Terms, Interpretation and Restrictions/Exclusions Flashcards

Question

C – Interpretation of exclusion clauses | 5/ Exemptions for indirect and consequential loss

Answer 1

These are also restrictively interpreted (sometimes the court will hold that the losses actually incurred were direct and not consequential loss so not covered by the clause): - Hotel Services v Hilton (claimed cost of removing and storing a defective minibar, and loss of profits): held that the losses were direct because (relying on Hadley v Baxendale remoteness test) “direct” loss was loss arising naturally from the breach and indirect loss was reasonably contemplated in view of special known facts. But this interpretation seems inconsistent with the natural meaning of “consequential loss” (which should cover loss of profits).

Answer 2

- The fundamental change in contractual interpretation has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of “legal” interpretation has been discarded. - The principles may be summarised as follows. o (1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. o (2) Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, background includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man. o (3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. o (4) The meaning which a document would convey to a reasonable man is not the same thing as the meaning of its words. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax. o (5) The “rule” that words should be given their “natural and ordinary meaning” reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. 1º “Almost all the old intellectual baggage of “legal” interpretation has been discarded” was said to include the “artificial rules” relating to the construction of exclusion clauses (BCCI v Ali; Photo Production, Lord Hoffmann)… But this is not so straightforward, esp. Canada Steamship line of cases.

Answer 3

- Lord Hoffmann: o The law of contract is designed to enforce promises with a high degree of predictability, and the more one allows conventional meanings to be displaced by inferences drawn from background, the less predictable. o There is no clearly established case for departing from the exclusionary rule. The rule may well mean that parties are sometimes held bound by a contract in terms which a reasonable observer would not have taken them to have intended. But a system which sometimes allows this to happen may be justified in the more general interest of economy and predictability in obtaining advice and adjudicating disputes. EXAM POINT Excellent quote about the need for contract law to balance the interests of the contracting parties and the wider interests of the community at large. o It is, after all, usually possible to avoid surprises by carefully reading the documents before signing them and there are the safety nets of rectification and estoppel by convention (if the parties have negotiated an agreement upon some common assumption, which may include an assumption that certain words will bear a certain meaning, they may be estopped from contending that the words should be given a different meaning), both of which lie outside the exclusionary rule. 2º Rectification and estoppel by convention operate very narrowly and are unlikely to provide “safety nets”, but then the UKSC made a broader exception that pre-contractual negotiations that form part of the factual matrix may be admissible (Oceanbulk Shipping).

Answer 4

- Lord Hoffmann: o It requires a strong case to show that something has gone wrong with the language; it is necessary to demonstrate more than that a particular interpretation results in an outcome especially favourable to one party. ♣ But in this case requirement satisfied because the interpretation would not only make it favorable to one party, but would make the structure and language of other provisions in the contract irrational and arbitrary. o When the language used in an instrument gives rise to difficulties of construction, the process of interpretation does not require one to formulate some alternative form of words which approximates as closely as possible to that of the parties. It is to decide what a reasonable person would have understood the parties to have meant by using the language which they did. The fact that the court might have to express that meaning in language quite different from that used by the parties is no reason for not giving effect to what they appear to have meant. o There is no limit to the amount of red ink or verbal rearrangement or correction which the court is allowed. All that is required is that it should be clear that something has gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant. In my opinion, both of these requirements are satisfied. 3º This appears to make interpretation no different from rectification, and has been criticized for confusing the meaning of what the parties said with what they meant but did not say (Buxton). However, this principle only applies where BOTH the fact that there is a mistake AND what the reasonable person would have understood the parties to have meant ARE CLEAR. Thus, Arnold v Britton failed because the second requirement wasn’t satisfied:

Answer 5

o When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to “what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean” (citing Lord Hoffmann, Chartbrook) o The court focuses on the meaning of the relevant words in their documentary, factual and commercial context, so meaning is assessed in light of: ♣ (i) the natural and ordinary meaning of the clause, ♣ (ii) any other relevant provisions of the lease, ♣ (iii) the overall purpose of the clause and the lease, ♣ (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and ♣ (v) commercial common sense, but ♣ (vi) disregarding subjective evidence of any party’s intentions o Seven important factors: ♣ Save perhaps in a very unusual case, the meaning is most obviously to be gleaned from the language of the provision because the parties have control over it whereas they don’t have control over commercial common sense and surrounding circumstances ♣ The less clear the words are/the worse their drafting, the more ready is the court to depart from natural meaning. But that does not justify the court embarking on an exercise of searching for drafting infelicities in order to facilitate a departure from the natural meaning. If there is a specific error in the drafting, it may often have no relevance to the issue of interpretation which the court has to resolve. ♣ Commercial common sense is not to be invoked retrospectively. The mere fact that a contract has worked out badly, or even disastrously, for one party is not a reason to depart from natural language. ♣ A court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of hindsight. It is not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice, so courts, when interpreting, should avoid rewriting it in an attempt to assist an unwise party or penalize an astute party. ♣ Can only take into account facts or circumstances which existed at the time that the contract was made, and which were known or reasonably available to both parties (and not only one party).

Answer 6

o Accepts unitary process of construction: in interpreting, “the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other” (citing Lord Clarke, Rainy Sky) o This requires an iterative process by which each rival meaning is checked against the provisions of the contract and its commercial consequences are investigated. o But there must be a basis in the words used and the factual matrix for identifying a rival meaning. The question for the court is not whether a reasonable and properly informed tenant would enter into such an undertaking. This would rewrite the parties’ bargain in the name of commercial good sense, which the court cannot do.

Answer 7

The problem is that under the current approach a party to a contract cannot proffer evidence of the parties’ action intention – should address the problem without resorting to rectification or estoppel. It is said to be that since objective approach is not concerned with identifying actual intention, pre-contractual negotiations must be irrelevant. But this is too broad and rigid – the content of pre-contractual negotiations is a background fact (Collins). Admitting evidence would not depart from the objective approach but would merely enable the notional reasonable person to be more fully informed of the background context. We should regard the exclusion of pre-contractual negotiations as not absolute because: - Injustice: exclusion disables the court from considering helpful evidence, and allows a party to contend for a meaning he knows was not intended. - Prior negotiations is often the best evidence: it should be admissible whenever it would influence the notional reasonable person in his understanding of the meaning intended by the parties - There are already a lot of exceptions: misrepresentation, rectification, estoppel, variation, ambiguity in written document… - Comparative law: exclusions are inconsistent with most other legal systems and international restatements of contract law

Answer 8

- Uncertainty but admitting pre-contract that furnishes clear insight into the intended meaning, we are furthering certainty not diminishing it - Third parties (who acquire an interest under the contract, because unlikely to know about pre-contract) but courts already taken into account “objective” background matters known to the parties but not others - Unhelpful (Lord Wilberforce, Prenn v Simmonds) because only the final document records a consensus but this doesn't apply where pre-contract is helpful - Subverts the objective approach (by giving too much weight to subjective factors over words of the contract: Mason J) yes but it doesn’t justify excluding relevant evidence from a trial. Parties’ subsequent conduct may also be a useful guide, and though problems are mostly solved by estoppel by convention, the law should still recognize this openly.

Answer 9

Argues that “objective” contractual interpretation has three possible meanings: - (i) weak meaning = must infer what the parties intended from their words and actions because we have no direct access to the minds of other people but it can’t be anything else, so it’s just a truism. - (ii) orthodox view (reasonable person test) = confines materials from which intention is inferred to matters within their common knowledge when the contract was made (ICS test) but this doesn’t reflect the actual practice and is insufficiently objective because it suggests that interpretation involves an inquiry into the state of mind of the parties. - (iii) preferred “more strongly objective” meaning (rational choice theory) = objective meaning is located by assuming that (i) the parties chose the language of their contract to express a shared intention, and (ii) the parties are rational people. This means that contractual documents are interpreted as having the meaning which best explains why rational parties who were using the language to express a shared intention would have chosen that language this promotes certainty, facilitates commerce and respects the autonomy of contracting aprties by treating them as having made a rational choice.

Answer 10

we should reject the “psychological theory” because the task of interpreting a contract cannot require the interpreter to discover a shared intention, because in most cases where the meaning of a contract is disputed, and different interpretations are put forward, it is likely that at least one party had no intention or understanding that the words bore any of the suggested meanings, at the time of contract. - They haven’t read the provision. - Contracts are binding even in circumstances that the parties didn’t envisage when they made it. - If one party didn’t have a relevant intention, there can be no shared intention. - Thus, a system that attached meaning to the language of contracts only when the meaning was actually intended would be one where contractual documents have very limited legal effect.

Answer 11

where there is an actual shared intention, the law should enforce it, but shared intention is the only form of actual intention that the law has reason to enforce. But how? - Interpret the language of the contract in accordance with a proven shared intention? Early English approach (The Karen Oltmann) - Interpret contractual language objectively, but where there is a conflicting proven shared intention, allow rectification (or estoppel by convention)? Modern English approach (Chartbrook v Persimmon Homes, overruling The Karen Oltman because it infringed the rule on exclusion of negotiations, saying that situations in The Karen Oltman can be solved through rectification)

Answer 12

we should adopt rational choice theory (i.e. a theory of contractual interpretation that depends on the two above assumptions), and only depart from this if a proven shared intention conflicts with this interpretation, and do this through rectification. Thus, objective interpretation does not depend on what (if anything) the parties actually meant, or would be understood to mean by a reasonable person, when the contract was made.

Answer 13

Argues that Leggatt’s rational choice theory is unpersuasive because (contrary to Leggatt’s suggestion) Lord Hoffmann’s principles in ICS do not represent “psychological theory” but are as objective as you can get. The inquiry is, under the current approach, into apparent intention, i.e. the intention that a reasonable person aware of the background would attribute to the parties (not an inquiry into the states of mind of the parties). IAO Leggatt’s treatment of shared intention in rectification is selective; a more principled approach would be that where it is proven that the parties negotiated on the basis of a common understanding that term X had meaning Y, that meaning is the meaning of the term. Thus, rectification is inappropriate to situations like The Karen Oltman because the parties didn’t attach a particular meaning to the chosen words, they just failed to appreciate that those words didn’t have the intended effect, and assumed that they sufficed. Leggatt claims that his theory is advantageous because: - It sheds light on the nature of disagreements about questions of contract interpretation and on the difference between interpreting an existing contract and creating a new or better one but it sheds no more light than Lord Hoffmann’s principles. - It is fair and respects people’s autonomy to treat them as reasonable people but this merely justifies an objective theory and not necessarily his. - It promotes certainty and facilitates commerce o by giving content to contractual obligations even in circumstances which the parties did not specifically envisage o by allowing parties to predict with a reasonable degree of certainty when entering into a contract how its provisions will be interpreted o by allowing third parties to ascertain the meaning of contracts without being privy to the actual intentions o by allowing judges to adjudicate on the basis of relatively little information and without need for expensive factual inquiry these claims seem “exaggerated”; if they exist, hard to see how they are less achieved by the ICS approach.

