Videos: Part 2: Keeping Contracts: Video 2: Contracts conferring unilateral powers

The case of Arnold v Britton [2015] UKSC 36, which you encountered in Chapter 7 in relation to contractual interpretation, arose out of a landlord’s power to increase service charges on holiday chalets.  It points to a broader issue that is common in modern contracting, namely, that contracts often give one party the power to unilaterally change the obligations of the other party.  This happens quite frequently in contracts relating to land.  People very often own their houses on a leasehold, which means they have to pay ground rent to the owner of the freehold, or own apartments subject to a covenant that means they have to pay an annual service charge.  The contract will typically give the owner of the freehold, or the company providing services, the power to increase the ground rent or the service charge.  This power is often unfettered.  Contracts also give the owner of the freehold the power to determine how much must be paid to extend the lease on the land.  This charge can be very high.

The exercise of these powers often causes real hardship.  The two videos below illustrate the problems individuals can face as a result of these clauses.  Watch the two videos, and consider why contract law produces these consequences.

Commentary

1.Both videos above relate to houses.  The issue of unilateral powers, however, extends beyond houses.  Problems have also arisen in relation to interest rates, when financial institutions have taken advantage of unfettered powers to increase rates very rapidly to significantly higher levels. 

2.In general, courts give full effect to clauses conferring powers of this type.  The only restriction is an implied term to the effect that rationally (as well as in good faith) and consistently with its contractual purpose’ (Braganza v BP Shipping Ltd [2015] UKSC 17 [30] (Baroness Hale JSC)). 

  1. This term applies to all contracts where one party has the power to make a unilateral determination or decision.  However, it focuses only on the decision-making process.  Did the party making the determination act capriciously or arbitrarily?  Did they exercise the power for a purpose which differed for that which it was given?  If the answer to either question is ‘yes’, the determination will be in breach of the implied term. 
  2. Critically, the court does not look to the substance of the determination or its impact on the other party.  The fact that it causes hardship, or is disproportionate, is not relevant.   As a result, virtually all determinations of this type have been upheld, even where the amounts charged appear extortionate. 
  3. Several statutes have given the courts the power to refuse to give effect to clauses which are excessively imbalanced.  Examples include the powers of the Court in relation to unfair terms under Part II of the Consumer Rights Act 2015 (which you will find discussed in Chapter 13), as well as its powers under the Consumer Credit Act 1974.  But these powers are narrowly drawn in terms of their scope, and do not extend beyond the types of clauses the statue covers.

3. The reluctance of the courts to intervene is deeply ingrained. A key theme that has underlain Part II is that English contract law is premised on parties acting in their own interests.  It is only in very exceptional circumstances that a party is required to pay attention to the other party’s interest, typically when they have voluntarily agreed to do so (for example, by agreeing to a best endeavours clause).  As a result, absent statutory regulation, English contract law does not prevent a party from aggressively pursuing its self-interest, even if doing so imposes hardship on the other party.  It is for each party to protect itself by negotiating to have appropriate clauses included in the contract.  If a party fails to do so, the law will not intervene to protect it.

4. Consider whether you agree with this position.  Is there a broader role which courts should play in policing contracts for unfairness, or in imposing legal fetters on powers that, under the contract, are framed in very broad terms?  What is the argument to be made for it?  What arguments can be made against it?  In making an argument either way, think carefully through potential negative consequences of giving the courts a larger role.