(SCOT LAW COM No 252) Report on Review of Contract Law: Formation, Interpretation, Remedies for Breach, and Penalty Clauses report Report on Review of Contract Law: Formation, Interpretation, Remedies for Breach, and Penalty Clauses Laid before the Scottish Parliament by the Scottish Ministers under section 3(2) of the Law Commissions Act 1965 March 2018 SCOT LAW COM No 252 SG/2018/34 The Scottish Law Commission was set up by section 2 of the Law Commissions Act 1965 (as amended) for the purpose of promoting the reform of the law of Scotland. The Commissioners are: The Honourable Lord Pentland, Chairman Caroline S Drummond David E L Johnston QC Professor Hector L MacQueen Dr Andrew J M Steven. The Chief Executive of the Commission is Malcolm McMillan. Its offices are at 140 Causewayside, Edinburgh EH9 1PR. Tel: 0131 668 2131 Email: [email protected] Or via our website at https://www.scotlawcom.gov.uk/contact-us/ NOTES 1. 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Any enquiries regarding this publication should be sent to us at [email protected]. ISBN: 978-0-9500276-2-3 Produced for the Scottish Law Commission by APS Group Scotland, 21 Tennant Street, Edinburgh EH6 5NA. ii SCOTTISH LAW COMMISSION Item No 1 of our Tenth Programme of Law Reform Report on Review of Contract Law: Formation, Interpretation, Remedies for Breach, and Penalty Clauses To: Michael Matheson MSP, Cabinet Secretary for Justice We have the honour to submit to the Scottish Ministers our Report on Review of Contract Law: Formation, Interpretation, Remedies for Breach, and Penalty Clauses. (Signed) PAUL B CULLEN, Chairman C S DRUMMOND D E L JOHNSTON HECTOR L MACQUEEN ANDREW J M STEVEN Malcolm McMillan, Chief Executive 16 March 2018 iii Contents Contents ................................................................................................................ iv Abbreviations ................................................................................................................ ix General ......................................................................................................................... ix Part 2: Formation of Contract ........................................................................................ x Part 3: Interpretation of Contract ................................................................................... x Part 4: Remedies for Breach of Contract ....................................................................... x Part 5: Penalty Clauses ................................................................................................. xi Glossary ............................................................................................................... xii PART 1 Introductory matters Chapter 1 Introduction ............................................................................................. 2 General policy ............................................................................................................... 2 Structure of the Report .................................................................................................. 6 Advisory Group.............................................................................................................. 7 Impact assessment ....................................................................................................... 7 Legislative competence ................................................................................................. 7 Chapter 2 Overview of the Report ........................................................................... 9 Formation of contract..................................................................................................... 9 Interpretation of contract .............................................................................................. 11 Remedies for breach of contract .................................................................................. 12 Penalty clauses ........................................................................................................... 13 Party autonomy ........................................................................................................... 14 PART 2 Formation of Contract Chapter 3 Formation: an introduction .................................................................. 16 Background ................................................................................................................. 16 Structure of this Part .................................................................................................... 16 A statutory statement: policy considerations ................................................................ 17 Chapter 4 General principles ................................................................................ 20 Introduction ................................................................................................................. 20 iv Contract as agreement ................................................................................................ 20 Party autonomy ........................................................................................................... 30 The need for communication between the parties ....................................................... 32 Matters on which we make no recommendation .......................................................... 43 Chapter 5 Offer and acceptance ........................................................................... 45 Introduction ................................................................................................................. 45 Offer ............................................................................................................................ 46 Acceptance ................................................................................................................. 53 Chapter 6 Change of circumstances .................................................................... 61 Introduction ................................................................................................................. 61 Change of circumstances generally ............................................................................. 61 Death or incapacity of any party before formation process complete ........................... 62 Insolvency ................................................................................................................... 66 PART 3 Interpretation of Contract Chapter 7 Interpretation: an introduction ............................................................. 69 Background ................................................................................................................. 69 Preparation of the 2011 Discussion Paper ................................................................... 70 The 2011 Discussion Paper’s suggestions .................................................................. 77 Responses to the 2011 Discussion Paper ................................................................... 77 Outcome of consultation .............................................................................................. 79 Chapter 8 Developments since 2011 .................................................................... 80 Introduction ................................................................................................................. 80 UK Supreme Court: decisions ..................................................................................... 80 UK Supreme Court: extrajudicial discussions .............................................................. 87 Developments in other Anglophone jurisdictions ......................................................... 90 Developments in the Court of Session ......................................................................... 91 Remaining differences between Scottish and English law? ......................................... 94 Conclusion .................................................................................................................. 96 PART 4 Remedies for Breach of Contract Chapter 9 Remedies for breach of contract: an introduction ............................. 99 Background ................................................................................................................. 99 Structure of this Part .................................................................................................. 100 v A statutory statement: policy considerations .............................................................