Answer 14

Argues that the trend in contractual interpretation was for a period to depart from the strict language and replace it with a broad notion of intention (esp. Lord Hoffmann), but recently the court has gone back to an IAO “more defensible position”. The construction of contract can never be entirely free of artifice, and the main artifice is that the parties understood what they were signing up to as completely as a judge armed with a mass of objectively relevant and carefully analyzed background information and the advantages of hindsight.

Answer 15

- Originally Lord Wilberforce in Prenn v Simmonds said that you had to have regard to the “origin and purpose of the transaction and circumstances in which it would fall to be performed”, but he was restrained – he was not saying that circumstances were an alternative way of discovering the parties’ intention, just that they were facts that assisted in interpreting the words. - However, later cases went too far: in The Antaios, Lord Diplock said that “if detailed semantic analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense” suggests that common sense is no longer just a means of understanding the language, but of overriding it. This is IAO “unnecessary and wrong”.

Answer 16

It is between an approach to contractual construction which elucidates the meaning of the words, and an approach which modifies or contradicts the words in pursuit of what appears to a judge to be a reasonable result. - Then in ICS Lord Hoffmann’s principles included the fifth principle, that the “natural and ordinary meaning” of the language is no more than a (rebuttable) presumption, that if the background suggest something has “gone wrong with the words”, the law may attribute a different intention. But by this phrase, Lord Hoffmann doesn’t seem to have meant something was accidentally omitted, but that the background may be used to show that the parties cannot as reasonable people have meant what they said, so that the court is entitled to substitute something else. - Subsequent caselaw (ex. Charbrook, Rainy Sky) shows that this has led to commonly treating background circumstances as an alternative guide to the parties’ intention instead of a means of interpreting the language.

Answer 17

1. The language of the agreement is the only direct evidence of their intention which is admissible, and it is not true to say that language is only meaningful in relation to some background – most language and all properly drafted language has an autonomous meaning. It is I think time to reassert the primacy of language in the interpretation of contracts – the flexibility of language is not a proper basis for treating the surrounding circumstances as an independent source of intention, because while they may enable us to discover what the objective was, they cannot help us determine how far it has been achieved. In negotiations, parties’ objectives are likely different, and only the language (not circumstnaces) can tell us how far each party succeeded in their conflicting and opposite endeavour. 2. It is difficult to fairly apply the principles in a legal system that excludes the use of preontractual negotiations as evidence of intention. Indeed Lord Hoffmann said the exclusion was founded on “practical policy”, but IAO it is more fundamental – it follows from the objective character of all contractual construction (negotiations can’t tell us what a contract objectively meant). An apparently harsh or unreasonable term may have been agreed by way of compromise or in exchange for concessions in other areas or because the deal was concluded at 3 a.m. and one of the parties was more interested in going to bed than in the finer points of drafting. Once the courts resort to sources other than the language in order to identify the object of the transaction, it is difficult to justify the current law about extrinsic evidence. Yet that rule is fundamental to the principle of objective construction. 3. Judges are not well-placed to determine what commercial common sense requires, because they necessarily focus on what has gone wrong, and their idea is likely to be moulded by ideas of fairness, whereas commercial contracts have nothing to do with fairness and everything to do with the spirit of competitive cooperation, with a view to serving their own interests. Applying the principles, the question is no longer what the parties agreed. It is: what would they have agreed if they were the objective, just and fair-minded people that in practice they are not. 4. Principles are difficult to reconcile with implied terms and rectification as hard to see the need for either.

Answer 18

- Arnold v Britton (Lord Neuberger) – cited some orthodox principles (primacy of language, danger of retrospectively applying a notion of commercial common sense…)

Answer 19

But it didn’t admit that any of the previous decisions went too far, and not clear how the UKSC will resolve these differences in the future, but an indication in Wood v Capita (Lord Hodge): - “Business common sense is useful to ascertain the purpose of a provision, but in the tug of war of commercial negotiations, business common sense can rarely assist the court in ascertaining on which side of the line the centre line marking on the rope lay, when the negotiation ended”.

Answer 20

Common law = caveat emptor (the onus is on the buyer to seek specific undertakings from sellers in relation to the quality of goods), but this was significantly reduced by statute.

Answer 21

The Sale of Goods Act no longer applies to contracts between a trader and consumer! |*Sale of Goods Act 1979, ss 12-15A; - Section 12(1): implied condition that the seller does have title to sell the goods - Section 12(2): two implied warranties (freedom from undisclosed encumbrances + quiet possession free from interferences by the buyer and third parties) - Section 13: if sale by description, implied term that the goods corresponds to the description - Section 14: two implied conditions where the seller sells in the course of business: o S14(2): That the goods be of satisfactory quality, defined in s14(2A) and a check-list of factors in s14(2B) and excluding certain factors in s14(2C) o S14(3): That the goods be reasonably fit for their purpose (if the buyer wants to use it for an unusual purpose he must declare) - Section 15: two implied conditions in case of sale by sample o The bulk will correspond with the sample in quality o The goods will be free from any defect making their quality unsatisfactory, which would not be apparent on reasonable examination of the sample - Section 15A: if a buyer has the right to reject goods because of s13/14/15 but the breach is so slight that it would be unreasonable for him to reject them (burden of proof on seller), the breach may be treated as a breach of warranty rather than condition, unless a contrary intention appears in or is implied from the contract. Can exclude liability if reasonable (except s12 which cannot be excluded) (≠ CRA 2015, where liability cannot be excluded).

Answer 22

- Parke B: o In commercial transactions, extrinsic evidence of custom and usage is admissible to annex incidents to written contracts. In such cases, there is a presumption that the parties did not mean to express in writing the whole of the contract, but a contract with reference to those known usages. o Whether it is wise to relax the strictness of the common law where parties have agreed to a written contract is doubted, but the principle is well-established and it is too late to pursue a contrary course. 1º The usage must be known (“notorious, certain and reasonable”) but the parties didn’t have to know it. 2º The usage must be observed from a sense of legally binding obligation, not mere courtesy, convenience or expediency. 3º The custom must not have been altered by contract (no implication if contrary to express terms of contract).

Answer 23

Test of necessity not reasonableness: - Facts: whether there was an implied undertaking to take reasonable care to ascertain that the bottom of the river was in such a condition as not to endanger the vessel during using their premises in the ordinary way. - Bowen LJ: - An implied warranty as distinguished from an express warranty, really is in all cases founded on the presumed intention of the parties, and upon reason, with the object of giving such business efficacy to the transaction as must have been intended at all events by both parties who are business men; not to impose on one side all the perils of the transaction, but to make each party promise in law as much as it must have been in the contemplation of both parties. - In this case: o Both parties knew that this jetty was let out for hire. o They must have known that it was by grounding that she used the jetty, and that unless the ground was safe the ship would be simply buying an opportunity of danger o Both parties knew that with regard to the safety of the ground outside the jetty the shipowner could know nothing at all, and the jetty owner might with reasonable care know everything. - The question is how much of the peril is it necessary to assume that the shipowner and the jetty owner intended respectively to bear in order that such a minimum of efficacy should be secured for the transaction, as both parties must have intended it to bear? 1º Source of the implied term is the presumed intention of the parties (so that the court isn’t really making a contract for the parties), but Bowen LJ says that it is also based on “reason”, suggesting a wider basis of implication.

Answer 24

EXAM POINT Here Bowen LJ was concerned about ensuring the minimum of efficacy to prevent total failure of consideration in order to imply a term by drawing an inference as to the parties’ intentions (in particular, the intention that there not be a total failure of consideration because they were both acting as businessmen). If we abolish consideration this would be impossible.

Answer 25

- Facts: whether a term should be implied into the articles of association of a company making provision for the removal of directors in certain circumstances. In this case the articles of association stipulated the election of directors according to particular types of shareholding, and provided for their removal in certain circumstances. The PC held that there was an implied term that a director could also be removed when the shareholder with the required shareholding to support his appointment ceased to exist, because it was necessary to avoid defeating the overriding purpose of the machinery for appointing directors, i.e. to ensure that the board of directors reflected the type and degree of shareholder interests.

Answer 26

o The court has no power to improve upon the instrument which it is called upon to construe. It cannot introduce terms to make it fairer or more reasonable. It is concerned only to discover what the instrument means. However, that meaning is not necessarily or always what the authors or parties to the document would have intended. It is the meaning which the instrument would convey to a reasonable person having all the background knowledge which would reasonably be available to the audience to whom the instrument is addressed. o The question of implication arises when the instrument does not expressly provide for what is to happen when some event occurs. The most usual inference in such a case is that nothing is to happen. o In some cases, however, the reasonable addressee would understand that the only meaning consistent with the other provisions of the instrument, read against the relevant background, is that something is to happen. In such a case, it is said that the court implies a term. This is not an addition to the instrument. It only spells out what the instrument means. o In every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean. o This test can be formulated differently (the implied term must “go without saying”, it must be “necessary to give business efficacy to the contract”) but these are not to be treated as different or additional tests. There is only one question, but in answering that question: ♣ Consider whether a different construction would frustrate the apparent business purpose of the parties (in case of a commercial contract). ♣ It is not enough for a court to consider that the implied term expresses what it would have been reasonable for the parties to agree to. It must be satisfied that it is what the contract actually means. ♣ How the actual parties would have reacted to the proposed amendment is irrelevant. ♣ Not necessary that the need for the implied term should be obvious in the sense of being immediately apparent (the fact that the actual parties might have said to the officious bystander “Could you please explain that again?” does not matter)

Answer 27

o said (in some case) that a series of conditions must be satisfied: ♣ “(1) reasonable and equitable; (2) necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) so obvious that ‘it goes without saying’ (4) capable of clear expression; (5) must not contradict any express term of the contract.” o But this list is best regarded, not as series of independent tests which must each be surmounted, but rather as a collection of different ways in which judges have tried to express the central idea that the proposed implied term must spell out what the contract actually means. The above formulations are all good reasons for saying that a reasonable man would not have understood that to be what the instrument meant.

