UNC- ONSCIONABILITY IN CONTRACT - A DOCTRINE OF PUBLIC POLICY
UNC- ONSCIONABILITY IN CONTRACT - A DOCTRINE OF PUBLIC POLICY
The nature of the problem
2. CHAPTER I A DOCTRINE OF PUBLIC POLICY
(1) Laissez faire and freedom of contract
(2) Real versus Spurious freedom (The death of contract)
(3) The vocabulary of Unconscionability
(4) Void and Voidable contracts
3. CHAPTER II
FUNDAMENTALS OF CONTRACT AND UNCONSCIONABILITY
(1) Conceptual Remedies and Supervisory Remedies
(b) Estoppel at common law
(c) Estoppel in Equity
(d) The modern debate about consideration
(i) Duress: at law and in Equity
(ii) Unfair Economic pressure
(b) Undue Influence
(i) at law;
(ii) in Equity
(i) Non est factum;
(ii) In Equity
4. CHAPTER III
UNCONSCIONABILITY IN ACTION
(1) Penalties and Forfeiture clauses.
(3) Restraint of Trade
(4) Exemption clauses
5. CHAPTER IV
THE GENERAL DOCTRINE OF UNCONSCIONABILITY
(1) Historical foundation
(2) The latest child of Equity?
(3) Imprudent bargains and unequal bargaining positions.
(4) Standard form contracts and unconscionability
(5) Ingredients of the doctrine and the standard of reasonableness
(6) Statutory recognition of the doctrine
(7) Remedies and the problem of adjudication.
6. CHAPTER V
(1) The need for a new theory of contract
(2) Future of unconscionability
(3) Problem of the Field Code (Indian Contract Act, 1872)
(4) The relationship between Unjust Enrichment and Unconscionability
UNCONSCIONABILITY IN CONTRACT
UNCONSCIONABILITY IN CONTRACT
The Indian Contract Act 1872 is a useful starting point for an enquiry about the doctrine of unconscionability in the common law tradition. The Preamble to the Act states: Whereas it is expedient to define and amend certain parts of the law relating to contracts;
The law that was to be defined was the common law made applicable first to the Presidency Towns of Bombay, Calcutta and Madras and later extended to the whole country. There was a general requirement of equity and good conscience superimposed on the principles of common law to meet the unpredictable needs of local people who were being made subject to an imported system of laws. Section 10 defines contracts:
All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and not hereby expressly declared void.
Section 11 links competence with sanitary (sound mind) and Section 12 proceeds to define sound mind for the purposes of contracting A person is said to be of a sound mind for the purposes of making a contract
if at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effects upon his interests
Section 14 defines Free consent
Consent is said to be free when it is not caused by “
(1) coercion, as defined in Section 15, or
(2) undue influence as defined in Section 16, or
(3) fraud as defined in Section 17, or
(4) misrepresentation, as defined in Section 18, or
(5) mistake, subject to the provisions of Sections 20, 21 and 22.
Consent is said to be caused when it would not have been given but for the Existence of such coercion, undue influence, fraud, misrepresentation, or mistake.
Even though the contract is defined in terms of consent free of the above mentioned ingredients, Section 19 makes the agreement voidable at the instance of the party whose consent was so obtained.
The most important section for the present enquiry is Section 16 that defines undue influence:
(1) A contract is said to be induced by undue influence where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other, and uses the position to obtain an unfair advantage over the other.
(2) In particular and without prejudice to the generality of the foregoing principle, a person is deemed to be in a position to dominate the will of another “
(a) where he holds a real or apparent authority over the other, or where he stands in a fiduciary relation to the other; or
(b) where he makes a contract with somebody whose mental capacity is temporarily or permanently affected by reason of age, illness or mental or bodily distress.
(c) where a person who is in a position to dominate the will of another enters into a contract with him, and the transaction appears, on the face of it or on the evidence adduced, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall lie on the person in a position to dominate the will of the other.
The illustrations that follow the main text of the section are very interesting. Two might be contrasted profitably.
(a) A, having advanced money to his son B, during his minority, upon Bs coming of age obtains, by misuse of parental influence, a bond from B for the greater amount than the sum due in respect of the advance. A employs undue influence.
(b) A applies to a banker for a loan at a time when there is stringency in the money market. The banker declines to make the loan except at an unusually high rate of interest. A accepts the loan on these terms. This is a transaction in the ordinary course of business, and the contract is not induced by undue influence.
It would seem that the ambit of this section is limited to the doctrine of undue influence as it appears in English cases and does not include a wider principle that Lord Denning argued for in Lloyd's Bank v. Bundy. Then again all the concepts in the Act can be seen in terms of the conventional remedies within the law of contract. These will for the present be referred to as the Conceptual Remedies since they are related to the concept of agreement and contract. But as the illustration (g) above shows these remedies are severely limited. Clearly (g) is meant to cover economic duress which though it has some echoes of common law duress, cannot be put into the same categories. The reason is that in such a case there is conceptually an agreement. If one wishes to prevent injustice one has to look elsewhere. Public policy is too vague a notion to adequately meet the requirements of a comprehensive argument for justifying interference with perfectly good contracts that have got past the obstacles in the region of conceptual remedies. More important than the justificatory element is the ability of the argument to become the foundation for monitoring the efficacy of any purported interference. American research in this area suggests that a naÃ¯ve faith in fairness of striking at Oppressive bargains might have disastrous consequences for those whom the courts wish to protect in the first place. Difficult problems about risk allocation and price equilibrium cannot be ignored. The distinction between genuine unconscionability and the consequences of optimal risk allocation is often very difficult to make and all too easily overlooked. The Official Comments to article 2-302 of the US Uniform Commercial Code, which lays down a general doctrine of unconscionability, seek similarly to limit the doctrine: The principle underlying the section is one of prevention of oppression and undue surprise and not of disturbance of risks because of superior bargaining power. Shifting (post facto) the stipulated risk position is likely to have socially harmful results. (see Harbutts Plasticine).
In the UCC the terms unconscionability or unconscionable are left undefined. There is is no indication (express) as to the specific ingredients of the doctrine. Karl Llewellyn, the principal draftsman of section 2-302, said the unconscionable provisions of the UCC will lead appellate courts into a machinery for striking down where striking down is needed ¦. But the section does not provide the machinery; it merely leads the courts towards the machinery the courts themselves must create. The thought here is that requiring the courts to create their own standards of unconscionability will result in more predictability and allow them to develop the law in accordance with the needs of society. The courts will then be able to set their own standards for unconscionability and can decide subsequent cases on precedent instead of interpretation of statutes. If the draftsmen of the section had supplied a detailed definition of the word, the development of the case law would most likely have been choked off. The draftsmen probably came to the conclusion that with the continuing development of our economic system and the changing ideas, concepts, and values that accompany it, the law must be free to evolve at the same time. The easiest way to allow this is by not restricting the courts with rigid definitions and tests which may envelop only certain contingencies, but to give the courts a broad and flexible standard with which to work.
The situation must be quite familiar to students of Restitution and its component of unjust enrichment. To a large extent the problems of adjudication are similar in the two areas. But of course there are some important differences as well. The concept of unjust enrichment has been recognized as the unifying factor and the basis of restitutionary remedies given in such diverse areas as mistake, waiver of tort, breach of fiduciary duty etc. However, even Goff and Jones seem to rely on the intuitive meaning of the term unjust enrichment rather than provide a comprehensive definition. On the other hand there are pockets of unconscionability law where the term is used with a precise meaning, e.g. Mortgages, Bargains with expectant heirs, secret trusts. At the same time there is no common thread running through the areas of unconscionability already identified so that it might become possible for the courts to extend it to its logical conclusion, thereby rationalising and integrating the law. Lord Denning attempted to establish such a thread in Lloyds Bank v. Bundy in stating that all the traditional defences to contract enforcement, for example, duress, undue influence, breach of fiduciary duty, were properly seen as merely exemplary of a general doctrine of inequality of bargaining power. The House of Lords had an opportunity in Macaulay v. Schroeder Publishing to endorse Lord Dennings view unequivocally but they preferred to work the ground gradually. Unconscionability was not given independent status but it was also not rejected in a preemptory manner as was the fate of unjust enrichment in another case.
In terms of the judicial philosophy brought to bear on Macaulay, the judgment of Lord Diplock is particularly instructive. At the outset, his Lordship was prepared to categorise the contract as a contract in restraint of trade and therefore within one of those limited categories of contractual promises in respect of which the courts will retain the power to relieve the promisor of his legal duty to fulfill. For at least four reasons it would seem unwise to construe this limitation too literally. Firstly, because his reasoning has no unique applicability to restraint of trade cases. Second, in the Court of Appeal in Macaulay Russell LJ, in trying to sort out the earlier case law as to what contracts technically fall within the rules relating to restraint of trade, said that rather than attempt classifying some situations involving restrictions on trade as restraint of trade and other situations as not, we would prefer a quite general approach to all such situations. We are not ¦. afraid that that would lead to litigious abuse. Third, Lord Reid in the House of Lords said that the contract to provide exclusive services is not normally within the doctrine of restraint of trade but nevertheless if contractual restrictions appear to be unnecessary or to be reasonably capable of enforcement in an oppressive manner, then they must be justified before they can be enforced. Fourth, in a later and similar case, Clifford Davis Management v. W.E.A. Records, Denning MR cited approvingly Lord Reid as to the irrelevance of the restraint of trade categorisation and proceeded to construe the judgment of Lord Diplock as supporting the principle of unequal bargaining power. It might be useful to point out that the public policy element in restraint of trade was clearly kept separate from the enquiry about the nature of the transaction inter parties.
The path it seems has been cleared for a general doctrine but that still leaves the questions that were mentioned earlier in the context of the UCC. These are largely questions of adjudicatory technique and competence of the courts to tackle what might be a very difficult question of microeconomics. However, tentatively speaking the following research possibilities emerge from the present state of the law:
(1) To trace the development of the doctrine in its historical perspective with an attempt to isolate the areas in which it was sustained by common law judges and the Chancellor;
(2) To trace any links between these diverse areas;
(3) To arrive at the juridical nature of the doctrine and the consequent remedy (remedies?). Here it will be necessary to distinguish what have above been called the conceptual remedies in contract.
