United Kingdom Journals

Thomas Wilhelmsson, Social Contract Law and European Integration, Dartmouth, Aldershot, 1995, ISBN 185521623X Hb £37.50 x & 243pp

Review Article by Dr Chris Willett

Senior Lecturer
Warwick Law School
Coventry CV4 7AL

< Chris.Willett@Warwick.ac.uk>

Copyright © 1996 Chris Willett.
First Published in Web Journal of Current Legal Issues in association with Blackstone Press Ltd.

Contents

Introduction

Social Contract Law - general principles

The European Context

The Nordic Perspective

Future Developments

Conclusion

Bibliography

Introduction

This is an excellent contribution to the literature on contract theory. It builds upon other recent work by the same author: Need Rationality in Private Law (Wilhelmsson 1992) and Perspectives of Critical Contract Law (Wilhelmsson 1993). It also builds upon the work done by the author on welfarism. Along with Roger Brownsword and Geraint Howells the author edited Welfarism in Contract Law (Brownsword et al 1994). This same team of authors also develop their analysis of welfarism in Aspects of Fairness in Contract (Brownsword et al 1996).

Social Contract Law and European Integration can be said to do three main things. First of all it considers the nature of social contract law. Secondly, it looks at the European harmonisation of important aspects of contract law and at how the harmonisation agenda relates to a social contract law agenda. Thirdly, it compares the emerging social contract law of the European Union with that of the Nordic countries. This is an obvious choice given that the author is Finnish. It is also a choice which is very worthwhile in terms of scholarship, given the distinctive and relatively homogeneous nature of many features of contract law in the Nordic countries.

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Social Contract Law - general principles

Wilhelmsson defines social contract law as being more 'altruistic or consumer welfarist' than traditional contract law (p 25). He identifies 'content orientation' as being one of the central features of social contract law (p 27). This refers to the law's tendency to be concerned with the substance of what the parties have agreed to. We can see that this tendency has indeed had a considerable impact upon both consumer and commercial contract regulation in the UK. The terms of consumer contracts are regulated by the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1994, (SI 3159) .(1) Many terms in commercial contracts are regulated by the Unfair Contract Terms Act 1977. This regulation is not what Wilhelmsson calls 'content neutral'. 'Content neutral' regulation ignores the substance of the terms of the contract, and simply concerns itself with the events and the behaviour of the parties at the time the contract was concluded (p 27). In other words content neutral regulation is concerned with procedural matters such as duress, undue influence and misrepresentation. It may even be concerned with the relative bargaining strengths of the parties. If there is a failure to meet the procedural standards set by the law then the contract or perhaps a particular term may be set aside. However, if the procedural standards are passed then the terms stand, no matter how unfair they may be in their content or substance. This is where we find the contrast with the content-oriented regulation cited above. Here the actual content of the term or terms is relevant to whether they will be enforceable.

This point requires further elaboration. Under the Unfair Contract Terms Act 1977 a wide variety of exemption clauses are subject to a test of reasonableness. The basic test is whether the term "is a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made" (s 11(1)).

It is quite clear from the cases that the degree of liability being exempted is relevant to whether it was fair and reasonable to incorporate the term in the contract (Smith v Bush [1990] AC 831). In other words, the substance or content of the term is relevant to whether or not it was reasonable to incorporate the term into the contract.

Under Article 4(1) of the Unfair Terms in Consumer Contract Regulations 1994 the test is whether "contrary to the requirement of good faith [the term] causes a significant imbalance in the rights and obligations arising under the contract to the detriment of the consumer". If we are to decide whether a term causes a significant imbalance in rights and obligations and a detriment to the consumer then it is clear that the substantive content of the term must be relevant.

Wilhelmsson identifies four other characteristics of social contract law in addition to content orientation. Social contract law is concerned to stimulate greater co-operation between the parties, at the expense of antagonism (p 28). Examples of this are provided by duties of disclosure (see Interfoto v Stilleto [1989] QB 433); by rules which encourage a contracting party to offer alternative packages of terms to the other ;(2) and generally by any rules which require good faith in some form. As we have already seen, the test of unfairness in the Unfair Terms in Consumer Contracts Regulations explicitly incorporates the good faith concept. It would appear that disclosure and choice are important elements of good faith (see Brownsword et al 1996). By this I mean that there is more chance of satisfying the good faith requirement if the terms are clearly disclosed to consumers and if consumers are offered choices between terms. In other words, good faith encourages co-operative behaviour by the seller or supplier.