Answer 28

- Confusion between principles of interpretation and implication - Break with tests used in the past - Attempt to liberalize the rules relating to implication (though this is unlikely his intention as he makes clear that usually the inference is that nothing is to be done at all) The test was reconsidered in:

Answer 29

- Facts: whether a term should implied into a lease, which would entitled the lessee to recover parts of an advance payment relating to a period after the exercise of a break period. - Held (UKSC): no term is implied because: o The lease is very detailed and was entered into between two experienced parties and was drafted by expert solicitors o The lease made provision for a number of contingencies but not this o The implication was not supported by the general attitude of the law to the apportionability of rent payable in advance (indeed the law assumes rent to be not apportionable in time). - UKSC confirmed that: o The test for implication was not diluted by Lord Hoffmann’s judgment in Belize o The test remained one of necessity (≠fairness, reasonableness) though not “absolute necessity” – the question is whether, without the term, the contract would lack commercial or practical coherence or whether it was necessary to make the contract work. o It is not enough that: ♣ The term appears to be fair ♣ The parties might have agreed to it had it been suggested to them ♣ The term is reasonable to be implied into the contract - UKSC cast doubt on Lord Hoffmann’s proposition that the process of implying is part of the exercise of interpretation (Lord Neuberger: when one is implying a term, he is not construing words as the words to be implied are ex hypothesi not there to be construed) - Lord Neuberger said that Lord Hoffmann in Belize was a “characteristically inspired discussion rather than authoritative guidance on the law of implied terms” (Lord Carnwath disagreed, Lord Clarke was equivocal, Lord Sumption and Lord Hodge agreed)

Answer 30

Thus the majority of the UKSC seemed to regard Belize as not authoritative guidance, and indeed subsequently the courts appear to move away from Belize back towards old tests like: - The Moorcock (emphasis on necessity to make the contract work, to give business efficacy to the contract) - Shirlaw v Southern Foundries (so obvious that if an officious bystander asked the parties whether there was to be such a term, both would have answered “yes”)

Answer 31

- Facts: whether a term is to be implied into the tenancy agreement relating to the obligation of the landlord to keep the common parts in repair and properly lit (and if so, what was its scope) - Held (HL): a term was to be implied to take reasonable care (though there was no breach).

Answer 32

o The statements in The Moorcock and Shirlaw do not truly represent the way in which courts act. In many cases, the court never looked at the intentions of the parties and if they did they either didn’t intend anything or each intended something different. Those cases show that courts do imply terms when it is reasonable, but not necessary, to do so.

Answer 33

o There are different varieties of implication: ♣ Where there is an apparently bilateral contract: • Court might add obvious terms or • Court might add terms necessary to make the contract work (The Moorcock) ♣ Lord Denning suggests a third head of implication of reasonable terms, but IJO this extends a long and undesirable way beyond sound authority (though he agrees with the examples Lord Denning cites but thinks that they all belong to the preceding two heads) ♣ This case is a fourth category. o In this case, there must be implied a letting (with exclusive possession) and with it, a covenant for quiet enjoyment (a necessary incident of the letting). The demise would be useless unless access is obtained by the staircase, and given the height of the building, the lift service. Since there is no other means of disposing of rubbish, there must be a right to use the garbage chutes. Thus, there is an easement for each of these common parts. o The question is what obligations must be implied; such obligation should be read into the contract as the nature of the contract itself implicitly requires, no more, no less: a test of necessity. The relationship in this case is between landlord and tenant, and not implying any obligation would be inconsistent with this relationship. o There is a distinction between implication to give business efficacy to a particular contract, and implication, based on wider considerations, of a term as the nature of the contract might call for, or as a legal incident of this kind of contract.

Answer 34

o Rejects Lord Denning’s “reasonableness” test – it is true that unless a term is in all the circumstances reasonable, it will not be implied. But reasonableness itself is not sufficient for it to be implied.

Answer 35

1º Lord Denning’s reasonableness test was rejected by the HL, but on the facts was it really “necessary”? Atiyah noted that it was obviously not “strictly necessary” to have a usable lift in a block of flats ten stories high, but it would be “exceedingly inconvenient” not to have one. Thus, “necessity” really means “reasonable necessity”, which must mean “reasonably necessary having regard to the context and price”. 2º D sought to rely on the “officious bystander” test, and Lord Cross said that it did not satisfy the test, but still implied a term as a general incident of all contracts of this type. If this is right, then there is a difference between the tests for implication in law and fact. 3º But otherwise the judges aren’t so clear on the distinction between terms implied in fact and law: Lord Denning relies on several cases for the proposition that the “reasonableness” test was used, but these were almost exclusively cases of implication in law.

Answer 36

- Facts: C sued their employers for damages based on an implied duty of care in the employment contract, that the employer take reasonable steps to inform the employees of the existence of their right to take steps to enhance their pension entitlement (under the employment contract) at more advantageous terms [and breach of duty of care, and breach of statutory duty]. - Held: there was an implied term.

Answer 37

o Analyzing the case in terms of tort is misleading because there has been an increasing trend to narrow the range of circumstances that tort law will recognize as sufficient to impose a duty of care to avoid economic loss. o In contract it is different – the present contract confers on the employee a valuable right but that requires him to take certain action – if this situation is known to the employer but not the employee, the law may imply a duty to take reasonable steps to bring the existence of the continent right to the notice of the employee. o This is a novel problem because in classical contractual situations where contract terms, having been agreed by the parties, must ex hypothesi be known by them. Here they are negotiated by representative bodies and the employee couldn’t be expected to know. o In this case the implication cannot be justified as necessary to give business efficacy to the contract of employment as a whole, but can be necessary to render efficacious the very benefit that the contractual right to purchase added years was intended to confer. o This might stretch the doctrine of implication for sake of business efficacy too far, but here we draw the distinction between implication to a particular contract and type of contract (Liverpool). This is the latter category, and any objection that the implied term would be too wide to be of general application can be surmounted by defining with sufficient precision the category of contractual relationship.

Answer 38

This shows that there is a difference between terms implied in fact and terms implied in law. Though Lord Bridge affirms that the test is still necessity, it appears to be a different sort of necessity

Answer 39

- The policy factors influencing courts in implied terms in law reveal a desire to ensure the parties co-operate with each other and with society's standards. - This article suggests that the essence of the test for implication in law is a consideration of the nature of the contract and of how to maximise the social utility of the relationship. It might be said that the test is whether the term is necessary for the reasonable operation of the type of contract concerned. - The technique of implying terms in law provides courts with potential to regulate to some extent the behaviour of parties contracting within a particular type of relationship, in situations where parties do not specify requisite performance details. To use this potential courts need to be convinced that these “default rules” will only apply to appropriate relationships and will advance desirable behaviour with regard to certain policy considerations (relative bargaining position, fairness, extent of the obligation imposed, insurance…) - Flexibility must be maintained by not dictating an exhaustive list of considerations and the weight to be given each of them.107 However, it would be appropriate for courts to be more open about the policy issues with which they are wrestling.

Answer 40

- Facts: D granted C the exclusive right to distribute Manchester United fragrances. C terminated the contract alleging misrepresentation and breaches of contract (not shipping orders promptly, refusing to supply products, undercutting agreed prices…). - Held (Leggatt J): there were repudiatory breaches justifying C’s termination, and damages for misrepresentation.

Answer 41

o There is “nothing novel or foreign to English law in recognizing an implied duty of good faith in the performance of contracts”, which should be implied in this case because: ♣ Comparative law ♣ We already do it (citing Interfoto) ♣ Based on the presumed intention of the parties o Main reasons against a duty of good faith in performance: ♣ English law’s preference for incremental development in response to particular problems ♣ Emphasis on freedom of contract and individualism ♣ Concern that such a duty would be too vague and uncertain o There is a spectrum of contracts ranging from: ♣ All contract parties can act solely in their own interest subject to fraud and other vitiating factors ♣ “Relational” contracts (franchise agreements, long-term distributorship agreements…) involving a longer-term relationship to which parties make a substantial commitment that require “a high degree of communication, cooperatin and predictable perforamcne based on mutual trust and confidence” ♣ Situations raising fiduciary duties that require utmost good faith (requiring avoidance of even the appearance of conflicts of interest, and placing the other party’s interest above one’s own)