(4) To identify the ingredients of pre-contractual (and if possible, post-contractual as well) behaviour and status that leads to the transaction being labelled unconscionable at law;
(5) To consider the efficacy of the interference by courts;
(6) To consider the usefulness of attempting a statutory definition of unconscionability or codifying the area at all. If the conclusion is in favour of codification, the right model will be suggested keeping in mind the two models available in the UCC and the Indian Contract Act;
(7) To look if possible at the consumer legislation like the Unfair Contract Terms Act and comment upon its protective techniques in light of the conclusions reached above.
1. See Taylor Fashions Ltd. v. Liverpool Victoria Friendly Society 251 EG 159, Ch. D.
2. Slator v. Nolan (1876) 11 ER Eq 367.
Earl of Chesterfield v. Janssen 28 ER 82.
Lanchire Loans v. Black (1934) 1 KB 380.
Evans v. Llewellin (1987) 1 Cox C.C. 333.
Fry v. Lane (1888) 40 Ch D 312.
Lakshmi Amma v. T.N. Bhatta (1970) 3 SCC 159.
Rajah Kokahm Singh v. Rajah Rup Singh IC (1893) 20 IA 127.
3. Malhotra v. Union of India AIR 1976 (J&K) 41.
4. Lloyds Bank v. Bundy (1974) 3 VER 757.
Clifford Davis Management v. WEA Records L 1975 1 AER 237.
5. Yooman Credit Ltd. v. Apps (1982) QB 508.
See also Upjohn LJ in Chaterhouse Credit Co. Ltd. v. Tolly (1969) 2 QB 683,
710; Unfair Contract Terms Act 1977.
6. Inche Noriah v. Shaik Allie AIR 1929 (IC) 3 Raghunath Prasad v. Sarju Prasad (1923) 51 IA 101.
7. See section on Vocabulary of Unconscionability, post.
8. (1920) 1 QB 447. And see Shell U.K. v. Lostock Garage (1976) 1 SLR 1187.
9. See Coote, Exemption Clauses, pp. 4-14.
10. See Saxena, (1974) JILI Vol. 16 at 187.
11. (1980) 1 AER 198.
12. ibid., and Russey v. Palmer (1972) 3 AER 744.
13. Motilal Padampat Sugar Mills v. The State of U.P. AIR 1979 SC 621.
17. Ibid., emphasis added.
19. See Law Commission of India, Report No. 13, Gajanan v. Madan AIR (1942) Bom 302.
20. Section 16, Indian Contract Act, 1872. Kesavuhu v. Arithulai Ammal LLR 36 Mad 533.
21. Supra, n. 19; see recommendation for revamping present section
22. (1956) 1 AER 256; (1947) KB 130.
23. (1975) 3 AER 865.
25. Dunlop Pneumatic Tyre Co. v. Selfridge (1915) AC 847.
See also N.Z. Shipping Co. v. A.B. Satterthwaite (1974) AER 1015.
26. supra, n. 19.
27. ILR 5 Cal 669 (1880).
29. Reported in Smiths Leading Cases.
29A. Laurie & Forewood v. Dudin & Sons. (1926) 1 KB 223.
30. ILR 29 Bom 580 (1905).
32. 1861-73 AII ER Rep. 384.
33. Article 299 (1) of the Constitution of India. State of Bihar v. K.C. Thapar
AIR 1962 SC 110.
34. (1952) 3 SCR 43.
36. Banister v. Banister (1948) 2 AER 133.
37. Raddison v. Alderson (1883) 3 App Cas 467.
38. But see supra, n. 23.
39. AIR 1961 Puj. 314.
40. AIR 1968 SC 599.
43. AIR 1976 J&K 41.
44. (1972) 3 SCR 711.
45. Ibid., emphasis added.
46. (1974) 1 SCR 575.
47. AIR 1971 SC 1021.
48. (1968) 2 SCR 366.
50. Supra, n. 47.
51. Ibid., emphasis added.
52. But see post, nn 53 & 54.
FOOTNOTES 1. A general discussion on public policy will be found in Ch. I, supra.
2. For the distinction between policy (which is goal oriented) and principle (which is right based, see Ronald Devorkin, Taking Rights Seriously (2nd Ed.), Ch. Hard Cases.'
3. 3 Inst. 181.
4. Damenant v. Hurdis (1958) Moore KB 576.
5. (ISIS) AC 59, 77.
6. Atiyah, The Rise and Fall of the Freedom of Contract'.
7. Nordenfelt v. Maxim “ Nordenfelt Guns and Ammunition Co. (1894) AC 535, 553. per Lord Herschell.
8. Jansen v. Driefontein Consolidated Mines (1902) AC 491.
9. See R. Devorkin, Liberalism'in Hampshire ed. Private and Public Morality.
10. Astley v. Reynolds (1731) 2 Str 915; Williams v. Bayley (1866) LR 1 H.L. 200; North Ocean Shipping Co. Ltd. v. Hysindan Construction Co. Ltd. (1978) 3 AER 1170.
11. Butterwworths, (1971) Ch. 11.
11A. The model represents in Petrofina v. Martin (1966) 1 Ch 146, 181 an excellent exposition by Diplock L.J.
12. (1974) 3 AER 616.
13. Bigos v. Bonsted (1951) 1 AER 92.
14. Shaw v. Groom (1970) 2 QB 504. See also Belvoir Finance Co. v. Stapleton (1971) 1 QB 210; C.J. Hamson, 10 CLJ 249; B. Coote (1972) 35 MLR 38.
15. (1933) A11 ER Rep. 349.
16. (1966) 3 AER 384.
17. (1970) AC 403.
18. (1959) Ch 108.
19. Ibid. The Judgment of the Court of Appeal (delivered by Jenkins LJ) is not a model of clarity and consistency. The court said it was deciding the case on the reasonableness of the agreement in the interests of the parties (both being employers) it was obviously considering the reasonableness from the point of view of the employees.
20. This is Hyedon's view at p. 267. But according to him the aggregate of the equivalent private interests of the employees was also involved.
21. Supra, n. 17.
23. The Restrictive Trade Practices Act 1956 and 1968 and the Fair Trading Act 1973 provide a comprehensive attack on agreements which benefit the parties but may prejudice third parties. The Acts specify certain agreements that have to be registered with the Director General of Fair Trading. They are then brought before the Restrictive Practices Court to have their validity determined.
24. (1913) AC 781, 795.
25. (1967) 2 WCR 871.
26. That aspect of Esso v. Harper has been discussed in a later section on Mortgages.
29. per Lord Reid.
30. (1711) I.P. Wms 181; 24 ER 347.
31. At this stage the phrase oppressive bargain is being used as pragmatic shorthand for the doctrine of unconscionability. The doctrine itself is made up of two essential parts “ procedural and substantive oppression. A detailed discussion will be found in the section on Vocabulary'in Ch I and Ch IV.
32. (1969) 1 WLR 116.
33. Supra, n. 25 at
34. There are echoes of this in the area of mortgages. The attitude has crystallized at the core with the rule about inviolability of the equity of redemption.
35. Supra, n. 25 at
36. (1928) AER 396.
37. (1894) AC 535 at
38. Supra, n. 25 at
39. Ibid., at
40. Ibid., at
41. Ibid., at
42. (1974) 3 AER 616.
43. Ibid., at
44. Ibid., at emphasis added.
45. No serious attempt shall be made to answer the question at this stage though the preference for the semantic approach will be obvious. In a later section on Mortgages the question will be discussed in some detail.
46. Supra, n. 30.
47. Supra, n. 7, and see Heydon, op. Cit., at p. 78, n. 1.
48. (1920) 3 KB 571.
49. Ibid., at 581; emphasis added.
50. (1837) 6 A & E 438.
51. (1916-17) AER Rep. 396.
52. Lord Shaw of Dumfermline has been influential in formulating the language of the courts in trying to draw these distinctions. In Herbert Morris Ltd. v. Saxelby (1916) AC 688, 714 he said: Trade secrets, the names of customers, all such things which in sound philosophical language are denominated objective knowledge “ these may not be given away by a servant; they are his master's property. On the other hand, a man's aptitudes, his skill, his dexterity ¦ all these things which in sound philosophical language are not objective, but subjective they may and they ought not to be relinquished by a servant; they are not his master's property; they are his own property; they are himself.
54. (1933) ACL ER Rep 349.
55. (19666) 3 AER 384.
56. Supra, n. 52, emphasis added.
56. (1917) 1 KB 305.
58. (1928) AER 396, emphasis added.
59. (1914) AC 461.
60. (1974) 3 AER 616.
61. (1975) 1 AER 237.
63A. (1966) 1 Ch 146, 190.
64. (1414) 2 Hen 5, Pasch. pl. 26.
65. (1711) 1 P. Wms 181.
66. (1913) AC 724, 745-6.
67. (1920) 3 KB 571.
68. (1554) 2 AER 266.
68A. In Attwood v. Lamont, supra, n. 67, Younger LJ pointed to the vice of the standard form of contract “ This system of printed covenants prepared beforehand for signature by every future employee, irrespective of the nature of his employment or his personal qualifications, is to be deprecated in the interests of fair play, and the system is only likely to disappear if it be thoroughly understood by employers that such covenants will not be assisted in cases where in their integrity they are found to be oppressive.
69. (1965) 1 QB 623.
70. (1970) 1 AER 1227.
71. (1977) 1 AER 481.
72. A.G. of Australia v. Adelaide SS Co. (1913) AC 781; Esso Petroleum v. Harper's Garage (1967) 2 WCR 871.
73. Supra, n. 71.
74. Ibid., at 489-90.
75. Lord Denning in Liverpool City Council v. Irwin (1975) 3 AER 664, CA.
76. (1976) 2 AER 39, H.L.
79. (1936) 3 AER 160.
80. [1843-60] ACL ER Rep. 368.
81. (1967) 3 AER 822.
82. (1918) 1 KB 418.
83. (1831) 1 Cr. & J 331.
84. (1966) 1 AER 126.