There also seems to be an agenda to promote good faith co-operation in the recent reform to the rules on a commercial buyer's right to reject defective goods. Previously, if goods did not meet the merchantable (now satisfactory) quality standard, all buyers had the right (subject to the rules on acceptance) to reject the goods. Now a commercial buyer cannot reject if the breach is so slight as to make rejection unreasonable (Sale of Goods Act 1979 s 15A), or in Scotland if the breach is not material (s 15B). This combats the worst cases of bad faith rejection i.e. where the breach is small, and the only reason for the buyer wishing to reject is that market circumstances have changed and the bargain is less attractive (see Willett 1996). Of course, we must remember that the rule is not a fully-fledged requirement of good faith. There may well be a breach which is more than slight, but which could easily be put right. It may also be clear that the buyer's motives for rejection are nothing to do with loss of confidence in the seller, but are rather to avoid what has become a bad bargain. In such a case the buyer retains his right to reject, as the breach is not slight. Indeed, the buyer's motives are not mentioned in the test. However, at least the effect of the rule is to prevent bad faith rejection in its worst manifestation i.e. where the breach is slight.

Social contract law is also 'person oriented' (p 29). Rather than simply viewing contractors as 'buyers', 'sellers', 'debtors', 'creditors'' etc., social contract law is more likely to take account of personal characteristics, strengths and weaknesses. An example of this is the fact that in the Unfair Terms in Consumer Contracts Regulations, and in virtually all important respects in the Unfair Contract Terms Act 1977, the controls only apply to terms used by those operating in the course of a business. Another example is provided by the application of the reasonableness test under the Unfair Contract Terms Act 1977. In Smith v Bush [1990] AC 831 the House of Lords had to decide whether it was reasonable to rely on a term excluding liability for a negligent valuation. Their Lordships considered whether the house buyers had reasonable alternatives open to them. In deciding that they had no alternative but to agree to the valuation on the terms in question, the view was taken that young first time buyers at the lower end of the market could not be expected to pay the cost of a full structural survey.

A further feature of social contract law identified by Wilhelmsson is its tendency to 'collectivism' (p 28). An important example of this is the way in which consumers, employees, tenants etc. are viewed as collectives, sharing similar problems for the purpose of regulation.

Finally, there is the 'dynamic' approach of social contract law (p 27). Wilhelmsson contrasts this with the 'static' approach of traditional contract law which sees contract solely in terms of what happened at the point of formation. A dynamic approach is able more appropriately to regulate complex long term relationships which continue to 'live' throughout the contract period. An example of this given by Wilhelmsson is section 36 of the Finnish Contracts Act, which tests fairness by reference to the events taking place after the conclusion of the contract. Another example which might be given is the way in which contractual gaps are filled in corporate contracts. Because trust and co-operation are regarded as important to the ongoing and dynamic process of corporate governance, these values are used to help fill gaps (see Bratton et al 1996).

By way of recap then, we can say that the first part of the book defines social contract law and elaborates on its make-up. I find the argument convincing. The features described by Wilhelmsson are well illustrated by example. In addition I have been able to give more examples, so that it is clear that Wilhelmsson is not describing atypical values.

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The European Context

In the second part of the book Wilhelmsson examines social contract law in the context of European harmonisation of contract law. He looks at four main areas. First of all there is Consumer law, where there has been the Product Liability Directive, the Doorstep Selling Directives, the Consumer Credit Directive, the Package Travel Directive, the Unfair Terms in Consumer Contracts Directive (hereafter the "Unfair Terms Directive") and various Directives relevant to insurance. Secondly, there is employment law where there have been Directives on Equality and Job Security, as well as the Employment Information and the Copyright Rental Directive. Thirdly, there is the Commercial Agency Directive. Fourthly, there are aspects of EC Competition law which are of relevance, in particular Articles 85 and 86 of the Treaty of Rome, as well as the Contractual block exemption regulation, and the Insurance block exemption regulation.

In the latter part of Chapter 4, Wilhelmsson discusses the different goals of harmonisation. First of all there is legal-technical harmonisation which aims at a very high level of uniformity in order to reduce the transaction costs involved in transnational contracting. Then there is regulatory harmonisation, which is concerned to reduce distortions in competition which hinder trade, but which does not aim at such a high level of uniformity as does legal-technical harmonisation. Thirdly, there is ideological harmonisation, which has particular ideological goals such as the "development of a more harmonic world order" (p 106) and a political European Union.