Answer 42

- 122 The general view among commentators appears to be that in English contract law there is no legal principle of good faith of general application (and Interfoto and Walford are often cited). Those cases were concerned, however, with the position of negotiating parties and not with the duties of parties who have entered into a contract and thereby undertaken obligations to each other. - 124 Three main reasons have been given for what Professor McKendrick has called the ‘traditional English hostility’ towards a doctrine of good faith: o The preferred method of English law is to proceed incrementally by fashioning particular solutions in response to particular problems rather than by enforcing broad overarching principles (Lord Bingham, Walford) o English law is said to embody an ethos of individualism, whereby the parties are free to pursue their own self-interest not only in negotiating but also in performing contracts provided they do not act in breach of a term of the contract. o Fear that recognising a general requirement of good faith in the performance of contracts would create too much uncertainty (content of the obligation would be too vague) - However: this jurisdiction would appear to be swimming against the tide (it is in most civil law jurisdictions, it entered English law through UTCCR, and exists in several common law jurisdictions (ex. US, Canada, Australia, Scotland)) - Under English law a duty of good faith is implied by law as an incident of certain categories of contract, for example contracts of employment and contracts between partners or others whose relationship is characterised as a fiduciary one. I doubt that English law is ready to recognise a requirement of good faith as a duty implied by law into all commercial contracts. Nevertheless, there seems to me to be no difficulty in implying such a duty in any ordinary commercial contract based on the presumed intention of the parties (implied term in fact). o The modern case law on the construction of contracts has emphasised that contracts are made against a background of unstated shared understandings which inform their meaning. o The relevant background includes not only matters of fact known to the parties but also shared values and norms of behaviour (some general, others specific to particular trades, and arising out of the particular contractual relationship). Many such norms are naturally taken for granted by the parties when making any contract without being spelt out in the document recording their agreement. o A paradigm example of a general norm which underlies almost all contractual relationships is an expectation of honesty. That expectation is essential to commerce, which depends critically on trust. Yet it is seldom, if ever, made the subject of an express contractual obligation. Indeed writing such an obligation in would undermine trust and weaken the relationship between parties. EXAM POINT Here again the tension between the role of contract to enforce intentions of the parties and the broader interests of society and commerce, though here the two coalesce and the latter informs the former. o As a matter of construction, it is hard to envisage any contract which would not reasonably be understood as requiring honesty in its performance. The same conclusion is reached if the traditional tests for the implication of a term are used. In particular the requirement that parties will behave honestly is so obvious that it goes without saying. Such a requirement is also necessary to give business efficacy to commercial transactions. EXAM POINT Blurring the line between interpretation and implied terms. o There might be other such standards that are intended to be observed but not written in the contract. A key aspect of good faith is the observance of such standards (ex. fidelity to the parties’ bargain, not to act improperly/commercially unacceptable ways/unconscionably) - What good faith requires is sensitive to context. o It includes the core value of honesty. o In some contractual it may extend further to an expectation that the parties will share information relevant to the performance of the contract such that a deliberate omission to disclose such information may amount to bad faith. ♣ English law has traditionally drawn a sharp distinction between certain relationships – such as partnership, trusteeship and other fiduciary relationships – on the one hand, in which the parties owe onerous obligations of disclosure to each other, and other contractual relationships in which no duty of disclosure is supposed to operate. ♣ That dichotomy is too simplistic. While it seems unlikely that any duty to disclose information in performance of the contract would be implied where the contract involves a simple exchange, many contracts do not fit this model and involve a longer term relationship between the parties which they make a substantial commitment. ♣ Such ‘relational’ contracts may require a high degree of communication, cooperation and predictable performance based on mutual trust and confidence and involve expectations of loyalty which are not legislated for in the express terms of the contract but are implicit in the parties' understanding and necessary to give business efficacy to the arrangements. Examples of such relational contracts might include some joint venture agreements, franchise agreements and long-term distributorship agreements. - Although its requirements are sensitive to context, the test of good faith is objective in the sense that it depends not on either party's perception of whether particular conduct is improper but on whether in the particular context the conduct would be regarded as commercially unacceptable by reasonable and honest people. This follows from the fact that the content of the duty of good faith is established by a process of construction which in English law is based on an objective principle. - There is in my view nothing novel or foreign to English law in recognising an implied duty of good faith in the performance of contracts. o It is consonant with the theme identified by Lord Steyn as running through our law of contract that reasonable expectations must be protected. o It is already reflected in several lines of authority that are well established. - Further observations: o Because the content of the duty is heavily dependent on context and is established through a process of construction of the contract, its recognition is entirely consistent with the case by case approach favoured by the common law. o As the basis of the duty of good faith is the presumed intention of the parties and meaning of their contract: ♣ Its recognition is not an illegitimate restriction on the freedom of the parties to pursue their own interests. The essence of contracting is that the parties bind themselves in order to co-operate to their mutual benefit. The obligations which they undertake include those which are implicit in their agreement as well as those which they have made explicit. ♣ It is open to the parties to modify the scope of the duty by the express terms of their contract and, in principle at least, to exclude it altogether. I say ‘in principle at least’ because in practice it is hardly conceivable that contracting parties would attempt expressly to exclude the core requirement to act honestly. o The fear that recognising a duty of good faith would generate excessive uncertainty is unjustified. There is nothing unduly vague or unworkable about the concept. Its application involves no more uncertainty than is inherent in the process of contractual interpretation.