85. Whitwood Chemical Co. v. Hardman (1891) 2 Ch. 416-428.
86. See Heydon, op.cit. 61-71.
87. (1898) 2 Ch 451.
88. Supra, n. 80.
89. See Supra, n. 72.
90. 38 LJ QB 20.
91. Supra, n. 80 and Heydon, op. Cit., n. 65. Miss Davis says that Sir Patrick Hastings smiled that concrete smile and spoke of my slowly graduating salary that by 1942 would reach six hundred pounds [per week] If anybody wants to put me into perpetual servitude on that basis of remuneration, I shall prepare to consider it.'(The Lonely Life, 164).
RESTRAINT OF TRADE
1. Public Policy in Restraint of Trade The Restraint of Trade doctrine is widely considered to be a part of the doctrine of public policy.1 But this is an inaccurate description or explanation of the doctrine. Public policy, in a manner of speaking, may have been the starting point of the Restraint doctrine, as of most other concepts and rules. But the law quickly develops from the goal based arguments of public policy to a rights based structure of principles.2 This may be called the institutionalization of the common law.
The fact that the Restraint doctrine has found it well nigh impossible to shake off its early associations may be explained on two grounds “ (1) The Restraint doctrine has much in common with Monopolies which according to Coke were contrary to the ancient and fundamental laws of the realm.3 Monopolies are considered undesirable by the law because they tend to bring about a state of affairs considered bad for society as such. Monopolies are seen as having their main effect at the social organization level (prices of goods etc.) and are therefore rejected or curtailed as a matter of policy.4 (2) The other reason why the Restraint doctrine has been unable to separate itself from public policy is due to confusion in the minds of judges and writers, between public policy and public interest. The former has, in effective terms, only a residual role left in the Restraint doctrine's operation, but the latter is an important ingredient.
An interesting exposition of the variation on the theme is to be found in the speech of Lord Haldane in Rodrignez v. Speyer Brothers.5 His Lordship considered rules of public policy as falling under three categories:
(1) A rule, originally settled for reasons of public policy but now a crystallized proposition which forms part of the ordinary Common Law, and is so definite that it must be applied without reference to whether a particular case involves the real mischief to guard against which the rule was originally introduced (e.g. the old Common Law rule against perpetuity).
(2) A rule which does not apply to a particular instance if that instance discloses no mischief from the point of view of public policy (e.g. law regarding wagers).
(3) A rule where public policy has partially precipitated itself into recognized rules which belong to law properly so called, but where these rules have remained subject to the moulding influence of the real reasons of public policy from which they proceeded (e.g. the Restraint of Trade doctrine).
There was never a policy against Restraint of Trade. The policy or competing policies were:
(a) Freedom of trade; and
(b) Freedom of contract. Ultimately of course they flowed from the same ideological commitment. Public interest is the result of balancing the competing policies. To that extent public interest can change as the Freedom equilibrium between trade and contract shifts with social attitudes.6 That should explain the changing attitudes of judges towards restraints, e.g. the falling into disuse of the distinction between partial and general restraints.7. Of course, public policy can change as well but it takes longer.8. There might be a further level of change “ society may perceive the concept of freedom differently as time goes by. In the area of free consent the negating motion of duress has gradually developed from physical coercion to undue pressure in equity, with a present culmination in commercial or economic duress.10
II. The Nature of Interests Involved J.D. Heydon, in his excellent book, The Restraint of Trade Doctrine11 provides a useful catalogue of the components and stages of the Restraint doctrine. He does not rush final conclusions on all points in view of the vast quantity of inconsistent and loose dicta concerning the basis of the doctrine. However, he sets out a comprehensive model which has been adapted to provide the one below that will help place the discussion that will follow in an attractive form.
WORKING MODEL: INTERESTS11A
The relevant interests involved in a Restraint decision are usually as follows:
(1) PRIVATE (a) general expectation of opportunity to earn a INTERESTS: living and contribute socially across a reasonable field - (COVENANTOR'S INTEREST)
(b) legitimate proprietary interest, quasi-proprietary interest or specific expectation of protection of existing means of livelihood -(COVENANTEE'S INTEREST) (That itself shows clearly that (b) is based on a more tangible possession than (a).
(2) PUBLIC (a) An aggregate of 1(a) (which would indirectly be INTEREST: an aggregate balance of trade and contract freedom exercised or expected to be exercised by each individual).
(b) A crystallized version of what the law considers a desirable state of affairs “ balance between the sum total of contract and trade freedom. (This is slightly different from (a) because that uses Private Interest as the basic raw material whereas (b) takes a more definite public posture.
(c) What the law considers a desirable state of affairs either by itself or as a means of a further goal. (This is pure policy).
STAGE A : Protection of (1)(b) without altogether crushing (1)(a). At this (lexical stage the transaction is purely private. If courts interfere right priority) away it is clearly to protect a weaker party. In fact, as we shall see later, most cases do not actually go beyond this point.
STAGE B : Either The balance (or rather an adjustment between (1)(b) and 2(a). That explains why covenants that are hold reasonable at Stage A are rarely if ever held to offend Stage B.
Or In addition to satisfying Stage A the covenant should also satisfy 2(b). Arguably 2(c) might apply. That of course would mean that the case could no longer be considered as having been decided under the Restraint doctrine.
* * * *
Our present concern is with Stage A “ to show how it reflects the situations where a general test of unconscionability is applicable and indeed if Schroeder v. Macaulay is correct, actually applied. It will therefore be suffice to say something briefly about Stage B.
Stage B acts as an independent external constraint upon legal transactions between individuals (the product of Stage A). To that extent the Restraint decisions cannot be attributed to public policy any more than the theory of consideration. Illegal consideration (e.g. agreeing to perform a criminal act) would be on grounds of public policy no consideration at all.13 Even where proper consideration can be shown a contract might be unforceable if it offends public policy in the manner of its performance.
14 PUBLIC INTEREST DECISIONS:
The English courts have only twice overtly rejected contracts on the ground of the public interest though the covenants concerned were considered reasonable between the parties. Besides Wyatt v. Kreglinger15 and Bull v. Pitney-Bowes16 decided on overt application of the public interest, there is also Pharmaceutical Society v. Dickson17 where that was an alternative ration, and Kores v. Kolok,18 where the interest of the employees not parties to the argument was perhaps taken, sub silentis to represent the public interest “ generally the interest of the public in mobility of labour.20 Clearly freedom of contract was not an important issue in the case.
In Dickson21 Lord Wilberforce gave some indication of the substance of the public interest test at Stage B. Having already said that the defendants had failed to show cause under Stage A, he said that the restraints were also against the public interest. On the simple ground ¦ that there is nothing here to displace the normal proposition that the public has in the absence of countervailing considerations an interest in men being able to trade freely in goods which they judge the public wants and that these restraints clearly, severely and arbitrarily restrict this freedom. More special arrangements to the effect that the restraints might cause a reduction in the number of pharmacies I would regard as less secure: before I could accept them I should require persuasion, first, that this type of consideration may properly be taken into account in relation to the common law doctrine of restraint of trade (as contrasted with proceedings in the Restrictive Practices Court) and, secondly that a reduction in the number of pharmacies, if it were to result, is contrary to the public interest. To demonstrate this would require a far more extensive inquiry than has been attempted here and it is certainly not something which can be assumed.22
Lord Wilberforce seems to be talking about 2(b) rather than 2(c) which seems to be relevant to the Restrictive Practices Court.23 There a policy is devised and applied with constant scrutiny as to its efficacy in achieving a desired goal. However, even if it could be shown that the courts actually apply 2(c) (pure policy) the impact on the present area of concern -“Stage A would be negligible. As late as 1913, in A-G for Australia v. Adelaide S.S. Co. Ltd.24 the Privy Council had the following comment to make “ Their Lordships are not aware of any case in which a restraint though reasonable in the interests of the parties has been held unforceable because it involved some injury to the public ¦ a state of circumstances in which some trade or industry has passed or is likely to pass into the hands or under the control of a single individual or group of individuals, and are indicating that if a restraint of trade is likely to produce this result, it may on grounds of public policy be unenforceable however reasonable in the interests of the parties to the contract. Such a state of circumstances may, by eliminating competition, entail the evils thought to be incident to monopoly rights granted by the Crown, and may therefore in a popular sense be called a monopoly.
Quite clearly then, Stage B can be taken by itself as an independent external constraint on Stage A. It does not directly influence the internal arrangement of Stage A. An examination of the leading cases will show that this model reflects the real foundation of the Restraint doctrine.
III. STAGE A: ITS IMPORTANCE IN PRACTICE
From the point of view of a general doctrine of Unconscionability, the House of Lords' decision in Esso Petroleum Co. v. Harper's Garage Ltd.25 might rightly be considered a case of missed opportunities. The facts were particularly interesting since they gave rise to possibilities under the doctrine of Restraint of Trade as well as the general law concerning Redemption in Mortgages.26 Since it is argued in the present work that the considerations that form the core of a general doctrine of unconscionability are prominent in cases in the two mentioned areas along with other areas discussed in this chapter, their Lordships could usefully have taken the opportunity to state the doctrine. Explicitly no such thing was either attempted or achieved. However, if one is to take a leaf out of Karl Llewellyn's book27 and actually look at what their Lordships in fact did rather than what they declared they were doing, the position appears more promising.
The facts of Esso are straightforward and familiar. The appellants, suppliers of motor fuel to dealers, entered into two agreements with the respondent in relation to two garages owned by the latter. These may be conveniently referred to as M and C respectively. The agreements were on the appellants' standard form. Agreement M was for a period of four years and five months. The appellants agreed to sell and the respondent agreed to buy for that period the total requirements for the garage at the appellants' wholesale schedule prices for dealers. The appellants further agreed to allow the respondent a rebate per gallon on the fuel sold besides providing the standard advantages under their dealer cooperation plan. The respondent covenanted not to purchase any other brand fuel and to keep the garage open during reasonable hours. Agreement C was in all respects identical except that it was for a period of twenty-one years. The difference in the agreement periods can obviously be explained by the fact that the second garage was also subject to a mortgage agreement entered about three months after the tie agreement. The appellants advanced 7000 to the respondents as loan. The respondents in turn covenanted (inter a to repay the loan with interest by installment over 21 years and charged the garage by way of legal mortgage. The mortgage could not be redeemed otherwise than in accordance with the covenant.
