Consent has to be, "informed" assent based on appreciation of the overall situation.3 Every contract implies consent. Contract is thus an outcome of consenting minds. However applying this concept practically entails not just satisfaction of the elusive but also ensuring that it is applied realistically to a situation which is before the judiciary for settlement.4 A contract as is generally understood is a promise or agreement which is enforceable by law. Under the civil law contracts are an obligation and hence these are to be considered under the general law of obligation.5 The law of obligations is commonly understood to have two connotations. There are certain obligations which are undertaken voluntarily and are owed to specific person or persons. These are applicable when we fail to improve things or when the performance is below expectations. The second types of obligations are in tort which implies protection of interests which are likely to be harmed or inflicted wrongfully. This thus indicates that instead of delivering the expected performance, things were made worse.6 Obligations under tort are not specific to individuals and are applicable to a wider group of persons. These are imposed by law. A recent category of obligations are restitutionary obligations which concern unfair enrichment of the defendant at the cost of the plaintiff. The restituionary obligations as is implied are aimed at profit from the plaintiff's money, resources or work unjustly.7 English law freely allows people to make contracts. As a result people enter into a large number of contracts.8 The practical application of issues as consenting and meeting of minds to contracts thus assumes significance. However the principle of consenting minds needs to be applied with due care to what contract law implies. A contract law addresses essentially four issues which are examined at the time of any adjudication. These are as follows:- (a) The time and method of the contract and the form in which it has been executed. (b) The contract should be free from any duress or any misrepresentation. Thus the party should not be a victim of force, in which case it may escape obligations of the contract. (c) The terms of the contract, their meaning and impact should be drawn out in detail. (d) Remedy for breach of contract should be included in the terms.9 A contract is also formed when there is an agreement which has the components of an offer and acceptance, a consideration and contractual intention. It should be in a written form as a formal document. The capacity under which the parties have entered into contract should be legally acknowledgeable, that is the parties must have a legal sanction to go for the contract. These must be between legally constituted functionaries of the organisation, company or nominated third party. Public policy should not be violated by the agrement and thus it should have legal tenability in the law of the land. Examining these fundamentals of contract with the key criteria of consent implies that there has been no duress or coercion and the contract has been evolved freely. The question of application of consenting minds also includes plea in some cases in which actual signing of the document by the defendant has to be proved. In such cases again the issue of consenting minds should be applied as one of the considerations.10 There is also a need to understand why contracts are enforced. This is provided by the normative and conceptual issues covered in the contract theory. More specifically, it entails economic benefits that arise from enforcement. It is also significant that contracts are enforced as these entail ensuring that promises between individuals and organisations are kept. This is the famous, "contract as promise" approach of Charles Fried.11 Since a contract violation involves disagreement between parties about terms which were required to be followed or which bind each party, there is always a cause for varying interpretation of the terms and conditions. At the time of drawing a contract, it may not be practicable to visualise all conditions that may arise during the term of the agreement or at times malafide intent may be demonstrated by one party while another may be relatively ignorant. Under such circumstances consent as stated holistically in the preceding paras assumes great significance.12 Thus it is seldom that all facets are considered when drawing contracts. It is only once a dispute arises that the various clauses therein may appear misleading and confusing. One such simple case is compensation due to a person who has entered into a contract for a vacation but which could not be executed as the holiday plans were cancelled as the person sufferred injury in the foot.13 How is a contract enforceable in this context. Should it be struck down in common law This contract has been concluded as a matter of consenting minds. However can mere consent be considered as the sole criteria in resolution of this case or should we apply a more practical approach and judge the case holistically on its merits. The issue may also involve the benefit that this person could have derived or has been denied as she has withdrawn from the contract due to circumstances beyond her control. The judge will have to apply his mind and rationalise the inter se benefits that could have accrued in this case and then make a judgement accordingly. Where no benefit or loss has accrued to any party, the case can be decided easily. However if the issue is of a gain or a loss, then it will have to be determined whether it has been due to violation of contract, has it occurred deliberately or as a force of circumstances beyond the control of the defendant. In the former case, the issue of consent assumes considerable significance and should be applied to the benefit of the plaintiff. However when it has occurred beyond the control of the defendant, then the matter of compensation will be diffiuclt to determine and will in all probability go against the defendant. The courts also agree that there should be a meeting of minds or a consensus, "ad idem" to establish a contract. The court will apply the test of reasonableness as they would not be able to form an opinion based on what the parties actually think or thought while drawing the contract. This is what has been referred to as the reasonableness test.14 Cheshire and Fifoot imply that in assessing the level and acceptance of consenting minds, the courts generally apply not just the language of offer, acceptance and agreement but also the reasonableness test which implies the conditions that rational people under similar circumstances would have agreed to.15 Thus in common law it is not anybody's case that the outcome of consenting minds or of consensus, "ad idem" should be interpreted to adopt a totally unfamiliar approach in interpreting the agreement. An English judge has to ensure that the problem is adjudicated in practical terms and the expectations of people who have the integrity to follow the code is not discriminated and the principle of reasonableness is applied. CONCLUSIVE POINT Contracts need to be drafted with due care and caution by experts in the field as well as with legal advice. While malafide intent is not time constrained and may arise even after lapse of a long period, disputes could be adjudicated by applying the principle of reasonableness. Reasonablenes has to be assessed by the Judge based on his practical knowledge of the issue under discussion and the manner of its conclusion by either parties. Language, tone, offer and acceptance may provide some indicators of intent. This will avoid an unfamiliar approach and meet the expectations of the people. Read More