Answer 43

``` o The advantage of claiming damages on the ‘reliance’ basis is not that the claimant can recover expenditure which would have been wasted even if the contract had been performed but that the burden of proof lies on the defendant to show that the expenditure would not have been recouped. o A general theme which runs through the law of damages = on the one hand, the general rule that the burden lies on the claimant to prove its case applies to proof of loss. But on the other hand, courts will do the best they can not to allow difficulty of estimation to deprive the claimant of a remedy, particularly where that difficulty is itself the result of the defendant's wrongdoing. Accordingly the court will attempt so far as it reasonably can to assess the claimant's loss even where precise calculation is impossible. o The court is aided in this task by what may be called the principle of reasonable assumptions – that it is fair to resolve uncertainties by making reasonable assumptions which err if anything on the side of generosity to the claimant where it is the defendant's wrongdoing which has created those uncertainties. o The (rebuttable) presumption that the claimant would have recouped expenditure incurred in reliance on the defendant's performance of the contract is an illustration of this approach. o I therefore conclude that Yam Seng is entitled to recover as damages for ITC's breach of contract its net expenditure incurred in performing the agreement. ```

Answer 44

Argues that if Leggatt J meant no more than that it is open to courts to find an implied term of good faith in particular contracts, then this is uncontroversial. But if he argues for a general requirement of good faith in the performance of contracts, then this invites courts to go well beyond the proper function of judicial law-making. - Leggatt J said that there was no need for English law to abandon its characteristic “case by case” approach to accommodate the principle of good faith in contractual performance, but IAO he goes very far in arguing for the recognition more generally of an implied term requiring good faith so as to reflect the expectations of the parties, which would not reflect the incremental approach. - Leggatt J said that such a term would not be an illegitimate restriction on the freedom of parties to pursue their own interests because “the essence of contracting is that the parties bind themselves in order to cooperate to their mutual benefit”. However, IAO many English lawyers would say that the “essence of contracting”, and freedom of contract, includes the right for parties to pursue their own interests and does not require them to cooperate for their mutual benefit. Introducing standards like “improper”, “commercially unacceptable” and “unconscionable” is bound to create uncertainty, so much so that when EU law introduced such an open-textured approach in B2C contracts, it provided three examples (misleading actions, misleading omissions, aggressive commercial practices) and a black-list. Using implied terms to give effect to good faith would surprise most civil lawyers (who would say that you can’t exclude the application of good faith). But Leggatt J said that parties could modify the scope of the duty or even exclude it (though it is hardly conceivable that they would).

Answer 45

- The crucial variable as to where on the spectrum of good faith something falls is not duration of contract, but where on the spectrum it falls between market (less good faith) and organization (more good faith): o Market = contracts between parties with antagonistic interests, each seeking to gain at the other’s expense o Organization = network of contracts that bind the parties together, where cooperation is required to maximize the joint profits to be distributed according to the contractual formula The suggestion in Yam Seng that the authority of Walford can be confined to cases of negotiation is not beyond challenge, and subsequent cases haven’t resolved the matter…

Answer 46

- Jackson LJ (on Yam Seng): there is no general doctrine of good faith in English contract law, but a duty of good faith may be implied by law as an incident of certain categories of contract. However, while an express duty of good faith in performance is enforceable, such a duty will not be implied in fact (thus does not support Leggatt J’s proposition that good faith duty can be implied in fact) - Jackson LJ (on implied term in discretions): o In The “Product Star” the charter-party provided that the vessel should not be required to proceed to any port which the master or owners in their discretion considered dangerous. The owner exercised the discretion, CoA held that this was a breach of contract: ♣ “Where A and B contract with each other to confer a discretion on A, that does not render B subject to A's uninhibited whim. Not only must the discretion be exercised honestly and in good faith, but it must not be exercised arbitrarily, capriciously or unreasonably.” o In Horkulak the claimant’s contract of employment entitled him to a discretionary bonus. The Court of Appeal held that the lost bonus should form part of the damages. It was an implied term, based on the common intention of the parties, that there would be a genuine and rational exercise of the discretion by the employer. o An important feature of the above line of authorities is that in each case the discretion did not involve a simple decision whether or not to exercise an absolute contractual right. The discretion involved making an assessment or choosing from a range of options, taking into account the interests of both parties. In any contract under which one party is permitted to exercise such a discretion, there is an implied term. Such a term is extremely difficult to exclude, although I would not say it is utterly impossible to do so. o However, in this case, there is no such implied term because the express terms of the contract merely confer on the party a discretion to decide whether or not to exercise an absolute contractual right. There is no need for an implied term to make the clause work.

Answer 47

- Express duty of good faith: o Express term of a contract that requires the parties to act in good faith in performing the contract definitely enforceable (Mid Essex Hospital) o Express dispute resolution clause in an enforceable contract that requires the parties to seek to resolve a dispute in good faith enforceable (Emirates Trading Agency) o Express obligation to negotiate in good faith ? ♣ Courts can build upon the previous cases to enforce such obligations ♣ But on the other hand Walford v Miles might stand in the way of this - Implied duty of good faith: o Yam Seng said that courts should imply a duty in the performance of contracts in the appropriate case, but subsequent cases have been reluctant to do so because: ♣ Of the substantive content of the term, which makes it inconsistent with the arm’s length nature of the relationship between the parties but unlikely that Leggatt J envisaged implying an onerous duty; it is merely to give effect to parties’ intentions so can just be honesty… It seems like his intention was more to promote and protect expectations of honesty and encourage adherence to standards of commercial dealing generally accepted in the market place. ♣ Of any inconsistency with the express terms of the contract, ex. by cutting down the scope of an express obligation or to render redundant other clauses of the contract

Answer 48

- Norris J: Yam Sen is not authority for the proposition that parties in commercial contracts may be presumed to intend a general obligation of good faith; there will generally be an implied term not to frustrate the purpose of the contract, but no routinely implied term to subordinate its own commercial interest to those of the other party.

Answer 49

- The law of contract is predicated upon these two notions of freedom: the positive freedom of contract, which means that the parties are free to create a binding contract reflecting their free will, and the negative freedom of contract, which means that the parties are free from obligations so long as a binding contract has not been concluded. - As to the positive freedom of contract, this principle means that the formation of a contract and the selection of its terms are the result of the free will of the parties. The crucial question: when is a contract considered as a product of the free will of the parties?2 - The freedom to act in the bargaining process is limited: the contracting party is not allowed to act so as to frustrate the pre-conditions for the existence of freedom of contract. - It should be stressed, however, that not every difference between the parties calls for the intervention of the law. Violence and fraud are incompatible with freedom of contract, but what about economic or emotional compulsion, non-disclosure of a material fact? - The determination of the prerequisites guaranteeing the positive freedom of contract ‘already implies a judiciary enforced redistribution of advantages from the strong to the weak’3 and raises doubts and controversies as to its scope. A system which recognizes a principle of good faith in the bargaining process is likely to broaden the minimal pre-conditions guaranteeing freedom of contract.

Answer 50

- So long as a contract has not been concluded, the contracting parties are free to withdraw. According to this reasoning, if they are not contractually bound (and have not committed any tort), why should they be bound at all? ‘By permitting liabilities to arise before agreement has been reached, the courts sense a danger that this would amount to the imposition of liability without consent’6 - But strict adherence to freedom from contract might transform it into a freedom to manipulate the rules of the game. Freedom of action which is the underlying idea of freedom of contract may be abused (by inducing reliance and then reneging a (non-contractual) promise) - The duty of good faith is likely to limit the negative freedom from contract and the possibility of abusing the contractual rules of the game. It means a rejection of the adversarial approach which characterizes the position of the negotiating parties in English law.11

Answer 51

- The difference between the systems is not as wide as might initially appear; while Continental systems have adopted a broad principle of good faith, English law prefers piecemeal solutions to existing problems, which end up imposing liabilities on contracting parties while a contract has not been concluded: o Promissory estoppel, which is a hybrid creature, comprising elements of contract (promise) and tort (reliance). o Restitution to recover benefits transferred in the expectation that a contract would be concluded. o Collateral contract theory,19 which might treat a pre-contractual promise as a contractual one, antecedent to the principal contract and sometimes operating along it. o Postal acceptance. o Law of torts (esp. negligence) might be applied as well to impose pre-contractual duties. - The principle of good faith postulates an a priori limitation of freedom of action in the bargaining process. On the other hand, the position of English law is just the opposite: it is an a priori assumption of freedom in the bargaining process, subject to special rules imposing liability. - Limits on freedom of action during negotiations might be well justified: o Commercial contracts require complicated and lengthy negotiations. The parties should not always bear their own expenses. When, in the course of negotiations, trust is being built and consequently expenses are incurred, the rule of freedom should be substituted by another rule of risk allocation

Answer 52

- From the point of view of the injured party, we can say that the two notions of freedom correspond to two types of defects in the bargaining process that frustrate the party’s expectations: o defect in the will of the contracting party and occurs when one party makes a contract as a result of a mistake, misrepresentation, duress or undue influence good faith doesn't really play a role o breach of a promise given or expectation created in the course of negotiations good faith plays major role - The freedom to enter into a contract also implies the freedom not to do so. The English rule would, in principle, exempt a negotiating party from liability for breaking off negotiations (≠good faith systems) - But what would be the approach of English law with regard to a contract which attempts to regulate the process of negotiations? Does English law allow for a positive contractual limitation on the negative freedom from contract? What would be the position of such a contract in a system rejecting a general duty of good faith in the negotiation process? o Walford v Miles,37 ♣ Facts: Owners of a photographic processing company wished to sell their company. They were negotiating with a third party. Shortly afterwards they received an offer from the plaintiffs. They agreed in principle to sell the business to them. In a phone conversation it was also agreed that, if on a certain date the plaintiffs provided a comfort letter from a bank, the vendors ‘would terminate any negotiations with a third party’. The plaintiffs duly provided the comfort letter within the time specified, and the defendants confirmed in letters that, subject to a contract, they agreed on the sale. But several days later the defendants withdrew from the negotiations and decided to sell the business to the third party for the same price. The plaintiffs claimed damages for misrepresentation in continuing to deal with the third party (and got damages for it representing wasted expenses). The controversy related, however, to the contractual cause of action. The plaintiff claimed that the vendors broke a collateral contract, which imposed on them a positive duty to negotiate with them in good faith, and a negative duty not to negotiate with third parties. ♣ The consideration for that undertaking was the supplying of the comfort letter by the plaintiffs. They determined their loss as a result of the breach to be £1 million, ie the difference between the contract price and the present value of the company. ♣ The trial judge ruled that the vendors broke the collateral contract and ordered that the damages for the loss of opportunity be assessed. ♣ The Court of Appeal, by a majority (Dillon and Stocker LJJ), allowed the appeal, holding that the action relied only on an agreement to negotiate which was unenforceable under English law. Bingham LJ, who dissented, held, however, that the vendors broke the negative agreement not to deal with third parties. ♣ The House of Lords affirmed the Court of Appeal's position. Lord Ackner, who rendered the judgment, held that the cause of action failed on both grounds: the positive ground failed, because an agreement to negotiate was not binding under English law for lack of certainty; the negative cause, not to deal with others, failed because it did not specify any time limit.

Answer 53

- Indeed, the apprehension regarding a contract to negotiate may be justified. It seems quite difficult to assess the propriety of the causes of the breakdown of the negotiations49 Some may be legitimate. - A system which has never built the common law notion of good faith into negotiations might feel unable to fill gaps in a contract predicated on the notion of good faith. - On the basis of the elaboration of an already existing duty of good faith in negotiations (in other jurisidcitons, it is easy to give an effect to an express contract to negotiate in good faith, and possibly also to such an implied contract. o French law: by virtue of tort law, the parties are subject to a duty to negotiate in good faith,53 but once the negotiations have attained a mature stage, the parties are subject to a ‘contractual obligation … to continue to negotiate in good faith. This obligation is sometimes express, but most often implicit in the structure of the preliminary dealings. It prevents parties putting up unacceptable proposals with the aim of … causing a break-off of negotiations, or of merely pretending to negotiate seriously, while in fact he has decided to deal with a competitor, it compels him to work towards the reaching of a definite decision within a reasonable period’

Answer 54