The House of Lords quite categorically stated that the existence of a mortgage did not exclude the doctrine of restraint of trade. That statement in itself is unexceptional. What their Lordships failed to assert with clarity was the relationship between the requirements of the two separate principles that were applicable.
Their Lordships were at pains to emphasise the special nature of the covenants in the instant case and to distinguish these covenants from ordinary restrictive covenants familiar to property lawyers. Lord Morris may be taken to be speaking for his Brothers as well, when he said:
There is a considerable difference between the covenants in the present case and covenants of the kind which might be entered into by a purchase or by a lessee. If one who seeks to take a lease of land knows that the only lease available to him is a lease with a restriction, then he must either take what is offered (on the appropriate financial terms) or he must seek a lease elsewhere. No feature of public policy requires that if he freely contracted he should be excused from honouring his contract. In no rational sense could it be said that if he took a lease with a restriction as to trading he was entering into a contract that interfered with the free exercise of his trade or his business or with the free individual liberty of action in trading. His freedom to pursue his trade or earn his living is not impaired merely because there is some land belonging to someone else upon which he cannot enter for the purpose of his trade or business. In such a situation (i.e., that of voluntarily taking a lease of land with a restrictive covenant) it would not seem sensible to regard the doctrine of restraint of trade as having application. There would be nothing which could be described as interference with individual liberty of action in trading. There is a clear difference between the case where someone fetters his future by parting with a freedom which he possesses and the case where someone seeks to claim a greater freedom than that which he possesses or has arranged toacquire.28
Several brief observations may be made about this position.
(1) (a) Firstly, it is clearly stated that the doctrine is based in public policy. As discussed above in Section II the so called public policy test requires that the agreement be reasonable from the point of view of the parties as well as in the interest of the public. A balance between freedom of contract and freedom of trade is the focus in such cases.
(b) Secondly, a related point is that the doctrine bites restraints of trade and not restrictions. Restrictions on trading activities are not per se condemned. It is only when they become detrimental to the existence of trade that they fall foul of the doctrine. Restrictions that amount to restraints on free trade are detrimental to the public interest and therefore unreasonable. Many restrictions on trading activities are in fact very useful for promoting trade in a planned manner. The solus agreements in the fuel trade are an example of this.
(c) Contracts in Restraint of trade are perceived as being sui generis and attract special treatment.
If a contract is within the class of contracts in restraint of trade the law which applies to it is quite different from the law that applies to contracts generally. In general unless a contract is vitiated by duress, fraud or mistake its terms will be enforced though unreasonable or even harsh and unconscionable, but there a term in restraint of trade will not be enforced unless it is reasonable.29 As far as ordinary contracts are concerned there is a clear assertion of the 19th century attitude that the absence of what have been called conceptual hurdles to the formation of contract, there is no further obstacle in enforcing an agreement made for valid consideration. Courts do not look to the adequacy of consideration. However, Parker C.J. in Mitchell v. Reynolds while discussing an attempt to establish a distinction between promises and bonds in restraint cases, stated that the true distinction in that case was between contracts with and without consideration; and that wherever a sufficient consideration appears to make it a proper and a useful contract, and such as cannot be set aside without injury to a fair contractor, it ought to be maintained; but with this constant diversity, viz. where the restraint is general and not to exercise a trade throughout the kingdom, and where it is limited to a particular place; for the former of these must be void, being of no benefit to either party, and only oppressive . In other words Parker C.J. telescoped the two elements Lord Reid prefers to keep separate.
Mitchell v. Reynolds is obviously obiter as far as the opinion as to the voidness of the general restraint is concerned, since the facts of the case did not give rise to arguments about it. However, preoccupation with consideration almost to the point of enquiring about its adequacy is important. One might interpret this in two possible ways assuming that the adequacy of consideration does not affect the public interest in any way. Perhaps there is no inherent prohibition on enquiring about the adequacy of consideration. In other words, agreements will be enforced only if they are fair in the circumstances and the standard of fairness in this case is that of the reasonable man. This in itself might sound very ominous to lawyers who view judicial discretion with some scepticism. Alternatively if the word ˜oppressive' is the operative word in that passage and is taken at its face value, we might have the beginnings of the unconscionability doctrine. Courts will not enforce oppressive bargains31 as a matter of public policy, even though they satisfy all conceptual requirements of binding contracts. This is type 2(c) in the model. The difference in the consequences of general and particular restraints, on the other hand has an obvious direct relevance to the public interest in free trade. But even that is at best a prima facie approximation. One can imagine general restraints in the case of sale and purchase of a large business which might not be detrimental to trade in the long run. This is type 2(b) in the model.
(2) The second observation that needs to be made about the judgment in Esso v. Harper concerns the point on which the case was followed by the Court of Appeal in Cleveland Petroleum v. Dartstone,32 i.e. if the primary concern is the public interest why should it matter whether the restraint is imposed as restrictive covenants at the time of creating a leasehold interest or imposed upon existing freehold interests? Either way it would be detrimental to the public interest in the same measure. Restraint cases are often decided without signifying which limb is being specifically referred to. Lord Reid himself said:
I think that in some cases where the court has held that a restraint was not in the interest of the parties it would have been more correct to hold that the restraint was against the public interest. For example, in Kores Manurfacturing Co. Ltd. V. Kolok Manufacturing Co. Ltd. the parties had agreed that neither would employ any man who had left the service of the other. From their own point of view there was probably very good reason for that. But it could well be held to be against the public interest to interfere in this way with the freedom of their employees. If the parties chose to abide by their agreement an employee would have no more right to complain than the Mogul Company had in the Mogul case. But the law would not countenance their agreement by enforcing it. And in cases where a party, who is in no way at a disadvantage in bargaining, chooses to take a calculated risk I see no reason why the court should say that he has acted against his own interests; but it can say that the restraint might well produce a situation that might be contrary to the public interest.
The real issue in Esso v. Harper, as in most cases on restraint of trade, was not whether the covenantor was giving up something he already possessed, but whether he was getting enough in return for it (the oppressive bargain point from unconscionability) an whether the public interest in reasonable supply of fuel and opportunity to trade was being safeguarded. Lord Reid himself emphasised that As the whole doctrine of restraint of trade is based on public policy its application ought to depend less on legal niceties or theoretical possibilities than on the practical effect of a restraint in hampering that freedom which it is the policy of the law to protect. One only has to add of the individual after freedom and we would have an ideal ground for unconscionability.
Lord Reid laid down three requirements (based on the Nordenfelt principle) for establishing that a restraint was not undue or unreasonable. (1) That it is necessary to consider whether the restraint went further than to afford adequate protection to the party in whose favour it was granted;34 (2) Whether it can be justified in the interests of the party restrained; and (3) Whether it is contrary to the public interest. There is no quarrel about the third requirement since we have already established the role of public interest as an external constraint upon a bargain between two people. The problem is really about the first two. Lord Reid seems to have split the unitary Nordenfelt requirement into two separate limbs. Presumably it is in the interest of a contracting part to be bound by his promise in return for another's promise. That is what he wants. It is only fair that the other party be allowed to negotiate reasonable protection. That should conclude the matter. To go further and inquire further about the interest of the restrained party is to make an inquiry into the merits of the bargain. However, it is possible to see the second requirement as an inevitable imperative of the more general doctrine of unconscionability considering the fact that most restraint of trade situations are at least prima facie situations of unequal bargaining strengths. Support for this view may be found once again in Lord Reid's speech:
Where two experienced traders are bargaining on equal terms and one has agreed to a restraint for reasons that seem good to him the court is in a grave danger of stultifying itself if it says that it knows the trader's interest better than he does himself. But there may well be cases where, although the party to be restrained has deliberately accepted the main terms of the contract, he has been at a disadvantage as regards other terms: for example, where a set of conditions has been incorporated which has not been the subject of negotiation -- there the court may have greater freedom to hold them unreasonable.35
The whole thrust of that passage is towards the inherent unfairness of holding someone bound by terms that he has not really accepted because he was never in a position to reject. One might also notice that disadvantage in that passage points to the manner (procedure) of bargaining “ a suggestion that there might be two levels of unconscionability or unreasonableness. In principle there is no obvious reason for limiting the power of the court to any special areas since the principle applies in the same measure across the board in contract. The immediate limiting factor is the overall commitment to the freedom of contract. To this purpose Scrutton L.J. declared in English Hop Growers Ltd. v. Dering36 I have always myself regarded it as in the public interest that parties who, being in an equal position of bargaining, make contracts, should be compelled to perform them, and not to escape from their liabilities by saying that they had agreed to something which was unreasonable.
In other words this is freedom of contract. Without equality there is no freedom. Nordenfelt itself clearly stated the position about consideration: It was laid down in Mitchel v. Reynolds that the court was to see that the restriction was made upon a good and adequate consideration, so as to be a proper and useful contract. But in time it was found that the parties themselves were better judges of the matter than the court, and it was held to be sufficient if there was legal consideration of value, though of course the quantum of consideration may enter into the question of the reasonableness of the contract.37
In other words only if the consideration is grossly inadequate will the courts take it up as a starting point for enquiring into the reasonableness or fairness of the contract. Even then something more is required before a contract is rejected -“inequality of bargaining position. In the familiar Restraint cases of employment contracts there is a prima facie presumption of inequality. Thus, a restriction as to time may be reasonable or unreasonable according to whether sufficient compensation has been given to the person restrained. The distinction between partial and general restraint is no longer alive. The extent of the restraint is now merely one factor to be considered.
