Freedom of Contract

A contract is an agreement between 2 or more parties, giving rise to obligations which

are enforceable at law. It may be in the form of writing, by word of mouth, by conduct or by

any combination of such. The factor which distinguishes contractual obligations from other

legal obligations is that they are based on the agreement of the contracting parties. Section 10

of the Contracts Act 1950 defines a contract as “all agreements made with the free consent of

parties competent to contract”. One of the most essential features of a contract is the freedom

of contract, in which contracting parties must be allowed to enter into a contract freely. The

parties must be permitted to enter into agreements of their own choice and on their own

terms. The doctrine of freedom of contract also states that nobody shall have contractual

obligations imposed upon them without their consent. Therefore, with this doctrine, parties

should be as free as possible to make agreements on their own terms without the interference

of the courts or Parliament and their agreements should be respected, upheld and enforced by

the courts.

The purpose of contract law basically is to form rules to determine whether or not

there is a contract and what that contract requires of each party. There are two approaches to

the analysis of the validity of contract. The first is the generally accepted classical approach,

known as the “objective” test, which refers to how a reasonable person would interpret a

party’s intention from his conduct in all the circumstances. This test systematically searches

for the various elements that are seen to be the origin of a valid contract. These elements

include an offer, acceptance, consideration, intention and so forth. With the objective test,

contracting parties are free to sign on anything as they know that the courts will honour the

contract and will not interfere. Thus, this test is said to provide certainty and predictability.

The second way to solve a contract problem is to adopt the “subjective” test, which is a fairly

modern approach that was suggested by Lord Denning. The subjective test attempts to

ascertain the actual intention of the contracting parties, regardless of the appearances. It looks

into the mind of a party and aims to discover what that party actually intended. Through this

test, judges are allowed to interfere into the contract and decide the validity of it based on

reasonableness and fairness.

“The freedom of contract has allowed courts to elevate the needs of certainty and

predictability above those of reasonableness and fairness”

I completely agree with the statement mentioned above as I think that the main

purpose that leads people to enter into contract is the certainty and predictability of it. A

contract is formed when both contracting parties agreed to perform all the terms stated inside

the contract. If one party changes his mind and refuses to perform his duty, he should be held

liable even though he thinks that the original contract may not be fair to him. When two

parties to a contract have arrived in court, they are no longer of the same mind. They may

deny that there was ever an agreement between them at all or, while accepting that there was

an agreement, they may disagree to its terms. This situation is difficult to be resolved. When

this happens, the courts cannot rely solely on what the parties now say was in their minds at

the time the contract was made, even if they are very convincing. Thus, the subjective

approach cannot always be exercised. In fact, the courts adopt an objective approach to

decide whether there was an agreement and what the terms truly were. They will look into

what was said and done between the parties from the point of view of a reasonable person

and try to decide what such a person would have thought was going on. Therefore, the courts

should always decide based on the actual intentions of the parties by looking at what is

agreed between them, regardless of reasonableness and fairness.

From the modern law cases illustrated below, we can clearly identify the differences

between a subjective test and an objective test. Through these cases, we learn how the courts

have resolved arguments by applying an objective test and we also realize the significance of

this test to the contracting parties.

In the case of Smith v Hughes, a buyer thought he was buying “old oats” for his horse

but in fact they were new oats. He refused to pay and the seller sued him for breach of

contract, for the amount of oats delivered and also the amount still to be delivered. Usually, a

mutual mistake negates consent and no agreement is said to have been formed at all.

However, Smith v Hughes established that the intentions of the contract are “objective”

whereby a reasonable man would believe that he was assenting to the terms proposed by the

other party. The court held that the agreement is not void because the contract was for the

sale of “oats” without specifying whether it’s new or old.

The use of objective test in this case is appropriate as judgement should be made

based on what the parties say and do in the contract and not what they meant. With this test,

the contractual terms are to be interpreted as what a “reasonable man” would understand

them to mean, even if this is not what one party actually did intend. Although the seller is

aware of this mistake, yet he is not under an obligation to inform the buyer that he has made a

mistake. The responsibility lies within the buyer to ensure that the oats are what he intends to

purchase. He cannot escape from what is a bad bargain for him by arguing that it is the

responsibility of the seller to inform him of his mistake. Therefore, this is a case of mutual

mistake, in which the courts placed a reasonable interpretation on the behaviour of the

parties, rather than seeking a meeting of minds.

The Paal Wilson & Co A/S v Partenreederei Hannah Blumenthal was a case

concerning the sale of a ship; provide that any dispute arising out of the sale should be settled

by arbitration in London. In 1972, the buyers commenced arbitration proceedings. This was

followed by a long delay, until 1980, the buyers proposed to fix a date for arbitration. The

sellers issued a writ seeking, declaring that the arbitration agreement had been discharged by

the buyers’ repudiation of it, or by frustration arising out of an agreement to abandon the

arbitration. The House of Lords held that, because there were mutual obligations to avoid

delay, neither party could rely on the other’s conduct as amounting to a repudiation. The

agreement was not frustrated, because there had been no external change of events affecting

the performance of the arbitration agreement, nor had the delay occurred without the fault of

either party.

Lord Brightman defined the objective test in the following terms:

“If one party ‘O’ so acts that his conduct, objectively considered, constitutes an offer,

and the other party ‘A’, believeing that the conduct of ‘O’ represents his actual intention,

accepts ‘O’’s offer, then a contract will come into existence, and on those facts it will make no

difference if ‘O’ did not in fact intend to make an offer…”

He thought that, to enable the seller to rely on abandonment, they must show that the buyers

so conducted themselves as to entitle the sellers to assume, and that the sellers did assume,

that the contract was to be abandoned sub silentio. Thus, an objective test is applied in this

case, whereby the court would stand in the seller’s shoes and ask what the reasonable man

would have concluded from the events. The sellers would be allowed to assume the contract

was abandoned if the reasonable man would think it abandoned. Therefore, this approach is

objective from the viewpoint of the sellers, whereby a reasonable man watches the buyer’s

conduct through the seller’s eyes.