- Walford: a lock-out agreement may be valid, but it is ineffective if it does not specify any time limit. o Bingham LJ (dissenting): the agreement not to deal with others should be construed as binding the vendors for such time as was reasonable. o Lord Ackner: the construction which Bingham LJ had suggested would again impose indirectly on the vendors a duty to negotiate in good faith, a duty not recognized in English law.73 - In contrast to the contract to negotiate, the content of the duty in the lock-out agreement was clear and so was its breach. There was no need for assistance from the standard of good faith so the objection raised by Lord Ackner against its enforceability is not convincing. - The reluctance of the court in Walford could be explained by reference to the classical will theory: if a contract is supplemented by the court, the contract no longer derives from the parties' agreement, but from the position adopted by the court. - However, the concept of freedom of contract is prejudiced in either solution: the total rejection of a contract is more harmful to the free will of the parties than the introduction of supplementing elements to a contract whose main features had already been agreed upon (which is why we have implied terms) - Indeed in this case there is no problem: o The trial judge held that there was an intent to conclude the deal as soon as possible after 6 April (because it took the transaction into the next financial year), so could have implied reasonable time after 6 April. o Even if the parties were to determine for themselves the reasonable time limit,87 they could not have exempted themselves from liability, as the breach occurred from the very beginning of the contract and it was certainly within the reasonableness limitation. - Principle of validity applied by the Court of Appeal in Pitt v PHH Asset Management Ltd: o Facts: Pitt was competing with a third party for the purchase of a residential property. His final bid of £200,000 was accepted by the vendor, acting through an agent, subject to contract. The third party increased her offer to £210,000. The vendor was informed that the acceptance of his offer was withdrawn. Pitt told the vendor's agent that he would seek an injunction to prevent the sale to the third party; alternatively, that he would tell that third party that he was withdrawing and that she could lower the price and also that he could exchange as quickly as the agent wished. Consequently an oral agreement was reached between Pitt and the vendors whereby the vendor would stay with Pitt's offer and that he would not consider any other offer provided Pitt exchanged contracts within two weeks of its receipt. Pitt sued for damages for breach of the oral agreement. o Held: the agreement was enforceable. The parties had reached a lock-out agreement, whereby the vendor would not negotiate with anyone for the period of two weeks following Pitt's receipt of the draft contract. The consideration = Pitt did not sue for an injunction; would not cause trouble with the third party; and agreed to exchange contracts within two weeks. - But consideration raises problems: if Pitt did not have any substantive cause of action, how could his promise not to sue be regarded as valid consideration? Is a nuisance value good consideration? And if a promise to contract is not binding on each party, how could the agreement to exchange contracts be regarded as consideration being based on an invalid promise? It seems that the court applied a rather loose concept of consideration in order to give binding force to the lock-out agreement.91 - By relaxing the element of consideration, the court has broadened the ambit of contractual liability, and opened the gate for the recognition of binding promises given during the negotiation. EXAM POINT Relaxing the concept of consideration to impose pre-contractual liability – this means that consideration is necessary in order to shield parties from too great extent of liability where they haven’t yet entered into a contract, and thereby to preserve their (negative) freedom to contract. - Parties to negotiations now have to be more cautious. A promise supported by consideration in its broader sense might give rise to a contractual liability. Consequently, the borderline between negotiations and contract has been blurred to some extent.

Answer 55

Rules and standards - The creation of a contract is governed by fixed rules dictated by the law (certainty, consideration, formalities…). - A system based on the duty of good faith in negotiations will impose pre-contractual duties which will mitigate the harshness of the formal rules. Good faith is a standard which might override the formal rules. In English law, equity has been used similarly ‘to mitigate the rigours of strict law’.108 o Lacking the tradition of a good faith system, English law has shown a reluctance to be assisted by this standard as a means to subdue the formal rule. By preserving the governance of rules, English law has thus reinforced the values of certainty and security111 and undermined those of co-operation and solidarity, regarded as the underlying values of modern contract law.112 o Indeed, Professor Atiyah is of the opinion that since 1980 there is a post-modern return to the classical principles ♣ Walford exemplifies such a trend: it made use of classical contract law by adhering to rules (certainty and definiteness) and the rejection of standards (good faith, reasonableness). ♣ But Pitt v PHH Asset Management Ltd goes in another direction. It relaxed the element of consideration so as to give binding force to promises inducing reliance given during negotiations. Such construction might pave the way for the validity of irrevocable offer and other agreements made during negotiations, hitherto considered nudum pactum, provided they are supported by the required meager consideration.

Answer 56

- Breach of a promise which amounts to misrepresentation promisor is bound by promise and must compensate innocent party’s reliance. Good faith and English law reach the same result – parties cannot manipulate the rules - Without misrepresentation promisor is not bound by promise, even if it induced reliance. o Promise to negotiate in good faith wholly ineffective o Non-specified lock-out agreement wholly ineffective o Mere promise unsupported by consideration wholly ineffective - Although the formal application of consideration is less rigorous than that of certainty in the sphere of negotiations, reliance has not yet become an explicit substitute for consideration, and liability based on promissory estoppel has not yet substituted conventional contractual liability. where no misrepresentation is involved in the negotiations, the barriers to the freedom to manipulate with the rules are lower than those obtaining in a good faith regime.

Answer 57

- Excluding purely contractual obligations (ex. fitness for purpose in Sale of Goods) - Excluding tort liability (ex. liability for damage to goods in bills of lading) - May be partial

Answer 58

- It is wrong in principle to take away or reduce a person’s legal rights but (i) legal rights might be designed to serve as “default” terms meant to work well in most cases but users can modify when they don’t work, and (ii) there are substantive reasons that parties may incorporate such clauses (ex. allocation of responsibility for insurance, so that someone doesn’t have to pay twice for insuring the same thing) - Exemption clauses are often forced on unwilling parties in “take it or leave it” contracts indeed historically, exemption clause are often found in non-competitive markets, but (i) why are exemption clauses in particular subject to judicial hostility (and not, ex., contract price, which surely must be more dangerous because why would you even bother with exemption clauses if you can set whatever price you’d like), and (ii) exemption clauses are also commonly found in perfectly competitive markets. - Less experienced contracting parties frequently fail to understand the full significance of exemption clauses so are more likely to agree to unreasonable exemption clauses than other unreasonable clauses (ex. price) but (i) commercial parties are usually fully aware of what they are agreeing to, (ii) there are good commercial reasons, (iii) consumers today are often very sophisticated about them too and even unsophisticated consumers know that if they buy something at very cheap prices they are not likely to receive the same guarantees as expensive stuff.

Answer 59

- Allowing aggrieved party to sue in tort someone other than the contracting party (or use the 1999 Act) - Interpretation devices, but unsatisfactory: o The devices don’t distinguish between reasonable and unreasonable exemption clauses o The devices can’t refuse to enforce clear language - Thus, what was needed was substantive power to override unreasonable clauses on the ground that they are unreasonable UCTA and UTCCR. o These led courts to modify the way they approach interpretation of exemption clauses. o However, unfortunately HL also appears to have endorsed the distinction between exemption and limitation clauses (Ailsa) meaning that the former seems to require a stricter interpretation.

Answer 60

- Problems are now less severe than following WWII: (i) industry became more competitive, (ii) consumers are more sophisticated and knowledgeable (and powerful). This means that the paternalistic arguments in old cases should be treated with caution

Answer 61

If the terms are not incorporated they will be unenforceable (ex. In Poseidon v Davies, the standard terms were only printed on the back, with a proviso on the front saying that the conditions were on the back, but the back was not faxed to the contracting partner so C was unable to rely on the term).

Answer 62

Considers whether there are any principles underlying the courts’ decisions on issues where the contract is not wholly reduced to writing, especially the relevance of bargaining positions at the time of contracting.

Answer 63

where there is no formal written contract but one party claims that the contract includes a term on a written notice, the basic rule is that the party will be successful if he takes reasonable steps to bring the term to the other party’s attention. - The principle emerging from Harris v Great Western Railway is that as long as A gave B the chance of seeing the written term, and A actually and reasonably believed that B agreed, then B’s agreeing to the contract means A is entitled to hold B to the written term. - The content of the term will be relevant to its incorporation because the more onerous the term, the less reasonable to assert that B can be taken to have assented without attempt to draw it to B’s attention (ex. Interfoto) - The relative positions of the parties is clearly relevant – if they are of equal bargaining power and in the same trade, it may be possible to imply terms standard in the trade (British Crane Hire).

Answer 64

- NB a contracting party who doesn’t understand the language of the written document which he signs is still bound by it (The Luna – master of a Dutch shipping vessel didn’t speak English but signed a contract in English without attempting to read it or ask any questions about it – held that he was bound). Rationale of the signature rule = limit the circumstances in which the binding effect of a signature can be avoided. Signatures are evidence of the party’s agreement to the contract, so that one party should be allowed to rely on the other’s signature (except if procured by their fraud or misrepresentation). There is also good reason for not allowing a party to escape a contract merely because he failed to read it.

Answer 65

both can be explained in relation to the objective test in Smith v Hughes – the question in each case is whether it is reasonable for one party to take the other party as having assented to the term. In incorporation cases, it will be reasonable if there is sufficient notice, and no actual knowledge on the part of A that B didn’t agree. In signature cases, a signature is prima facie binding because it induces the other party to rely on it, but if the other party is at fault (fraud/misrepresentation) then he can’t.

Answer 66

Signing the document means being bound by the terms, even if one didn’t read it.

Answer 67

- Facts: C bought a machine from D and signed a sales agreement excluding liability for any implied warranties. The machine did not work satisfactorily and C claimed that it was not fit for purpose. D sought to rely on the exclusion clause. C argued that she was induced to sign the contract by the misrepresentation that it was an order form, and that she knew nothing of the conditions. - Held (County Court): D could not rely on the clause because they had not done what was reasonably sufficient to give C notice of the conditions. - Held (CoA), allowing the appeal: that C had not been induced to sign the contract by any misrepresentation, and was bound by her signature to all the terms of the contract, including the exclusion clause.

Answer 68

o The question was whether the exclusion clause formed part of the contract; if so, it excludes any condition or warranty. County Court referred to railway passenger and cloak-room cases, but they have no application when the document has been signed. In such a case, absent fraud or misrepresentation, the party signing it is bound whether or not she has read it. o [After finding that there was no evidence of fraud or misrepresentation] She signed the document and not having been induced to do so, cannot escape being bound by the terms because she had not read them.

Answer 69

o I regret the decision to which I have come, but I am bound by legal rules and cannot decide the case on other considerations”. o The material question is whether there was a contract in writing between C and D. The document set out certain terms and conditions in regrettably small print but quite legible, and she cannot escape the terms if she signed it. o But there are two possibilities: ♣ Non est factum - didn’t work in this case because even if she was told it was an order form, she cannot say that it did not affect her because she did not know its contents ♣ Misrepresentation – didn’t work in this case because (i) the fact that C didn’t know the conditions the document contained cannot avail her of the fact that it was a signed document in writing, and (ii) there is no evidence that she was in fact assured that it was an order form, even if such an assurance can be interpreted as a representation that it contained no exclusion clauses.

Answer 70

1º CoA thus recognizes that the rule that one is bound by their signature is not absolute: - Non est factum (narrowly confined defence where a party can deny that the document he signed is his deed because he was unable, through no fault of his own, to have any real understanding of the document) - Misrepresentation (as in Curtis v Chemical Cleaning) - The document signed must be one that purports to have contractual effect and not an administrative document (like a time sheet in Grogan v Robin Meredith)

Answer 71

- Facts: C took a dress to D for cleaning, and was asked to sign a document with an exclusion clause (excluding liability for any damage however arising). Before signing, C asked why she was signing it, and was told that it was because D did not accept liability for damage done to the beads or sequins of the dress. C then signed it without reading. When she got the dress back it had a stain on it, and D sought to rely on the clause. - Held (CoA): D could not rely on the clause because of the representation made before C signing the document.

Answer 72

o Any behaviour by words or conduct is sufficient to be a misrepresentation if it is such as to mislead the other party about the existence or extent of the exemption – enough to create a false impression (unknowingly = innocent misrepresentation; knowingly = fraudulent misrepresentation) – either is sufficient to disentitle D from the exemption. o When one party puts forward a form for signature, failure to draw attention to the existence/extent of an exemption clause may in some circumstances convey the impression that there is no exemption at all (or not such a wide exemption). This is true in the present case. o Thus in this case failure to draw attention to the width of the exemption clause created a false impression that the exemption related to beads and sequins only. Thus they cannot rely on the exemption except for beads and sequins. EXAM POINT But the normal rule for misrepresentation is that the contract is voidable so the innocent party can elect to either rescind it completely, or go ahead with the contract as it is. The court has no jurisdiction to enforce certain terms of the contract only. However, using the misrepresentation to reinterpret the scope of the exclusion clause seems to undermine this – why should the rules governing misrepresentation be different simply because it relates to an exclusion clause? 2º Now UCTA would regulate the term, and at the time courts didn’t have the power to strike down exclusion clauses for unreasonableness/unfairness. Thus any criticism of L’Estrange based on the unfairness of the result can be met with argument that giving courts such a power is the best way to deal with the situation. 3º Some argue that the CoA was not in fact bound by authority (≠ Maugham LJ’s suggestion) because of the objective approach to see whether the parties have reached agreement:

