Lord Hope speech on the development of contract law

Last week the Institute of Law in Jersey hosted a conference on Contract Law (the programme is here). The conference was considering contract law generally, and the possibility of codification of the area. Among the speakers was Lord Hope who delivered a fascinating speech on "the role of the judge in developing contract law", published this week on the website of the Supreme Court of the United Kingdom. His comments are of particular interest in Scotland where the Scottish Law Commission is turning again to contract law in its eighth programme of law reform. The SLC project will re-examine various unimplemented reports on formation of contract, interpretation in private law, and remedies for breach of contract in the light of the publication of the Draft Common Frame of Reference.

Lord Hope's speech suggests to his Jersey audience that in considering possible reforms it should not just look to English law, and indeed he expressly concludes that

"it would seem unwise, if I may say so, for you to adopt wholesale the entirety of English contract law. In so many respects is out of keeping with that of most, if not all, of the other jurisdictions who wish to be part of the European project: as to its requirement for consideration, its rejection of the broad notions of good faith and reasonableness and its exclusion of evidence of pre-contractual negotiations, for example. It may look attractive today. That may not be so fifty years on from now, when so much more will have been done to encourage harmonisation along the lines favoured by the current generation of code-makers."

Before reaching this conclusion Lord Hope ranges widely over the development of contract law within the legal systems in the United Kingdom, examining the late nineteenth century codification projects, before moving on to consider codification generally and the possible reform of the law in Jersey. His speech is well aware of the approach at EU level to the DCFR – that mandatory codification at EU level is unlikely in the near future – and that the DCFR is a tool that can be used in a variety of ways by law reformers (in this respect he refers to Professor MacQueen's consideration of the House of Lords EU sub-committee E report on the DCFR and contract law).  He notes, for his Jersey audience – but remarks also of value to a Scottish reader:

"In contrast to the movement towards more uniformity between English and Scots law which was current there in the 1890s, there is now a much wider perspective. A wholesale incorporation of English law into the laws of Jersey and Guernsey is not the only option which is open to you. My task is to offer some reflections, from a judge’s perspective, on the question whether you should retain what you have or whether there useful lessons to be learned from the various European Contract Code projects."

But in generally discussing codification (and the proposed criminal codes prepared in Scotland and in England and Wales in recent years) notes that

"The rules of procedure, which are invariably written down, are much easier to deal with in this way than the substantive law."

In considering codification in the context of contract law, Lord Hope focuses on an aspect of the law relating to interpretation and looks at the case of Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101, a case of particular interest to the Edinburgh Centre for Commercial Law as the speech of Lord Hoffman refers to our first annual lecture delivered by the late Lord Bingham, later published in (2008) Edinburgh Law Review pp. 374-390.

Lord Hope refers to Article 39 of the European Code of Contract (a project headed up by Professor Gandolfi) and quotes paragraphs 3 and 4 which provide

"3. In case of doubts arising on examination of the text which cannot be resolved by a comprehensive evaluation of that text, which doubts may be in connection with the statements or conduct of the contracting parties even after the conclusion, but compatible with the text, of the contract, the contract shall be interpreted in conformity with the common intention of the parties which can also be ascertained by recourse to extrinsic elements concerning the parties.

4. In any event the interpretation of the contract shall in no way produce effects contrary to good faith or reasonableness."

Lord Hope considered this in the context of the Chartbrook case which re-examined (and re-affirmed) the traditional analysis in both England and Scotland that pre-contractual negotiations could not be referred to in interpreting the terms of contracts (for England and Scotland see the cases referred to in WW McBryde, The Law of Contract in Scotland (3rd edn) para 8-28). Lord Hope refers to criticisms of the approach by Lord Nicholls, in "My Kingdom for a Horse: The Meaning of Words" (2005) 121 LQR 577, Professor David McLaughlan, "Contract Interpretation: What is it about?" (2009) 31.5 Sydney Law Review 5; and the different approach taken by the Unidroit Principles of International Commercial Contracts (1994 and 2004 revision) and the Principles of European Contract Law (1999) and the United Nations Convention on Contracts for the International Sale of Goods (1980), as well as the United States, Restatement (Second) Contracts. In addition he could have referred to the suggestion that the law in Scogtland could move towards the approach in the international codes by my colleagues Laura Macgregor, writing with Judge Carole Lewis in "Interpretation of Contract" in Zimmermann, Visser and Reid (eds) Mixed Legal Systems in Comparative Perspective: Property and Obligations in Scotland and South Africa (2004) 66 at p 85. However, despite the international approach the possibility of referring to pre-contractual negotiations was rejected by Lord Hoffmann. He described the approach as reflecting the French approach to interpretation (para [39]) and could not then be transplanted into the English system with its more objective approach.  His view is quoted by Lord Hope,