Besides, the objective test is also applied in the case of Centrovincial Estates plc v

Merchant Investors Assurance to decide whether promises exchanged and expressed by both

parties amounted to an agreement. B had let several floors of an office building to C, who

underlet one floor to D at a rent of $68, 320 per year. The contract consists of a rent review

clause, which states that the rent paid by D should be increased at a later date (25 December

1982) to the current market value. On 22 June 1982, a firm of solicitors wrote to D, on behalf

of B and C, inviting D to agree to a figure of $65, 00 per year as the correct rental value at the

review date. D accepted the proposal on the following day. On 28 June, D received a phone

call saying that the letter on 22 June contained an error and that B had intended to propose a

rent of $126,000 per year. D refused to agree to this corrected proposal and claimed that there

was an contract concluded by the two letters of 22 and 23 June. However, C claimed that the

parties had failed to reach agreement on the current value and that the matter should be

referred to an independent surveyor, as provided for in the rent review clause. C also denied

that the exchange of letters had resulting in a binding error and argued that there was no

meeting of the minds due to the error.

Whenever a mistake occurs, the courts are usually prepared to make the contract void

or voidable. But in this case of unilateral mistake, the objective test came into place and the

contract in fact became valid. The court held that an offeree may accept an offer in the sense

which a reasonable man would give it, despite clear evidence that the offer did not represent

the offeror's true intention, and had not in any way been acted upon by the offeree. I believe

that, the objective test applied here is aimed to give certainty to the law and prevent any one

party to suddenly turn around and say that the terms that were agreed upon were not intended

or was a mistake. If subjective test were to be taken, C may be allowed to escape from a bad

bargain by claiming that his real intention is not what he meant in the letter dated on 22 and

23 June. This would definitely create a lot of confusion on the validity of contract. Therefore,

the real intention or the subjective intentions of the parties would be irrelevant when deciding

if there is a contract.

Somehow, in certain cases that involve misrepresentation, undue influence, exclusion

and limitation clauses, and economic duress, where a party may avoid a contract, the courts

would adopt the subjective test in resolving them.

In the case of Hartog v Colin and Shields (1939), the defendant offered to sell 3000

Argentinian hare skins at a fixed price per pound, and the offer was accepted by plaintiff. The

defendant made a mistake in the pricing of goods. He had intended to offer the hare skins at

the same fixed price per piece, which is a rather different offer because 3 pieces amount to a

pound. The plaintiff’s claim for damages for breach of contract is rejected by the court. It was

held that the plaintiff must have realized and knew that the defendant’s offer was a mistake as

it concerned a term of the contract. Thus, the plaintiff should not be permitted to enforce the

contract and the contract should be void. Although the plaintiff did not admit his knowledge

of the mistake, yet he should have recognized it from the previous verbal negotiations and

written letters, in which prices had always been discussed per piece.

In other words, Hartog v Colin and Shields established that, when the buyer knows

that the seller had made a mistake as to price, there is no contract. The buyer is prevented

from “snatching a bargain” that he must have known was not intended for him. Mistakes as to

terms known to the other party can void the contract, whereas mistakes as to fact cannot.

Therefore, a subjective approach is applied in this case of unilateral mistake, whereby the

court only looked into the actual intention of both parties but not examining their actions

from the point of view of a reasonable man.

Moreover, the subjective test is also applied in the case Scriven Bros & Co v Hindley

& Co. The plaintiff instructed an auctioneer to offer a number of bales of hemp and tow for

sale and placed samples on view before the sale. The catalogue did not explain the difference

in nature of the goods and whilst the samples were marked with different number of the lots it

was not specified which was hemp and which was tow. The defendant was examining the

hemp but not the tow, as he was not intending to buy the tow. When the lots representing the

tow were put up for sale in the auction room, defendants' buyer made a bid which was an

extravagant price for tow, and the lots were at once knocked down to him. The auctioneer

realised the defendant was mistaken in some way but merely thought his mistake was in

respect of the value of tow. The plaintiff sued to recover the amount of the defendant’s bid.

The court held that the defendant is not liable as there was no binding contract. A

mutual mistake occurs, whereby the plaintiff had intended to sell tow and the defendant had

intended to buy hemp. Therefore, there is no meeting of minds between the parties, not even

consensus or agreement. In this case, we know that the courts have applied the subjective test

to determine the validity of a contract. Although a bid has been made, yet the judge looked

into the minds of the parties to discover what they actually intended. The courts then came to

a decision that there is no contract at all so that they could be fair to both parties.

In conclusion, I think that the freedom of contract has allowed courts to elevate the

needs of certainty and predictability above those of reasonableness and fairness. Through the

freedom of contract, contracting parties should be as free as possible to enter into agreement

of their own terms. The contract should always be respected, honoured and upheld by the

courts, despite of the reasonableness and fairness of it. Hence, I personally think that the

subjective test should not be exercised at all. This test does not coincide with the freedom of

contract. With the existence of subjective test, the parties can never enter into a contract

freely as they cannot expect or predict the validity of it when it is sent before court. It allows

the courts to interfere and decide what is fair to the parties. The contract may not be

enforceable and the terms may be always subjected to change. People would not want to enter

into contract when it does not provide certainty and predictability. Therefore, the objective

test is very important in determining the validity of a contract and in resolving all the contract

problems.