Answer 73

- Facts: C took a dress to D for cleaning, and was asked to sign a document with an exclusion clause (excluding liability for any damage however arising). Before signing, C asked why she was signing it, and was told that it was because D did not accept liability for damage done to the beads or sequins of the dress. C then signed it without reading. When she got the dress back it had a stain on it, and D sought to rely on the clause. - Held (CoA): D could not rely on the clause because of the representation made before C signing the document.

Answer 74

- The rule in L’estrange v Graucob appears to be founded on the objective theory of contracts, but even accepting that theory, an essential part of the test is whether the other party entered into the contract in the belief that D was assenting to all the terms. In this case C knew that D had not read the entire document, so cannot rely on provisions which it had no reason to believe were being assented to by D. - Only a reasonable expectation that the signature is a manifestation of assent can be protected; in ordinary commercial life this will usually be the case, but in modern commercial practice, many standard form printed documents are signed without being read, and many parties seeking to rely on the terms know or ought to know that the signature of the other party does not represent the true intention of the signer and is unaware of the stringent provisions. In such circumstances, the party cannot rely on the term unless he has taken reasonable measures to draw it to the attention of the other party, and in the absence of such measures, the other party need not prove non est factum, misrepresentation or fraud. English courts have not yet adopted such a wide exception, because of the significance attached to a signature:

Answer 75

- The rule in L’estrange v Graucob appears to be founded on the objective theory of contracts, but even accepting that theory, an essential part of the test is whether the other party entered into the contract in the belief that D was assenting to all the terms. In this case C knew that D had not read the entire document, so cannot rely on provisions which it had no reason to believe were being assented to by D. - Only a reasonable expectation that the signature is a manifestation of assent can be protected; in ordinary commercial life this will usually be the case, but in modern commercial practice, many standard form printed documents are signed without being read, and many parties seeking to rely on the terms know or ought to know that the signature of the other party does not represent the true intention of the signer and is unaware of the stringent provisions. In such circumstances, the party cannot rely on the term unless he has taken reasonable measures to draw it to the attention of the other party, and in the absence of such measures, the other party need not prove non est factum, misrepresentation or fraud. English courts have not yet adopted such a wide exception, because of the significance attached to a signature:

Answer 76

- The signature is widely recognized as a formal device, and its value would be greatly reduced if it could not be treated as a conclusive ground of contractual liability in ordinary circumstances. Indeed the rule in L’estrange “underpins the whole of commercial life” so that “any erosion of it would have serious repercussions” (Peekay, CoA). However, not sure whether courts will treat electronic signatures as counting as a signature for this purpose, or whether the court would adopt the approach in Clendinning. But the HCA followed L’Estrange in e-signature cases (Toll v Alpapharm) subject to its existing exceptions, and IAO this is the better approach (if necessary, can give courts greater power to deal with unreasonable terms).

Answer 77

|*Olley v Marlborough Court Ltd [1949] 1 KB 532

Answer 78

- Exemption clause inside a car park was ineffective because (i) D had not taken reasonable steps to bring the clause to the attention of the customer and, per Lord Denning, (ii) it was too late to be incorporated into the contract because the contract was concluded upon entry into the car park so that terms inside the carpark and those printed on the ticket were too late. - Lord Denning: the customer pays and gets a ticket; he cannot refuse it nor get his money back. He is committed beyond recall from the moment he put his money into the machine (at which time the contract was concluded). Thus, the offer was when the machine owner holds it out as being ready to receive the money, and acceptance when the customer puts the money in. The terms of the offer are those on the notice near the machine stating what is offered for the money, and the customer is bound by those terms (as long as they are sufficiently brought to his notice). He is not bound by the terms on the ticket because it comes too late.

Answer 79

Thus, terms contained in a receipt and not contractual document are ineffective.

Answer 80

- A ticket given to someone who hired a deckchair was held not to be effective to give notice of terms, because it was a “mere receipt” and could not be expected to contain contract terms.

Answer 81

- Facts: C deposited his back in D’s cloak-room, paid, and received a ticket. The ticket says “see back”, and the back has an exclusion clause for lost bags. A legible placard is hung up in the cloak-room with the same conditions. The bag was lost. C claimed damages and argued that he did not see the placard nor read the ticket because he thought it was only a receipt. The judge asked the jury (i) whether C knew of the special condition and (ii) whether C was under an obligation to read the condition. - Held (CoA): new trial because of misdirection by the judge as to the second question, which should have been whether what the company did was reasonably sufficient to give C notice of the condition. Bramwell LJ further thought that this was a question of law and that judgment ought to be entered for D.

Answer 82

- D wanted some photographs and telephoned C to enquire whether they had any suitable photos. C said they would look into the matter, and later the same day, sent a bag of transparencies to D together with a delivery note containing (i) the due date and (ii) several terms printed prominently, including a very onerous holding charge for late return. D then telephoned C to say that some of the transparencies might be of interest. After the due date, C attempted to telephone D twice but could not get through, and the transparencies were returned late. C sent an invoice to D for the £3800 holding charge. - Held (CoA): The term (ii) had not been incorporated into the contract.

Answer 83

o The condition was very onerous – D could not conceivably have known, if their attention was not drawn to the clause, that C charged a holding fee. Hardly anyone read the printed conditions on tickets or delivery notes, and these conditions have gotten more and more complicated and one-sided in favour of the party imposing them. o In ticket cases there was already a requirement to take reasonable steps to draw the other party’s attention to the condition (Thornton v Shoe Lane), and it is a logical development of the common law that if one condition in a set of printed conditions is particularly onerous or unusual, the party seeking to enforce it must show that the condition was fairly brought to the attention of the other party. o In this case the condition was merely one of a series of conditions and nothing was done to bring it to the attention of the other party.

Answer 84

o In many civil law systems the law of obligations recognizes an overriding principle that making and carrying out contracts must be in good faith. It means more than not deceiving each other; it means a principle of fair and open dealing. Fairness would have required C to point out to D the high price payable. o English law has no such overriding principle, but has developed piecemeal solutions in response to demonstrated problems of unfairness (unconscionable bargains, exemption clauses, certain classes of contracts require good faith…). Sufficiency of notice cases should be treated in this context because they are concerned with two things: ♣ Contractual analysis – whether A has done enough to give B notice of the incorporation of the term ♣ Fairness – whether it would in all circumstances be fair or reasonable to hold a party bound by a particular condition of an unusual and stringent nature o In Parker v South Eastern Railway, Mellish LJ said: ♣ We cannot lay down, as a matter of law, either that the plaintiff was or was not bound by the conditions printed on the ticket, from the mere fact that he knew there was writing on the ticket, but did not know that the writing contained conditions. • There may be cases where it would be quite reasonable that the party receiving it should assume that the writing contained in it no condition, and should put it in his pocket unread. • The railway company must be entitled to make some assumptions respecting the person who deposits luggage with them (that he can read, understands English, and pays such attention as may be reasonably expected of someone depositing luggage) • The railway company must, however, take mankind as they find them: o if what they do is sufficient to inform people in general that the ticket contains conditions, a particular plaintiff ought not to be in a better position than other persons on account of his exceptional ignorance or stupidity or carelessness. o if what the railway company do is not sufficient to convey to the minds of people in general that the ticket contains conditions, then they have not obtained their consent. o Baggallay L.J.'s analytical approach was somewhat similar: ♣ A plaintiff would be bound by a term if: • At the time when a plaintiff accepted the ticket, he, either by actual examination of it, or by reason of previous experience, or from any other cause, was aware of the terms • He was aware or had good reason to believe that there were upon the ticket statements intended to affect the relative rights of himself and the company, but intentionally or negligently abstained from ascertaining whether there were any such, or from making himself acquainted with their purport. ♣ But in the absence of any such knowledge or information, or good reason for belief, he would not be under any obligation to examine the ticket with the view of ascertaining whether there were any such statements or conditions upon it. o Bramwell L.J. said: ♣ Does it make any difference that Cs didn’t know of the terms? (No – they were bound either way) • The plaintiffs knew of the printed matter, and that it concerned them in some way (though they did not know what it was) • Neither C knew or believed it was not the contract or that it had nothing to do with the business in hand (ex. it was an advertisement or other matter unconnected with his deposit of a parcel at the defendants' cloak-room). • They knew it might be the contract though they didn’t know it was. They did not think, and how claim to charge the company and to have the benefit of their own indifference. • This is not just or reasonable – one is not allowed to think, judge, guess or chance a matter without informing himself when he can and then claim a duty on another party, which he wouldn’t be able to claim had he informed himself properly. ♣ However, one would not be bound if there were some unreasonable condition and the party tendering the document didn’t insist on its being read, because there is an implied understanding that there is no unreasonable condition to the knowledge of that party and not insisting on it being read. o This is not a simple contractual analysis whether an offer has been made and accepted; all three judges considered questions of fairness. o In Spurling v Bradshaw Denning LJ said: ♣ The more unreasonable a clause is, the greater the notice which must be given of it. Some clauses would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient. o Thus, what would be good notice of one condition would not be notice of another. The reason is that the more outlandish the clause the greater the notice which the other party, if he is to be bound must in all fairness be given. o Therefore, the tendency has been to look at the nature of the transaction and the character of the parties, to consider what notice the party was given and resolve whether in all circumstances it was fair to bind him.

Answer 85

o In this case the contract was only concluded upon receipt of the delivery notice, and insofar as the terms displayed were common form or usual terms regularly encountered in this business, D cannot intend that they were not incorporated into the contract. But (i) C delivered 47 transparencies, which was a number D didn’t ask for, and (ii) imposed an exorbitant rate per transparency for late return. Thus, C did not do what was necessary to draw this unreasonable and extortionate clause fairly to D’s attention, and D would not be bound. 1º The focus is not on the recipient of the notice (and whether they read it or not or did what was reasonable to discover its existence), but on whether the other party did what was reasonable to bring the term to the recipient’s attention. 2º Relevant factors include the location and prominence of the notice (so that notice on back of a document unlikely incorporated unless the front alerts it (Henderson v Stevenson)), but it is not a technical exercise but depends on the nature of the term and the party attempting to enforce. 3º But why should what D must do depend on how onerous the term is? If the court is concerned about the unfairness of the term itself shouldn’t it be given more power to regulate unfair terms? 4º The term merely needs to be onerous or unusual (not both).

Answer 86

- Facts: C asked X to arrange for his car to be shipped. X took the car to D’s office where he paid the fare and was given a receipt. The ship sank due to D’s negligence and the car was lost. C brought an action in negligence against D and D sought to rely on an exclusion clause in their conditions of carriage. Usually, D would ask people sending goods to sign a risk note where they agree to be bound by C’s conditions, but on this occasion X was not asked to sign one. X gave evidence that he had shipped goods with D before and had sometimes been asked to sign one though he never read it. C, too, had shipped goods with D four times (three times for his employer and once a car for himself) and each time he had signed one. He knew of the existence of the conditions but didn’t know their content. - Held (HL): the exclusion clause was not incorporated into the contract.

Answer 87

o If two parties have made a series of similar contracts each containing certain conditions, and then make another without expressly referring to these conditions, it may be that these conditions ought to be implied if, had a bystander asked them if they intended to leave out the conditions this time, both would in all honesty have said “of course not”. o But in this case there was no consistent course of dealing: (i) C was sometimes asked to sign and sometimes not, and (ii) didn’t know what the conditions were, and (iii) this time was not referred to the conditions and accepted the offer in good faith. o D sought to rely on C’s knowledge, but cannot because in the previous cases C was contracting on behalf of his employer and shipping different goods, so cannot be said that he knew there would be some special term.

Answer 88