The opinion of Lord Pearce stands out due to the somewhat different attitude he professes to take. In fact it is almost in the nature of a confession about what the courts have really been doing all along: Public policy, like other unruly horses, is apt to change its stance; and public policy is the ultimate basis of the courts' reluctance to enforce restraints. Although the decided cases are almost invariably based on unreasonableness between the parties, it is ultimately on the ground of public policy that the court will decline to enforce a restraint as being unreasonable between the parties. And a doctrine based on the general commercial good must always bear in mind the changing face of commerce. There is not, as some cases seem to suggest, a separation between what is reasonable on grounds of public policy and what is reasonable as between the parties. There is one broad question: is it in the interests of the community that this restraint should, as between the parties, be held to be reasonable and enforceable?38 With great respect that seems to be putting the cart before the horse. Lord Pearce has telescoped many points to confuse the picture somewhat. It was noted earlier that ultimately most doctrines of common law and more so Equity, are derived from public policy but it is hardly enough to chant that magic formula and hope to deal with cases on an ad hoc basis. Certainly it is advisable to resort to a logical system of checks if one is easily available. Lord Pearce should really have addressed himself to the question, Does the public policy supporting freedom of contract include the concept of fair bargaining opportunity? In other words there might be a public policy argument for not enforcing unconscionable contracts. Even on his own terms, Lord Pearce fails to provide a clear lead towards training the unruly horses, for having given a carte blanche to public policy (in the loose sense in which he used it in the passage above), when it came to enumerating the factors that he considered relevant for the actual decision in the case, the discussion tilts heavily towards the individual's predicament.
If Esso had assured to the garage proprietor a supply of petrol at a reasonable price, come what may, in return for the garage proprietor selling only Esso petrol, it might be that the contract might have come within the normal incidents of a commercial transaction and not within the ambit of restraint of trade. But Esso did not do this. They hedged their liability around so that they had an absolute discretion in the event inter alia of a failure in their own sources of supply, whether or not Esso should have foreseen it, to withhold supplies from the garage proprietor (leaving him the cheerless right in such a situation to seek supplies elsewhere); And the price was to be fixed by Esso. And for the duration of the contract he owed them a contractual obligation to continue to keep his garage open (or find a successor who would do so in like terms). When these contracts are viewed as a whole the balance tilts in favour of regarding them as contracts which are in restraint of trade and which, therefore, can only be enforced if the restraint is reasonable.39
The confusion at the end of that passage is quite obvious. Lord Pearce quite reasonably found the arrangement too one sided. But if he were to be faithful to his earlier proposition of public policy these considerations would not arise at all. If the contract was considered detrimental to the public interest (which must be the basis of public policy) and struck down for that reason where is the need to evaluate the consequences of enforcing such a contract upon the party concerned? LORD WILBERFORCE AND THE BROAD AND FLEXIBLE RULE OF REASON Lord Wilberforce, in his speech discussed various types of cases in which judges have been able to dispense from the necessity of justification under a public policy test of reasonableness such contracts or provisions of contracts as, under contemporary conditions may be found to have passed into accepted or normal currency of comercial, or contractual, or conveyancing relations.40
That such contracts have done so may be taken to show at least with strong prime facie force that, moulded under the pressure of negotiation, competition and public opinion, they have assumed a form which satisfies the test of public policy as understood by the courts at the time or, regarding the matter from the point of view of trade, that the trade in question has assumed such a form that for its health and expansion it requires a degree of regulation. Such contracts do not need justification. He says again a few moments later “ The line of thought that restrictions may in some contexts be imposed, and upheld, where they have become part of the accepted pattern or structure of trade, as encouraging or strengthening trade, rather than limiting trade, is I think behind the courts' acceptance of exclusively contracts and contracts of sole agency.41
Clearly, Lord Wilberforce's ˜broad and flexible' rule of reason uses social acceptance of contract for the job that the court would otherwise have to attempt itself and for which the courts had the advesarial system is very badly equipped “ to judge the merits of a particular practice in terms of the economic structure and social commitments. It is important to note that he is thinking of the public interest yet he categorically states later that the case was fought exclusively on the first limb of the Nordenfelt test of reasonableness (in reference to the interest of the parties) the respondent explicitly disclaiming any reliance on the second limb (in reference to the interests of the public). Therefore the requirement of justification in this case must have come from elsewhere. In fact, for Lord Wilberforce there is a closer nexus between the public interest and individual interest than appears in the other speeches. At one stage he goes to the extent of saying, I venture to think it important that the vitality of the second limb, or as I would prefer to put it, of wider aspects of a single public policy rule, should continue to be recognized. This seems to be against the trend of the other speeches. The criticism that was made of the sudden shifts between the two limbs in the other speeches implies in itself an acceptance of the two limb doctrine. Lord Wilberforce's attempt to unify the two completely not only are a crucial deviation from Nordenfelt but also suspect in principle. Many areas of the restraint doctrine involve sensitive balancing of public and private interest. They do not always act in the same direction. Employment cases quite often, though not directly offending the public interest, will involve unreasonable restrictions upon the behaviour of a party unable to negotiate better terms.
IV. RESTRICTIONS NOT AFFECTING PUBLIC INTEREST DIRECTLY
There are cases where only Stage A is involved and taking the two stages together would lead to obfuscation of the important factors that are pertinent to Stage A only. Schroeder v. Macaulay42 is a good example. In that case a 21 year old song writer entered into a very one sided argument with music publishers in their Standard form. It was a 5-year agreement subject to a further 5-year extension at the publishers' option if the writer received more than 5,000 in royalties during the first term. Only the publishers could determine the agreement (at a month's notice). Full copy rights for the whole world were assigned to the publishers.
Schroeder was not really a restraint on trade and the public were not being deprived of anything. It was all a question of what the young songwriter was being given for the substantial rights that the publisher had acquired against him. While discussing the standard form contract used in the case Lord Reid commented “ I do not find any evidence in this case, nor does it seem probable, that this form of contract made between a publisher and an unknown composer has been moulded by any pressure of negotiation. Indeed, it appears that established composers who can bargain on equal terms can and do make their own contracts.43
The emphasis is clearly on the bargaining position of the parties. The standard form itself can work either way depending on the bargaining position.
Lord Diplock was more forthcoming on the topic of the bargaining positions of the parties. The second paragraph of his speech has central importance for the present theme and merits complete reproduction:
It is, in my view, salutory to acknowledge that the in refusing to enforce provisions of a contract whereby one party agrees to for the benefit of the other party to exploit or to refrain from exploiting his own earning power, the public policy which the court is implementing is not some 19th century economic theory about the benefit to the general public of the freedom of trade, but the protection of those whose bargaining power is weak against being forced by those whose bargaining power is stronger to enter into bargains that are unconscionable. Under the influence of Bentham and of laissez-faire the courts in the 19th century abandoned the practice of applying the public policy against unconscionable bargains to contracts generally as they had done formerly to any contracts considered to be usurious; but the policy survived in its application to penalty clauses and to relief against forfeiture ad also the special category of contracts in restraint of trade. If one looks at the reasoning of the 19th century judges in cases about contracts in restraint of trade one finds lip service to current economic theories but if one looks at what they said in the light of what they did, one looks at what they said in the light of what they did, one find that they struck down a bargain if they though it was unconscionable as between the parties to it, and upheld it if they thought it was not.
So I would hold that the question to be answered as respects a contract in restraint of trade of the kind with which this appeal is concerned is: was the bargain fair?44
There could not possibly be a clearer statement of 2(c) type public policy in our model above. In a sense this 2 (c) type public policy in our model above. In a sense this 2(c) policy “ true freedom of contract “ acts here directly at Stage A in cases like Schroeder, and in balance with the other policy “ true freedom of trade (as public interest) at State B in characteristic Restraint cases. An important question that now arises is whether the difference between ˜unreasonableness' and ˜unconscionability' tests is purely semantic or something more substantial.45
Before proceeding to suggest a precise formulation of the test of fairness applied by Lord Diplock it would be useful to see whether in earlier cases judges were trying to arrive at the same result even though they failed to articulate their endeavour beyond the vague motions of public policy. To begin at the beginning “ Mitchell v. Reynolds.46
In that case the defendant had assigned the lease of a bake house to the plaintiff for five years, and gave a bond undertaking to pay a penalty if he worked as a baker during that term. The court found for the plaintiff because there was a special consideration ¦ set forth in the condition, which shows it was reasonable for the parties to enter into it. However Parker C.J's decision is far more interesting for his masterly review of trade restraints, whether imposed by contract, royal charter, custom, or by-law. The original affinity between monopolies and restraint of trade is obvious. Parker C.J. said that these cases could not be put into two categories “ either involuntary restraints, or voluntary restraints. We shall consider the latter category only.
Parker CJ said that the reasons that applied to involuntary restraints had no direct reference to voluntary restraints. The true reasons why the law frowned on voluntary restraints were as follows. First, a contract in restraint of trade causes the covenantee to lose his livelihood and brings sufferings to his family. Secondly, it deprives the public of a useful worker. Thirdly, such contracts can be abused to give covenantees unfair advantages “ masters trying to protect themselves from future competition from their apprentices, and corporations, who are perpetually labouring for exclusive advantages in trade, and to reduce it into as few hands as possible. Fourthly, restraints may often be excessive, inflicting hardship on the covenantor without conferring benefits on the covenantee.
On the other hand, the law frequently upholds restraints which are useful and beneficial, as to prevent a town from being overstocked with any particular trade, or where an old man is unable to work as well as formerly and sells his business in return for a pension and a promise not to compete. Another reason for upholding some covenants is that the law is not so unreasonable as to set aside a man's own agreement for fear of an uncertain injury to him since a man may, upon a valuable consideration, by his own consent and for his own profit, give over his trade. Parker C.J. offered an answer to the criticism that the doctrine was harsh in conferring a windfall on the covenantor if the covenant was held void by saying that the covenantee can suffer only from his knavery, and surely Courts of Justice are not concerned lest a man should pay too dear for being a knave.
There is undeniably an element of public interest reflected in some of the things said by Parker C.J. but the general focus is upon the position of the covenantor. In contrast the covenantee is seen as a knave who deserves little sympathy from the court. The argument is conclusively geared to private interest because as Parket C.J. pointed out the public interest was not affected. The only issue was whether the plaintiff or the defendant should be the local baker; in any event there would be a baker. As between the parties, the contract was reasonable, particularly because the restraint was exactly proportioned to the consideration, viz. the term of five years.