Wilhelmsson shows that regulatory harmonisation has been the strongest influence in the measures taken. However, he also points out that while the aim of this process has been to open up the common market and promote efficiency it has also developed a social justice dimension. The social element is clear, for example, in the protection of consumer rights and employee rights which is effected by the Directives cited above.

Chapter 5 identifies some specific social contract law values which are to be found in the harmonisation measures which have taken place. There is only the space here to give a few examples. One very strong theme focuses upon information (see pp 126-130). There are measures such as the Consumer Credit Directive, and the Package Travel Directive which focus upon the disclosure of information. The Consumer Credit Directive requires disclosure of information as to the total cost of the credit (Article 3). The Package Travel Directive requires the organiser or retailer to give information to the consumer as to passport and visa requirements and insurance (among other things).

Then there are measures which focus upon truthfulness, for example, the Misleading Advertisement Directive which acts against positively misleading advertisements.

Then there are measures which promote transparency, for example, the Unfair Terms Directive, which says that terms should be drafted in plain and intelligible language (Article 5).

Another theme is the disapproval of unilateral decision making by one of the parties to the contract. Here Wilhelmsson points to the list of terms which may be regarded as unfair under the Unfair Terms Directive. A number of terms included allow the seller or supplier unilaterally to alter the terms, alter the characteristics of the product or service, terminate the contract, alter the price etc. (see terms (J), (K), (L), (M)).

We can see a connection between these European trends and the general principles of social contract law described here. In particular there is a connection with the co-operation principle of social contract law. It runs contrary to the principle of co-operation to allow the use of intransparent terms, and terms which allow unilateral and arbitrary decision making by sellers and suppliers.

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The Nordic Perspective

In the final part of the book (Chapter 6), Wilhelmsson draws comparisons between Nordic and EC contract law. He observes that there are many similarities - a tendency to content orientation, the use of tests of fairness, a move towards seeing consumer law as a separate entity from commercial law (p 193). However, he goes on to highlight various ways in which EC social contract law remains more closely wedded to freedom of contract values than does Nordic social contract law.

First, he points out that a strong theme in EC consumer policy is the creation of the informed and therefore rational consumer (see Weatherill 1994). He suggests, therefore, that where there is a test of fairness (for example, in the Unfair Terms Directive) much emphasis may be put on the information side of the equation. As long as the term is made clear it may be held to be valid, no matter how substantively unfair it is. In contrast to this, the Nordic rules tend to provide protection against unfair terms even where the other party had knowledge of the terms prior to conclusion of the contract (p 195).

Secondly, the Unfair Terms Directive does not test the unfairness of terms that have been individually negotiated (Article 3(1)). There is no equivalent restriction in the relevant provisions of the Nordic Contracts Act (s 36) or the Finnish Consumer Protection Act (s 1). As Wilhelmsson points out, an imbalance of power between the seller and the consumer may make it possible for the seller to impose terms on the consumer even in the context of what is theoretically a negotiation. However, the EC approach is more wedded to freedom of contract values. The view is clearly being taken that if there is a process of negotiation then consumers have had sufficient opportunity to protect themselves.

A third way in which Nordic contract law is more social in its nature than EC law is that Nordic contract law allows some regulation of the price in contracts (p 199). The Unfair Terms Directive, on the other hand, does not test the fairness of the price (Article 4(2)).

Wilhelmsson also reaffirms the point mentioned earlier that Nordic social contract law is of a relatively dynamic nature, in assessing the fairness of contractual provisions by reference to events which took place after the conclusion of the contract (p 200). By contrast, the test of unfairness in the Unfair Terms Directive is more static, focusing upon the circumstances obtaining at the time of the conclusion of the contract (Article 4(1)). This is an approach which remains more closely wedded to a liberal/individualist model, where the choice (exercised at a particular juncture) to commit oneself to something and generate expectations in the other party is something which is valued. It is true that the fairness of what has been committed to is being questioned, and in this respect we see the social contract law influence. At the same time, by looking at fairness at the stage of conclusion of the contract, the law shows that it still respects the exercise of the individual choice to commit to something at a particular point. This term agreed to must be fair, but as long as the terms are fair at this point then it is irrelevant that they become unfair later, due to changing circumstances. The Nordic approach, on the other hand, seeks to ensure more comprehensive and continuous fairness, taking account of what happens after the contract is made. Inevitably this means further erosion of individual choice.