 "French law regards the intentions of the parties as a pure question of subjective fact, their volonté psychologique, uninfluenced by any rules of law. It follows that any evidence of what they said and did, whether to each other or to third parties, may be relevant to establishing what their intentions actually were. There is in French law a sharp distinction between the ascertainment of their intentions and the application of legal rules which may, in the interests of fairness to other parties or otherwise, limit the extent to which those intentions are given effect."

Lord Hoffmann's analysis in this respect is questionable (Lord Hope references Professor Clive's consideration of the case). But his position, with which the other judges agreed, was that there was no clearly established case for departing from the exclusionary rule. Lord Hope notes in this context, the views of Baroness Hale, as a former law commissioner.

"Baroness Hale of Richmond confessed to seeing some attraction in counsel’s invitation to reconsider the rule in Prenn v Simmonds [[1971] 1 WLR 1381] especially as the parties’ pre-contract negotiations, of which the committee had been made aware, made their position crystal clear. But she said that her experience on the Law Commission had shown her how difficult it was to achieve flexible and nuanced reform by way of legislation. The courts, on the other hand, are able to achieve step-by-step changes which can distinguish between cases where evidence of pre-contractual negotiations is helpful from cases where it is not. I echoed those remarks when I said that one of the strengths of the common law is that it can take a fresh look at itself so that it can keep pace with changing circumstances."

And stresses the practical benefits of the exclusionary rule of interpretation, contrasting it with the code provision which he suggests is limited only a principle of good faith – which is not part of the English system (albeit Lord Hope suggests that it may be part of Scots law).

"risks opening the door to an uncertain, wide-ranging and possibly fruitless inquiry at the expense of the advantages of economy and predictability which the rule in Prenn v Simmonds seeks to preserve."

From the example, and the historical approach to codification which he considers, Lord Hope makes a plea on behalf of the judiciary as law reformers. The passages are worth quoting in full:

"One has to bear in mind what judges can and cannot do. One has to bear in mind too the methods that they use. At the centre lies the adversarial system within which they work. This depends to a large degree on the contribution that is made to the way they think by the advocates. The work that they can do, by researching and presenting written and oral argument, must not be underestimated.

"The Scottish system of contract law was developed, as I have said, from the principles of the law of obligations that had been expounded by the jurists. The role of the judges was to fill in gaps where they were found and to develop and apply the basic principles. To some extent they could be creative in carrying out these functions. But their duty was to apply the law as they believed it to be. Their approach is, I think, inevitably, conservative rather than revolutionary. There are limits to the extent that the judges can reform the law. Structural changes must be left to the legislators.

"Furthermore, as the judges see it, the code-makers do not have the same day-to-day experience as they do of how disputed facts are actually dealt with under our domestic legal systems. One cannot, the judges will say, divorce reforms which may at first sight appear attractive in principle from the way in which they will work out in practice in the event of a dispute which has to come to court for resolution. Rules of procedure and rules as to the admissibility of evidence have been fashioned, mostly by the judges, in the light of experience. They should not be discarded without a careful assessment of the consequences of doing so. There is, of course, much to be said for the harmonisation of laws to promote commerce, especially in the international context. But such a process is bound to lead to the making of compromises, as the Scots found when they were confronted with the proposal to codify the law of sale of goods in the 1890s which led to the 1893 Act. The judges would say that each one needs to be examined critically with a close eye as to how the proposed new rule will work out in practice in each judicial system, having regard to its own rules of evidence and procedure. It would only be if it survives this scrutiny that it would be wise to adopt it."