V. DISTINCTION BETWEEN VENDOR COVENANTS AND EMPLOYEE COVENANTS
Already in Mitchell v. Reynolds there was a noticeable difference in attitude towards covenants entered into by traders selling of their business and covenants by employees and apprentices. Since Lord MacNaughten's judgment in Maxim Nordenfelt v. Nordenfelt47 it has become commonplace to stress that employee covenants are regarded more strictly than covenants on the sale of goodwill. In Attwood v. Lamont,48 almost thirty years after Nordenfelt Younger L.J. addressed himself to this distinction directly.
The facts of the case actually involved a covenant by an employee. The plaintiff carried on a business as a draper, tailor, and general outfitter. The defendant was employed as an assistant in the tailoring department and covenanted not to engage in a similar business within a radius of ten miles for an indefinite period after leaving the employment. The Court of Appeal held the covenant to be in restraint of trade.
Younger L.J. made the most of the opportunity. At the very outset he indicated the scope of his review.
W[e] are here dealing with a branch of the law which has at all times been peculiarly susceptible to influence from current views of public policy. Its modern developments have grown up under the shadow of the laissez faire school of economics, and, until recently, have, in consequence, been uniformly in the direction of extending the principle of freedom of contract in relation to such bargains a tendency that has not yet ceased to be operative when the covenant in question is one exacted from a vendor on the sale of the goodwill of his business. But current opinion on the relations between employers and employed has moved rapidly in recent years ¦. In consequence it must now, I think, be recognized in all Courts, that there is every difference in the matter of its validity between such a covenant as we find here embodied in a contract of service and the same covenant when found in an agreement for the sale of goodwill; and the dispute between the parties to this action must be decided with due regard to that difference.49
Of course it is possible to say that now once again the public view of employer covenants is shifting since employees are now able to protect their interests through collective bargaining and union muscle. But where such is the case the contracts might pass into the ˜accepted' category already mentioned in the discussion of Esso v. Harper's Garage. Significantly enough the covenant in Attwood v. Lamont was in standard form.
VI. ADEQUACY OF CONSIDERATION:
Hitchcock v. Coker is cited as authority for overruling a whole line of cases that required adequacy of consideration in restraint cases even though generally in contract there was never any such rule. The main reason for the Hitchcock decision seems to be the usual reluctance of courts to perform a very difficult task “ to judge by looking at the record, [and], to say whether, in any particular case, the party restrained has made an improvident bargain or not. There is seldom any dissent from that view though at the same time courts constantly look inter alia to what the covenentee has got for what he is giving away in order to decide whether the restraint is a reasonable one. Lord Shaw seems to have put his finger on the pulse in Herbert Morris v. Saxelby, reiterating at the same the distinction discussed above.
When a business is sold, the vendor, who, it may be, has inherited it or built it up, seeks to realise this piece of property, and obtains a purchaser upon a condition without which the whole transaction would be valueless. He sells, himself agreeing not to compete, and the law upholds such a bargain and declines to permit a vendor to derogate from his own grant. Public interest cannot be invoked to render such a bargain nugatory: to do so would be to use public interest for the destruction of property ¦. In the case of restraints upon the opportunity to a workman to earn a livelihood, a different set of considerations comes into play. No actual thing is sold or handed over by a present to a future possessor. The contract is an embargo upon the energy and activities and labour of a citizen, and the public interest coincides with his own in preventing him, on the one hand from being deprived of the opportunity of earning his living, and it, the public, on the other hand, from being deprived of the work and service of a useful member of society.
Adequacy of consideration is relevant to this analysis even though the position has been presented in terms of property transfers. In the sale of goodwill the buyer has paid for goodwill and can enjoy that only if the vendor is prevented from continuing to exploit it. A covenant against doing that expresses the complete bargain. In employment cases there is a limited exchange “ the employer gives the opportunity to earn by working and the employee offers services in return (including his subjective52 knowledge). The subjective knowledge may be added to during the course of employment by a process of accumulation. The employer does not promise to give objective knowledge which is his property (or quasi-property) and therefore he is permitted to prevent the employee making use of it for his personal benefit.
Consideration comes into all this implicitly since the judges look at what the real agreement is and therefore bound to see whether that consideration is being provided in performance. The next step is to inquire whether the consideration provided is reasonable in the circumstances.53 How else would they judge the reasonableness of the agreement? In view of that, and subject to the public interest argument there is no reason why an employee in a comfortable bargaining position should not be able to sell his subjective knowledge for a good price. Wyatt v. Kreghinger is just such a case where the court failed to appreciate this point. The advantage of applying the unconscionability test is that the courts will be able to pay more attention to the actual facts of every case.
VIII DO COURTS JUDGE ADEQUACY NEGATIVELY?
Though the courts may deny that they look at the adequacy of consideration it cannot be avoided if the courts have to look at a covenant and say whether it is reasonable between the parties. Generally speaking, apart from Wyatt v. Kreghinger54 and Bull v. Pitney-Bowes55 nothing special is offered by the covenantee to offset acceptance of a special restraint by the covenantor. In that sense there was no special consideration to be taken into account when deciding the reasonableness point. The employees had provided their services to the employers in return for remuneration and other benefits of employment. These included the right to a pension on retirement. The employees had not contracted to sell their subjective knowledge. Pension, as it is understood by the reasonable man in the street, is not an exchange consideration for subjective knowledge.
The courts may not directly consider the value of what the covenantor is getting but they will inquire whether he has really agreed to give up subjective knowledge. They apply a presumption against any such agreement to be rebutted only if reasonable grounds are available from the point of view of the covenantor, e.g. he was being paid a large price as compensation which he would not have received in the ordinary course of employment. Without such ˜special consideration' such an agreement would have oppressive consequences for the covenantor. The word oppressive got considerable attention in Lord Atkinson's speech in Herbert Morris v. Saxelby.56
By the word oppressive I take it that it is not meant that the respondent was induced to enter into this agreement by fraud, misrepresentation, or deceit, or forced to enter into it by such duress as would entitle him in a court of equity to have it set aside whether it referred to his trade or not, but oppressive in the sense that it would, if enforced, deprive him for a lengthened period of the power of employing in any part of the United Kingdom that mechanical and technical skill and knowledge which as I have said, his own industry, observation, and intelligence have enabled him to acquire in the very specialized manufacturing business of the appellants, thus forcing him to begin life afresh, as it were, and depriving him of the means of supporting himself and his family.56
In 1916 when Saxelby was decided the courts had yet to articulate the link between a one sided bargain (result) and the unequal bargaining position of the parties (cause) that are cumulatively necessary for the doctrine of unconscionability to apply. They were content in arriving at the right result behind the faÃ§ade of the Restraint doctrine. They did not consider it necessary to explore the limits of fraud, deceit, and duress along with the basis of the Restraint doctrine to discover a substantial overlap and common concern.
IX. THE MISSING LINK: RESTRAINTS AND OPPRESSION
In Horwood v. Miller's Timber57 a particularly harsh contract was struck down as attempting to impose servile obligations. Once again there is no specific reference to the unequal bargaining positions of the contracting parties but the facts of the case could hardly have been considered without conveying that impression. By an indenture made between the mortgagor (a clerk in the employment of the defendants) and the plaintiff (a money-lender) the mortgagor, who was indebted in various sums to creditors whom the money-lender agreed to pay on having the repayment secured to him, assigned to the plaintiff (inter alia) all the salary, wages, or other moneys then or thereafter during the continuance of the security to become due to him under his employment with the defendants or with any other employers to hold to the plaintiff absolutely, but subject to a proviso for redemption. The mortgagor then covenanted that he would repay the plaintiff by certain installments; that during the continuance of the security he would not, without the express sanction in writing of the plaintiff determine his engagement with the defendants or his other employers for the time being; that he would not borrow or attempt to borrow any money or part with, sell or pledge his furniture, chattels, or effects, etc.
Lord Cpzens-Hardy MR reacted with appropriate indignation. Such a covenant would prevent the man from employing a doctor or a surgeon in the case of illness in his family, and would prevent him from raising money for the maintenance of his wife and children, or for the education of the latter. I think this is a deed which the law must recognize as bad on grounds of public policy of the most well-established kind.57A
His Lordship does not actually label the policy but there can hardly be any doubt that it is the policy that prevents a party to the contract taking unfair advantage of the other party's necessitous circumstances. In English Hop Growers v. Dering58 Scrutton LJ provided a more direct statement: It is now well established that the courts will view restraints of trade which are imposed between equal contracting parties for the purpose of avoiding undue competition and carrying on trade without excessive fluctuations and uncertainties, with more favour than they will regard contracts between master and servant in unequal positions of bargaining. Sankey, L.J. took a similar view and relied upon Viscount Haldane's speech in North Western Salt Co. v. Electrolytic Alkash Co.59
When the controversy is as to the validity of an agreement, say for service, by which someone who has little opportunity of choice has precluded himself from earning his living by the exercise of his calling after the period of service is over, the law looks jealously at the bargain; but when the question is one of the validity of a commercial agreement for regulating their trade relations, entered into between two firms or companies, the law adopts a somewhat different attitude, - it still looks carefully to the interest of the public, but it regards the parties as the best judges of what is reasonable as between themselves.
By 1974 this position becomes entrenched in Schroeder v. Macaulay,60 a House of Lords decision already discussed above. In Clifford Davis v. WEA Records61 the Court of Appeal attempted to shatter the narrow confines of the restraint doctrine and to subsume the cases that would otherwise fall to be decided under it, within the broad compass of unconscionability.
The plaintiff in Clifford Davis was the manager of a ˜pop group'. He got two talented members of the group to sign a publishing agreement in standard form. M & W were bound for 5 years extendable for a further 5 years at the plaintiff's option to assign to him worldwide copyright in all of their compositions. The plaintiff had wide discretion in promotion and was obliged only to pay 1s. per work plus royalties. Later the group acquired a new manager, and the plaintiff brought an action to prevent the defendants from infringing his copyright in the songs composed by M & W.
Referring to the speeches of Lord Reid and Lord Diplock in Schroeder, Lord Denning said: Reading those speeches in the House of Lords, they afford support for the principles we endeavoured to state about inequality of bargaining power. It was in Lloyds Bank v. Bundy. Instone's case (Schroeder v. Macaulay) provides a good instance of those principles. The parties there had not met on equal terms. The one was so strong in bargaining power and the other so weak that, as a matter of common fairness it was not right that the strong should be allowed to push the weak to the wall.62
Lord Denning found in the instant case that
(1) Generally speaking the terms of the contract were manifestly unfair.
