Fair Dealing in Contract Formation

Abstract

This is a Thesis about the broad ideas and tendencies in our law of contract. In particular, its investigative burden is the emergent idea of “good faith and fair dealing” in the law relating to the formation of contracts.

Chapter One is concerned with the historically chequered germination of good-faith considerations in contract law. It shows how the development of modern contract law has been strongly influenced by the dominant ideological paradigms of other academic systems and disciplines. The chapter describes a progressive, universal acceleration of “good faith and fair dealing” themes in the twentieth-century contract jurisprudence, concluding that the issue today falls squarely in Australia’s legal agenda. Chapter Two enquires into the scope and meaning of good faith and fair dealing in contemporary contract jurisprudence. Eventually confining the enquiry strictly to the context of contract formation, it is concluded that good faith and fair dealing operates jurisprudentially as a general, organising principle or idea, which in practice produces a system of variable standards or norms of conduct administered through well established and discrete legal and equitable doctrines that purport to “exclude” particular instances of “bad faith” conduct in the procurement of bargain transactions. Whereas good faith and fair dealing seems to exclude quite heterogenous forms of bad faith behaviour in the contexts of contract performance and enforcement, as the notion applies to contract formation, it appears to demonstrate a much sharper point of focus and a more precise content. The chapter identifies the specific norm informing the idea of good faith and fair dealing in contract formation as “the duty to protect the vulnerable”, or , as lawyers put it, “neighbourhood”. It is concluded that the duty to protect the vulnerable in the pre-contractual setting gives rise, first and foremost, to a duty not to exploit those contracting parties whose interests are especially vulnerable to one’s own choices and actions (to help or to hurt) in bargaining. Chapter Three views bargaining as a unique interpersonal process in which parties with divergent interests engage in stylised reciprocal dealings with a view to reaching a valid or acceptable agreement concerning future action. The chapter describes an internal, process driven “functionalist” ethic of bargaining. This ethic embraces a convergence of deontological and teleological sources of moral reasoning. According to the assumptions informing the ethic, the law views strategic bargaining practices, or “advantage-taking”, as an accepted part of the bargaining “game”.

Correspondingly, under conditions of fair equality (“equilibrium bargaining conditions”), the law generally expects and requires parties to exercise individual responsibility in bargaining activity. However, where the opportunity to preserve one‘s own best interests is effectively closed off from one of the bargaining parties, or where social or moral norms are generally insufficient to constrain unacceptable exercises of interpersonal bargaining power, contract law has demonstrated a basic willingness to regulate what is ordinarily understood to be an externally unregulated process. This it essentially does by focusing on the “voluntariness” of the consent-rendering party. The voluntariness of that consent, however, is assessed relative to the strategic bargaining practices of the other party, who might have actively or passively procured or accepted the consent while aware of the first party’s serious inability to participate in the particular bargaining game. Specifically, the chapter concludes, whether a party’s consent is in law “consensual” hence “responsible”, translates into the fundamental question of whether it has been exploitatively accepted or procured by the other party. A contract procured through exploitation will be defeasible at the option of the victim of such action. Chapter Four argues that the concept of “exploitation” lies at the logical core of the traditional heads of relief in the context of contract formation. In particular, this applies to those doctrines traditionally considered to “police” the conduct of negotiations, and customarily collected under a broad “unconscionability” rubric. Exploitation, which involves illegitimate advantage-taking, or wrongful use of one party’s superior bargaining position relative to another, is purely a process-orientated conception. Substantive considerations, such as the relative distribution of benefits and burdens under the resultant contract, are relevant only to the extent that they evidence an alleged procedural abuse. The unfairness, or wrongness, in acts of exploitation resides in the self-interested exercise of one’s bargaining power over another in circumstances where one is strongly duty-bound actually to protect-to have proper regard for the interests of-that other who is peculiarly susceptible to the exercise of such interpersonal power. Exploitation, the chapter argues, can be either “active” or “passive” depending on whether the superior party contributed casually to the other party’s exploitable circumstances, or whether he merely accepted a contractual benefit while knowing or having reason to know of a peculiar circumstance giving rise to his strong moral-cum-legal obligation positively to assist the other party. In Australian law, these ideas are centrally exemplified through the unconscionable dealings doctrine in equity. Chapters Five and Six are concerned with improper pressure or influence in contract formation as cardinal instances of actual or presumed active” exploitation, or manipulation. Pressure may be wrongful of its own nature, such as where an illegitimate threat is made to “coerce” another’s contractual assent (Chapter Five: duress), or by reason of some special relationship of trust or responsibility in which the influencer stands to his victim, and on account of which the law is prepared to presume that the peculiar influence arising from the parties’ special relation was unduly exercised by the ascendant party receiving or directing the receipt of a contractual benefit within the scope of the relation (Chapter Six: relational undue influence). Chapters Seven, Eight, and Nine are concerned with exploitation of asymmetric information in the procurement of bargain transactions. Specifically, Chapter Seven considers “misleading or deceptive conduct” as an example of active exploitation. Subject to the minimal “justifiable reliance” criterion in this context, misleading conduct potentially jeopardises the integrity of the bargaining process and creates exploitable circumstances. Chapter Eight’s burden is unilateral mistake I equity, where it is argued that equity’s jurisdiction to grant relief for the exploitation of a known unilateral mistake is, analytically, a limited and specific manifestation of the unconscionable dealings jurisdiction considered in Chapter Four. Chapter Nine advances similar arguments in relation to nondisclosure in contract formation generally, although it concludes by emphasising the need for unconscionable dealings’s critical focus to be sharpened by a system of risk analysis in the context of so-called “transactional disadvantage”.