A final comparison made by Wilhelmsson relates to whether assessments of fairness are of a concrete or abstract form. He says that in Nordic law there are concrete assessments of fairness, i.e. assessments which look at the particular facts and circumstances, and which have more potential to take account of the particular weaknesses of the individuals ('need orientation') (p 202). He questions whether the test of unfairness in the Unfair Terms Directive can carry out such a concrete assessment. In particular he points to those terms on the Annex of indicatively unfair terms which seem to be seen as unfair on the basis that the seller or supplier has a right of some kind (for example, to dissolve the contract on a discretionary basis) while the consumer does not have an equivalent right (see term (f) on the indicative Annex of unfair terms attached to the Unfair Terms Directive). Wilhelmsson identifies this as a rather abstract way of looking at fairness, pointing out that in the context of a dispute over the right which the supplier has chosen to exercise, it hardly matters to the consumer what rights he would have in the hypothetical reverse situation. He also concludes that fairness under the Unfair Terms Directive may be satisfied as long as there is an abstract balancing of terms along these lines.

However, it must be borne in mind that the term under scrutiny may in fact be subject to a more concrete assessment. For example, term (D) on the indicative Annex is one which permits 'the seller or supplier to retain sums paid by the consumer where the latter decides not to conclude or perform the contract, without providing for the consumer to receive compensation of an equivalent amount from the seller or supplier where the latter is the party cancelling the contract'. Quite apart from the equivalence or proportionality issue is the matter as to whether the payment in question is valid under common law rules on pre-payments, deposits and penalties.

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Future Developments

Wilhelmsson finishes by considering prospects for the future development of social contract law. First of all he focuses upon the issue of equality. He points to the equal treatment requirements in the Equal Treatment and Equal Pay Directives; and to the way in which competition legislation tends to prohibit certain forms of discrimination (pp 203-4). He also points to the Nordic Contracts Act, s.36, under which terms can be unfair on the basis that they allow for discrimination on the grounds of sex, race, age, nationality, religion, membership of an organisation or any other reason. Wilhelmsson suggests that equality may develop as a more general principle of contract law. In particular he points to the way in which charging the less well off more for credit would offend against an operable equality principle (p 205).

Secondly, Wilhelmsson looks at competition rules and the small entrepreneur. He shows that the competition law of the EC, and in particular the block exemption rules offer a degree of protection to small businesses and can be argued to place importance on a co-operative ethic of sorts. He suggests that a more radical co-operative ethic might be developed (p 206).

Finally, Wilhelmsson looks at the right of a weaker party to escape from a contract. There are cancellation rights in specific contexts e.g. door-step selling, mail order selling and consumer credit. However, Wilhelmsson suggests a more general 'social force majeure' principle, which would allow weaker parties to escape from contracts on social grounds such as illness or unemployment.

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Conclusion

Social Contract Law and European Integration is a well written and convincing analysis of important modern trends in contract law. It takes a bold stand in setting up the idea of social contract law and demonstrating the role it has to play. It also locks into and stimulates further debate on a number of theoretical issues which have been around for some time, for example, as to the nature of fairness and as to the goals of European integration.

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Bibliography

Bratton et al (1996) 'Repeated Games, Social Norms and Incomplete Contracts' in Willett (ed) Aspects of Fairness in Contract (London: Blackstone).

Brownsword et al (1994) Welfarism in Contract Law (Aldershot: Dartmouth).

Brownsword et al (1996) 'Between Market and Welfare', in Willett (ed) Aspects of Fairness in Contract (London: Blackstone).

Weatherill (1994) 'The Role of the Informed Consumer in European Community Law and Policy' 2 Consumer Law Journal 49.

Wilhelmsson (1992) Need Rationality in Private Law (Aldershot: Dartmouth).

Wilhelmsson (1993) Perspectives of Critical Contract Law (Aldershot: Dartmouth).

Willett (1996) 'Fairness in Sale of Goods Act Quality Obligations and Remedies' in Willett (ed) Aspects of Fairness in Contract (London: Blackstone).

Footnotes

(1) Implementing the Unfair Terms in Consumer Contracts Directive 1993/13/EEC. Back to text.

(2) See the approach of the courts to the reasonableness test under the Unfair Contract Terms Act 1977; Woodman v Photo Trade Processing [1981] NLJ 935. Back to text.