(2) More specifically the consideration given by the covenantee was grossly inadequate.
(3) There was patent inequality of bargaining positions since
(a) Both composers were managed by the covenantee
(b) Their needs and desires were dependent on his will
(c) He was skilled in business and finance
(d) Undue influence or pressures were brought to bear on the composers
(e) The contracts were in standard form, long and full of legal terms and phrases
(f) The composers had no legal advice. In the event the Court held that the contracts were unenforceable.
Lord Denning conceded that these agreements were not ˜in restraint of trade' strictly so called. That may be a concession he did not really need to make and very little turns on it. Historically courts have been concerned about the mischief of sterlizing a person's capacity once he has left the covenantee's service. Cases that have arisen during the course of employment have been treated somewhat differently by default and shall be examined later. For the present it will suffice to say that the concession is somewhat redundant in view of Lord Denning's emphasis on a general principle going beyond the special confines of the restraint doctrine.
Contractual restrictions [which] appear to be unnecessary or to be reasonably capable of enforcement in an oppressive manner ¦ must be justified before they can be enforced.63
Diplock LJ in Petrofina v. Mantin63A described such contracts as attempting to create a new commercial serfdom.
X. THE ATTITUDE OF COURTS TOWARDS THE COVENANTEE:
THE REAL SANCTION Some confirmation of the view that the courts consider restraint contracts as an unfair advantage taken by one party of another's weakness comes from the manner in which courts look upon such contracts when it comes to interpreting them or enforcing them to the extent that they can be without offending the principle.
Dyer's case64 is said to be the earliest reported restraint case. The defendant entered a bond not to practise the trade of dyer in a certain town for half a year. He pleaded on breach, and won on this point. But Hull, J., who said that he could have demurred as the bond was illegal; By God, if the plaintiff were here he should go to prison until he paid a fine to the king. This statement found support in Parker C.J's Judgment in Mitchell v. Reynolds.65
The position has changed in the twentieth century but the old attitude is still echoed. In Mason's66 case Lord Moncton explained the test of generality (the blue pencil test as it has been often called) and cautioned courts not to assist an unmeritorious party. It would in my opinion be pessimi exempli if, when an employer had exacted a covenant deliberately framed in unreasonable wide terms, the courts were to come to his assistance and, by applying their ingenuity and knowledge of the law, carve out of this void covenant the maximum of what he might validly have required. It must be remembered that the real sanction at the back of these covenants is the terror and expense of litigation, in view of the longer purse of his master ¦ and the hardships imposed by the exaction of unreasonable covenants by employers would be greatly increased if they could continue the practice with the expectation that, having exposed the servant to the anxiety and expense of litigation, the court would in the end enable them to obtain everything which they could have obtained by acting reasonably.
Younger LJ took up the strain in Attwood v. Lamont.67 He thought the strict rule would encourage employers to stay within permissible bounds in which case they will not without success apply to the courts to exercise their primary function of seeing to it that such bargains like any others fairly entered into are duly observed. Ronson Enterprises v. Green68 took a more generous attitude towards the covenantee but it was a case of the sale of his share by one partner to another.
We must retrace our steps to Lord Moncton's dictum quoted earlier for it provides some interesting points. It is clear that he took a dim view of employers (in strong bargaining position) taking advantage or attempting to take advantage of their employees' weaker position. Words such as ˜exacted', ˜deliberate' and ˜unreasonable' provide the characteristic backdrop for the doctrine of unconscionability. As a matter of policy it might be sensible to strike down such contracts instead of straining to hack them to the size of validity. For the present we shall not engage in answering criticisms about all employment contracts not being one sided, in the bargain process or the result. That really is not the point here. The cases that the courts were dealing with were obviously seen as being suspect, and undoubtedly once an overt doctrine is stated it would by its own inherent nature stay clear of contracts between equals.68A
XI WHEN IS BARGAINING EQUALITY OR REASONABLENESS
OF THE BARGAIN TO BE JUDGED
The two most interesting points that emerge from Lord Moncton's dictum are “
(a) LITIGATION RISK INEQUALITY or the threat of litigation and the stronger (richer) party's advantage in being better provided for such enterprises. In Restraint cases it is obviously a very important element but its relevance to unconscionability generally can hardly be overemphasized. Surprisingly, however, courts, even when consciously providing an impetus to the doctrine of unconscionability, have failed to examine this aspect. Undoubtedly with the advent of legal aid this factor will have its importance diminished but it will not become irrelevant.
(b) POST BARGAIN INEQUALITY “ COLLATERAL HOLD OF STRONGER PARTY OR OPPRESSIVE ENFORCEMENT
Most conventional formulations of the inequality “ unconscionability thesis foucs on the inequality in the process of bargain “ a pre-contractual emphasis: Commercial Plastic Ltd. v. Vincent69 and Home Counties Dairies v. Skilton.70 But if one is to look at the ˜litigation risk inequality' it is really the stronger party's position during the contract period and his ability to make the weaker party go through with his onerous obligation which seems to become prominent. The case merely gives a hint of post bargain inequality perhaps unwittingly, as being a relevant factor. It was not till Lord Denning's Judgment in Shell v. Lostock Garages71 that a categorical statement was made to that effect.
In Shell v. Lostock Garages, L., a private company, operated a garage which was tied to Shell. The agreement was terminated at 12 months notice and required L to sell only Shell petrol and to keep the garage open at reasonable times. During 1975 there was a petrol price ˜war' and two garages in L's neighbourhood were able to cut their price drastically. Shell helped another 2 tied garages in the neighbourhood through a support scheme that did not apply to L. L obtained supplies from another source at a lower rate and began to sell petrol at a competitive price. Shell brought an action for breach of contract and claimed an injunction to prevent future breaches. L alleged that the agreement was an unreasonable restraint of trade. (There was a separate agreement about breach of implied terms that does not concern the present discussion). The Judge had found that the effect of the support scheme was ˜to inflict an unreasonable and unforeseen degree of hardship' on Lostock. Lord Denning, MR, mentioned that usually courts considered reasonableness at the time the contract is made. That would indeed be inevitable if contracts in restraint of trade were void ab initio. This, he points out, was a fallacy. Such contracts are merely unenforceable. There is ample respective authority for that proposition.72 Once that is accepted the logic of Lord Denning's argument cannot be challenged. According to him the Restraint doctrine operates in two situations:
First, when at the time of making the contract it is seen that it may in the future operate unfairly or unreasonable, the court will not enforce it. Secondly, when it is found afterwards to operate unreasonably or unfairly “ in circum- stances which are not envisaged beforehand “ the courts will not enforce it. At the time of making the contract the court has to speculate whether or not the restraint will operate unreasonably or unfairly: but if it afterwards turns out to have operated in fact unfairly or unreasonably, there is no need to speculate ¦. The court should therefore, not enforce a covenant in restraint of trade if circumstances afterwards arise in which it would be unreasonable or unfair to enforce it. This reasoning finds its exact parallel in the modern law as to exemption clauses, already in contracts for the sale of goods, and it may be extended to other fields as well. In the sale of goods, a party is not allowed to rely on an exemption clause which is seen at the time of the contract to be unfair and unreasonable. In addition, he is not entitled to rely on an exemption clause which, although superficially reasonable at the time of contract, nevertheless is prayed in aid in circumstances when it is unfair or unreasonable for him to rely on it.73
Unfortunately Lord Denning was unable to carry Bridge LJ and Ormrod LJ on that point primarily due to their misgivings about the uncertainty it would introduce in the law. With respect that seems a hollow objection, especially in the case of Ormrod LJ who was content to accept Lord Denning's alternative ground of the equitable remedy of injunction. It makes sense to say that the procedural unconscionability component can figure at any time and not just at the time of negotiations. What might appear a balanced bargaining position to begin with might in retrospect become most unfair due to the unforeseen manner in which one of the parties has the ability to influence conditions that affect the performance by the other party of his obligations.
XI. IS THERE A DUTY TO ENFORCE BARGAINS IN GOOD FAITH?
Lord Denning mentioned, with obvious delight, that his view of restraint cases was in keeping with the law on Exemption clauses.74 In either case the courts step in to prevent any dictation at the time of the formation of contract. The fact that a lot of cases in those areas involve Standard form contracts strengthens this view. But a fair and reasonable contract between parties can be turned into an unexpectedly onerous one by manipulation by the stronger party, while performance is due. The litigation risk inequality is relevant to this.
The initial device used by Lord Denning to prevent manipulation was that of implied terms.75 But his view of implying fair and reasonable terms was rejected by the House of Lords in Liverpool City Council v. Irwin76 in favour of the narrower test of commercial necessity. But for this categorical rejection of this device, it could have provided an effective check on post-bargain unconscionability. But the House of Lords may just have left an opening after all for they discussed two categories of implied terms “ (a) A category of contracts in relationships of common occurrence where terms are imposed though it can hardly be said that they were intended by the parties to apply but were not expressly stated; (b) the other category comprehends all other cases and the implication is based on the court's impression of the true intention of the parties.
Since most cases of unconscionable behaviour between unequal parties can be fitted into relationships of common occurrence77 one might still be able to reach the same result under (a) as Lord Denning wished to use the fair and reasonable formula to reach. In Shell v. Lostock itself Lord Denning reluctantly accepted that a solus agreement would not fall under category (a). But an employment contract with restraints or a contract of sale of goodwill should certainly qualify on category (a) contracts.
Lord Denning decided the case on the grounds that the special nature of Restraint contracts allows judicial scrutiny at the time of contracting as well as later. Therefore in his view at least in Restraint cases and cases involving Exemption clauses the courts have a wide jurisdiction to prevent enforcement of contractual terms that would lead to an unfair situation. What degree of personal responsibility of the so called ˜stronger party' is necessary is not at all clear. It would be a very radical position indeed if he were unable to enforce terms that in the circumstances, and due to no fault or unconscionable behaviour on his part, would cause unexpected hardship to the other party.78
XII. THE USE OF INJUNCTIONS IN EXCLUSIVE EMPLOYMENT CONTRACTS
The record of English courts in exclusive employment cases seems unimpressive. Cases like Warner Brothers v. Nelson79 and Lumley v. Wagner80 seem to have been considered purely from the point of view of remedies, i.e. the requirements for claiming the equitable remedies of injunction and specific performance. Even on that count Page One Records v. Britton81 shows the infirmities in the approach adopted.
