Calnan on jurisprudence

Form and substance
RE | Issue 8 | 2015

When you are dealing with a transaction, which is more importantthe form in which it is clothed or the substance of what it does? This is a question which all legal systems have to grapple with, and it arises in a variety of contexts.

Take a lease. A landlord leases an office to a tenant for ten years. The tenant can give six months’ notice to terminate the lease on the third anniversary of the lease. That is 13 January. By mistake, the tenant gives six months’ notice to terminate the lease on 12 January. Is the notice ineffective because the tenant got the date wrong? Even if it is perfectly clear to the landlord what the tenant was attempting to do? These were the facts of a case which was heard by nine judges in the course of three hearings. Five judges said the notice was ineffective, four that it was effective. But, because three of those four were in the final appeal court, the tenant won. What was important was not the form of the notice, but the substance of its effect on the landlord.

This was a borderline case, and it illustrates a constant battle between two ideologiesthe necessity to adhere to rules, and the wish to give effect to what is really meant. Different legal systems draw the lines between these opposing views in different places. In broad terms, the civil law systems (based ultimately on Roman law) tend to have more formal requirements than the common law ones (deriving from English law). But they all have to grapple with the problem.

In the common law systems, substance is often more important than form in commercial law. There are two main reasons for this. In the first place, most commercial activity stems from the creation of contracts. There are few formal rules for the creation of commercial contracts; what is important is how a reasonable person would view the intention of the parties from what they have written, said and done. The byword is freedom of contract: in most cases, parties are free to agree what they want.

The other key requirement of commercial law is the ability to transfer assets from one person to anotherfor instance on a sale, or by way of security. Here, there are more complications, but the basic principle remains that all that is necessary to transfer a beneficial interest in an asset is an intention to do so. The focus is again on the intention of the parties, rather than the form of the transaction.

Experience of dealing with formal requirements in practice inevitably leads to the conclusion that they create problems. One example is the requirement of many legal systems that a guarantee must be in writing and signed by the guarantor. In many cases, this is easy to comply with. But it can be a problem. One case involved a building contract. For good commercial reasons, a person gave an oral guarantee of the obligations of a party to the contract. It was held that the guarantee was unenforceable because it was not in writing. The effect was that a contractual undertaking was ignored because it was not made in the requisite form. It is hard to see how that can be said to serve the interests of justice.

The more mature a legal system becomes, the more reliance it places on general principles rather than detailed rules.