It all started with Branson J. in Warner Brothers v. Nelson where Bette Davis pleaded that a contract forbidding her to work as an actress for anyone but Warner Bros. was in restraint of trade. The Judge rejected that plea because the covenants are all concerned with what is to happen whilst the defendant is employed by the plaintiff and not thereafter. Branson J. was not referred to Joseph Evans & Co. v. Heathcote82 and Young v. Timmins.83 In recent years, however, the courts seem to have taken a different approach. In Petrofina v. Martin84 the Court of Appeal expressly rejected Branson J's position though their remarks were strictly speaking obiter.
As long as Warner Bros. v. Nelson is not expressly overruled the rule in Lumley v. Wagner, though severely criticized by Judges85 and writers alike86 and undermined somewhat by Page v. Britton, will continue to apply to contracts of exclusive employment. That may have its advantages for Branson J. said:
[T]he Court [in William Robinson & Co. v. Hever]87 proceeded to sever the covenants and to grant an injunction, not to restrain the defendant from carrying on any other business whatsoever, but framed so as to give what was felt to be a reasonable protection to the plaintiff and no more. The plaintiff wanted an option which they possessed to extend the period of service for an extra five years, and the injunction then was granted for the remaining period of unextended time.
Branson J. dismissed the argument that this could no longer be supported as law after the decision in Attwood v. Lamont, that it was a case “ where the covenants were held void as in restraint of trade. There is all the difference in the world between declining to make an illegal covenant good by neglecting that which makes it contrary to the law and exercising a discretion as to how far the court will enforce a valid covenant by injunc- tion.88
He then proceeded to lay down the rule that in a case like the one before him the court would grant an injunction unless to do so would in the circumstances be tantamount to ordering the defendant to perform her contract or remain idle or unless damages would be the more appropriate remedy.
We have seen in the discussion above that there is nothing that supports Branson J's view of restraint of trade covenants being illegal in the strict sense of the word. They are merely unenforceable in a court of law.89 In fact Bishop v. Kitchen90 is a strong authority against Branson J's view. The Court of Queens Bench held in that case that the plaintiff having submitted to a restraint and his part of the agreement having been executed, he was clearly entitled to recover consideration due in respect of it.
If restraint cases are not illegal, there is nothing to distinguish them in treatment from exclusive contract cases. It remains to argue that there is no reason in principle that exclusive contract cases might not expose the employee to the same oppressive consequences that the restraint doctrine is designed to prevent. In the next section on Indian law such cases will be discussed to show that the case considerations apply to them as well. However, it may be said that in mitigation from the English decisions that on the facts the parties did not look as though they were in an unequal bargaining position. This appears from the Judgment of Lord St. Leonards in Lumley v. Wagner where he used the following language:
It was objected that the operation of the injunction in the present case was mischievous, excluding the defendant J. Wagner from performing at any other theatre while this court had no power to compel her to perform at Her Majesty's Theatre. It is true I have not the means of compelling her to sing, but she has no cause of complaint if I compel her to abstain from the commission of an act which she has bound herself not to do, and thus possibly cause her to fulfil her engagement.
(1) The Restraint doctrine has its origins in public policy and close resemblance to the area of Monopoly and Restrictive Trade Practices. But in its developed form it seems to reserve only a residual role of veto over private transactions on account of public interest “ in freedom of trade and the competing freedom of contract. From the point of view of the public interest it is really a question of balancing or where and when possible, of reconciling the two.
(2) Most Restraint cases are really decided on the other limb of competing private interests even though judges like to pay lip se4rvice to public interest. By its very nature the doctrine was thought to apply to those special situations where a person's freedom to do as he pleased in the long run was threatened albeit by what appeared top be his own free choice.
(3) In recent years courts have begun to put a gloss on the concept of free choice. There may be choice so as not to render an obligation void and yet it may have been such a restricted choice that the courts would refuse to enforce the obligation. Such a restriction on choice can be placed by the unequal bargaining position of the parties in the subsequent ability of one to take more than he was reasonably entitled under the bargain. The Restraint doctrine here is using what are essentially the tools of unconscionability.
(4) English courts have failed to recognize, or at least to state that contracts of exclusive employment or engagement can suffer from the same vice as contracts sustaining post contractual behaviour. However, Higgs v. Olivier suggests that given the right facts they will willingly strike down the artificial barrier.
(5) Due to the existence of the barrier between the two types of restraints “ during and after the contractual period “ the courts have failed to develop the use of injunctions to cut down on undue restraints. Another explanation may be that such unconscionable attempts to take advantage are greeted with hostility and primitive consequences.
ESTOPPEL AND UNCONSCIONABILITY
The nature of quasi-contract.
The modern law of Restitution in so far as it relies upon non-proprietary basis for liability (albeit the relief granted might well be proprietary) can be divided into three areas: (1) quasi-contract;1 (2) waiver of tort;2 and (3) constructive trust.3 The courts do not always keep the three areas distinct but it is possible to assert that restitutionary liability is interstitial only. It is when the conventional remedies in Contract, Tort, or Trusts are unable to provide a just institutional settlement of a dispute between parties that judges need to look elsewhere for a solution.4 What rules out any expansion of the existing conventional remedies5 is the requirement of clear and certain rules in the umbral areas of the law, to borrow a phrase from Hart.6 The three categories set pout above resemble most obviously the area of the law reflected in their nomenclature. The connection becomes quite clear if one were to consider that cases in category (1) above are usually claims for return of or recompense for benefit received where there is otherwise total failure of consideration or defect in the formation of contract for any other reason.7 It is clearly a contractual situation in the sense of an exchange between two parties creating a legal relationship. For a while the courts attempted to cure the defects through the fiction of implied contracts but their limits were soon made glaringly obvious.8 The result was to fall back upon independent remedies based upon unjust enrichment.10 Similarly category (2) originates in actual tortuous acts in which the law of damages leaves the guilty party with a residue benefit which morally he can hardly claim to be entitled to.11 Once again judges looked to implied contract through the device of waiver. The artificiality of the waiver analysis was inevitably to be rejected in favour of independent remedies.12 Finally category (3) comprises claims against defendants in fiduciary or analogous relationship with the plaintiff and yet not trustees in the strict sense since they do not consent to take on the duties of trustees.13 This category is the most difficult of the three and least of all due to predominance of proprietary remedies. The great advantage, however, of relying upon a general principle of unjust enrichment instead of trying to work within the confines of conventional remedies is that the courts are able to vary relief substantially on the merits of each case.14
The law of estoppel is quasi contractual because it looks like contract and some of its main ingredients are similar to those of contract. Some writers have even suggested that estoppel is used to overcome a colossal mistake made by judges in following Lord Mansfield.15 Common law or fact estoppel is relatively simple and generally used as a rule of evidence.16 It is the more recently created or rediscovered equitable estoppel that is more difficult and interesting. Depending upon what view one takes of the new estoppel it can be considered part and parcel of the contractual scheme or falling outside it in the area of quasi contract. In either case it would be relevant to the present enquiry but as a quasi contractual devise its link with Restitution would support an argument for a general extra contractual jurisdiction of which both estoppel and Restitution are two examples.
Broadly speaking there are three schools of estoppel:
1. The Substitute school (associated with Professor Atiyah)
2. The Third Alternative
3. The Qualified Claim school
The Substitute school see the equitable estoppel acting as a pragmatic substitute for a mistaken technical rule about considerations which prevents the courts from enforcing promises that are intended to be binding. Such intention is conclusively proved if it can be shown that the promisor intended the promisee to act upon the promise or at least as a reasonable person would have known that the promisee would do so. Of course, the promisee must in fact act upon the promise though it is not very clear whether he needs to show any potential detriment to himself in doing so.
The Third alternative school provides a neat and compact argument: a promise intended to be binding is enforced by the courts if there is a complete bargain, i.e., an exchange of promises satisfying the requirement of consideration. It is also enforced if the promise is made in a solemn manner, i.e. by deed under seal. Finally, it may be enforced as the third alternative “ a promise made in circumstances that would lead a reasonable promisee to act in reliance and thus acted upon is enforced to prevent detriment to the promisee. On this view there is no need for an existing contractual (statutory) relationship between the parties. However, some relationship will be necessary and it seems as though the idea of Special Relationship' may have to be borrowed from the tort of negligent misrepresentation. Although the two schools mentioned till now would probably wish to accommodate estoppel within the contractual framework, its link with tort is strong enough to suggest a parallel with the second head of Restitution, waiver or tort.
Finally, the Qualified Claim school is most obviously a contractual rather than an extra contractual concept. On this view reliance upon a representation by one party to a contractual (statutory) relationship that the strict legal rights will not be enforced is made binding if the other party acts to his potential detriment. This view extends the common law estoppel to representations regarding future behaviour but is more limited in its strict requirement of an existing relationship. The merit of this is that it leaves the doctrine of consideration intact, perhaps even reinforces it by making an important exception.
Promissory and Proprietary Estoppel
Before proceeding to look at the three schools more carefully to establish which one best explains the existing corpus of case law and whether it provides an argument for the doctrine of unconscionability, it is important to make one further distinction between Promissory and Proprietary estoppels. That will also provide the link with the third head of Restitution, i.e., construction trust.
Some confusion is caused by the fact that Proprietary estoppel takes its name from the type of relief that is often given in those cases though its basis is inevitably in a promise or a representation by word or conduct. That of course is common between the two estoppels. The Court of Appeal in Crabb v. Arun D.C.17 ran the two distinct lines of authority together to give in effect a go-bye to the doctrine of consideration. Not surprisingly, Professor Atiyah wrote a note in the Law Quarterly Review entitled When is an Enforceable Agreement Not a Contract? Answer: When it is an Equity.'18