o All that can be inferred from the previous dealing was that C knew that D’s previous practice was to impose special conditions, but knowledge could not by itself import acceptance of these conditions (the exact terms of which they were unaware) into a contract different in character from the previous contracts.

Answer 89

o Previous dealings (whether three or 99) would not assist unless they prove knowledge of the terms (actual not constructive) and assent to them. If this is proven, then it may or may not be sufficient to justify importing the same knowledge and assent into the 100th contract (depending on the circumstances).

Answer 90

o It is the consistency of a course of conduct that gives rise to the implication that in a similar circumstance a similar contractual right would follow (whereas here D was seeking to establish an oral contract by a course of dealings that always insisted on a written contract) o D sought to rely on C’s knowledge, but this is not a case of bad faith (if C deliberately snatched at an offer that he knew was not intended or took advantage of D’s omission, things would be different). o D sought to rely on the fact that had X been made to sign a form, he wouldn’t have read it anyway so that they should be bound even though they didn’t sign it (because they would have been bound had they signed it). But to take advantage of the reasoning in Parker, D has to take the necessary legal steps. Otherwise would be to extend the benefits to D of the ticket cases, which is very undesirable.

Answer 91

1º Course of dealing requires both consistency and regularity: - Lord Guest and Lord Pearce emphasized the written/oral contract distinction, but IAO this should not be decisive because where parties rely on a course of dealing it is generally because they failed to comply with their standard practice (so that if this failure negative the consistency of dealing, it would almost never work) - Thus IAO Lord Reid’s approach is better (the past practice was itself inconsistent) 2º This is difficult to establish between consumer and business:

Answer 92

- Facts: C brought an action for damages against D, with whom C left his car for repairs. D sought to rely on an exclusion clause contained in an invoice, which had been signed by C on at least two previous occasions, but was not signed this time. He had D repair his car three or four times in the last five years. - Held (CoA): “not quite one dealing a year” is not enough to constitute a course of dealing – a greater degree of regulatory is needed. But position may be different if the parties are in the same trade or industry:

Answer 93

- Facts: Ds hired a crane from C. Both were in the business of hiring out cranes. Given the urgency of the situation, the contract was reached over the phone, where they agreed on price but not the general conditions of hire. C sent the conditions to D but before D signed it the crane was damaged. There was a term in the general conditions that required D to indemnify C against such losses. - Held (CoA): C could enforce the term against D because D knew that such terms were standard use in the trade.

Answer 94

o D had hired cranes from C on two previous occasions and each was on a printed form setting out the same conditions as in this case. Thus there were only two transactions many months before, and these transactions were not known to D’s manager who hired the crane. “I doubt whether these two would be sufficient to show a course of dealing” o In Hollier v Rambler Salmon LJ held that there was no case where a course of dealing consisting at most of three or four transactions over five years could imply a term. But there, he was talking about private individuals who were not of equal bargaining power with the garage. o Here, however, both were in the trade and were of equal bargaining power. D themselves knew that firms in the trade always imposed conditions, and their conditions were on much the same lines. o It is clear that both parties knew that conditions were habitually imposed and the substance of these conditions. Thus, the conditions should be regarded as incorporated into the contract. This is not so much on the course of dealing, but rather on the common understanding, derived from the conduct of the parties, that the hiring was to be on the terms of C’s usual conditions. o Thus, in the circumstances where D requested the crane urgently and it was supplied at once, before the usual form was received, C was entitled to conclude that D was accepting it on the terms of C’s own printed conditions which would follow in a day or two.

Answer 95

In BCCI Lord Hoffmann said that abandoning the old baggage included the artificial devices to interpret exemption clauses, but one body of caselaw that is very difficult and may have survived is the interpretation of clauses excluding liability for negligence: - Canada Steamship v The King (1952): o Clause expressly exempts negligence effect must be given to the provision ♣ NB merely saying “loss however caused” or “damaged howsowever arising” is not enough – must use the word “negligence” or a synonym (Shell v O Roadtanks) o If no express reference to negligence ♣ Are the words wide enough to cover negligence? If doubt subsists, it must be resolved against the proferens. ♣ If yes, then can the head of damage be based on some ground other than negligence? If so, then even if prima facie the words are wide enough to cover negligence, the scope of the words will only cover the non-negligent ground(s). • i.e. this means that general words will only be effective if the only realistic loss likely to be suffered by C is loss due to negligence of D

Answer 96

- Facts: D damaged C’s car by fire, and sought to rely on a clause “not responsible for damage caused by fire to customers’ cars”. - Held (CoA): the clause had not been incorporated, but even if it had been, it did not as a matter of construction exclude liability for negligence.

Answer 97

o Well settled that a clause excluding liability for negligence should make its meaning plain on its face to any ordinary literate and sensible person. This doesn't mean that to be effective it must say “negligence”, but the language must be so plain that it clearly bears that meaning. o It would not be right to allow Ds to shelter behind language that might lull customers into thinking that they have a right of action in negligence. o In Rutter v Palmer (“customers’ cars are driven by your staff at customers’ sole risk”) was wide enough to cover negligence because any ordinary man knows that when a car is damaged it is not infrequently due to negligence of the driver, and that the garage would not be liable for damage to the car unless the driver were at fault. Thus, no sensible man could have thought that the words had any meaning except that the garage would not be liable for negligence of drivers. o In Alderslade v Hendon (“maximum amount allowed for lost or damaged articles is 20 times amount charged for laundering”) was wide enough to cover negligence because obvious that when a laundry loses or damages goods it is almost invariably because there has been some negligence on the part of the laundry. It is possible that the goods be stolen, but this is far-fetched. o However, in this case, fires start for a variety of causes only one infrequent cause of which is negligence on the part of the occupier. Thus, the ordinary person would not consider the words to exclude liability for negligence.

Answer 98

Canada Steamship cannot easily be set aside because it has been affirmed many times, and would take more than a few (implicit) lines in ICS to set it aside… But the relationship between this and ICS is uneasy because it can fail to give effect to the parties’ intention, in that it assumes that parties don’t intend to encompass more than one type of loss within the same clause, but surely this is the case if they use “howsoever caused”…

Answer 99

But support for a departure from ICS can be found in: - Facts: C engaged D to make security patrols. During one patrol, D’s employee started a fire to keep warm and burned the factory down. D relied on an exclusion clause: “under no circumstances” would they be responsible for “any injurious act or default by any employee” unless this could have been foreseen and avoided by the exercise of due diligence. - Held (HL): the clause was effective to shield D from liability because (i) no due diligence would have revealed the employee’s predilection, (ii) C only paid a small sum for D’s services, (iii) the service was limited and (iv) C could have insured more cheaply than D.

Answer 100

- Lord Diplock: a lot of cases with very strained constructions of exclusion clauses mainly between professionals and consumers, but need for this kind of judicial distortion has been abolished by UCTA. In commercial contracts between business-men capable of looking after their own interests, it is wrong to place a strained construction on words in an exclusion clause that are clear and fairly susceptible to one meaning only.

Answer 101

But the HL has reaffirmed Canada Steamship while emphasizing the need to give effect to parties’ intentions (HIH v Chase Manhattan, 2003). But CoA said (Mir v Morris, 2012) that Canada Steamship should not be applied mechanistically but is no more than guidelines. 2º There is authority that limitation clauses are interpreted less restrictively than exclusion clauses:

Answer 102

- Lord Fraser: Strict principles in exclusion clauses are not applicable in their full rigour for limitation clauses. They will still be read contra proferentem and must be clearly expressed, but no reason to judge them to the specially exacting standards for exclusion clauses. The reason for that standard is the inherent improbability that the other party intended it, but there is no such high degree of improbability in the case of limitation clauses, especially because the potential losses resulting from negligence of the proferens are so great in proportion to the sums that can reasonably be charged. Thus, it is enough that the clause must be clear and unambiguous.

Answer 103

- C ordered seeds from D. C knew that the sale was subject to the relevant conditions of sale, which provided (1) that if the seeds sold or agreed to be sold did not comply with the express terms of the contract or proved defective in varietal purity the liability of the defendant vendors was limited to their replacement or to refund of the price paid, (2) for the total exclusion of all liability for any loss or damage arising from the use of any seeds supplied save their replacement or price refund, (3) for the exclusion of any express or implied condition or warranty, statutory or otherwise, and they stated (4) that the price of seeds supplied was based upon the stated limitations upon liability. D supplied the wrong seeds and C planted it, and had to plough it in after germination. The seeds cost £200, and loss to C amounted to £61,000. - Defendants relied on the conditions of sale, which C claimed were void and unenforceable by section 55 (3) and (4) of the Sale of Goods Act 1893. - Parker J. held that it was making commercial nonsense of the contract to suggest that either party intended it to operate where what had been delivered was wholly different in kind from what had been ordered and agreed to be supplied and he gave judgment for the plaintiffs for £61,513 and interest.

Answer 104

o (a) that the conditions limiting liability did not apply to the contract ♣ Lord Denning dissented on this point (but dismissed the appeal on (b)) because • the language of the exemption clause was plain and unambiguous, and that it would have been apparent to anyone who read it that the breach was covered • the need to resort to devices giving exemption clauses tortured meanings was removed by UCTA. o (b) but that in any event they were unenforceable by virtue of section 55 (4) of the Sale of Goods Act 1979 in paragraph 11 of Schedule 1 to that Act.

Answer 105

o (1) that on their true construction the conditions limited the liability of the defendants to a refund of the price paid or replacement of the seeds and that the ambit of the conditions could not be confined to breaches of contract arising without negligence on the part of the defendants. o (2) But that in all the circumstances, including the fact of the clear recognition in the seed trade that reliance on the conditions would not be fair or reasonable and that the defendants could insure against crop failure without materially increasing the price of seeds, it would not be "fair or reasonable" within the meaning of section 55 (4) of the Sale of Goods Act 1979 in paragraph 11 of Schedule 1 to that Act to allow reliance on the conditions which were accordingly unenforceable.

Answer 106

o The judgments of the learned trial judge and of Oliver L.J. on the common law issue come dangerously near to re-introducing by the back door the doctrine of "fundamental breach" which this House in Securicor 1 [1980] A.C. 827 , had so forcibly evicted by the front. ♣ Oliver LJ applied the "peas and beans" or "chalk and cheese" cases (where it was held that exemption clauses do not apply where there has been a contract to sell one thing, e.g. a motor car, and the seller has supplied quite another thing, e.g. a bicycle). But this case is not a peas and beans case. The clause is unambiguous and includes both seeds sold and delivered. o Kerr L.J. applied the principles in Canada Steamship Lines Ltd. v. The King [1952] A.C. 192, but omitted that the very strict principles laid down in the Canada Steamship Lines case as applicable to exclusion and indemnity clauses cannot be applied in their full rigour to limitation clauses.

Answer 107

1) For the purposes of this Part of this Act, ‘negligence’ means the breach— (a) of any obligation, arising from the express or implied terms of a contract, to take reasonable care to exercise reasonable skill in the performance of the contract; (b) of any common law duty to take reasonable care or exercise reasonable skill (but not any stricter duty); (c) of the common duty of care imposed by the Occupiers’ Liability Act 1957. 1º This definition of negligence assumes that a duty of care has arisen, so technically an exclusion clause that denies the existence of a duty of care should not fall within its scope. However, courts have rejected this argument (Smith v Bush). 2º Both tortious and contractual negligence (breach of contractual duty to exercise reasonable care) are covered. Thus, it can apply to notices the purport to exclude liability, even in the absence of a contract. (2) This Part of this Act is subject to Part III; and in relation to contracts, the operation of sections 2 to 3 and 7 is subject to the exceptions made by Schedule 1. Certain contracts are excluded from the scope of the Act (insurance, land, intellectual property, companies…). Section 2(1) is excluded in employment contracts except in favour of employee. (3) In the case of both contract and tort, sections 2 to 7 apply (except where the contrary is stated in section 6(4)) only to business liability, that is liability for breach of obligations or duties arising— (a) from things done or to be done by a person in the course of a business (whether his own business or another’s); or (b) from the occupation of premises used for business purposes of the occupier; and references to liability are to be read accordingly [but liability of an occupier of premises for breach of an obligation or duty towards a person obtaining access to the premises for recreational or educational purposes, being liability for loss or damage suffered by reason of the dangerous state of the premises, is not a business liability of the occupier unless granting that person such access for the purposes concerned falls within the business purposes of the occupier. The Act only applies to attempts to exclude/restrict business liability; purely private contracts fall out of the scope. (4) In relation to any breach of duty or obligation, it is immaterial for any purpose of this Part of this Act whether the breach was inadvertent or intentional, or whether liability for it arises directly or vicariously.

Answer 108

(1) A person cannot by reference to any contract term or to a notice [s14] given to persons generally or to particular persons exclude or restrict his liability for death or personal injury [s14] resulting from negligence. 1º Applies to both contract terms and notices (defined in s14), and encompasses non-contractual notices. 2º Only applies to attempts to exclude liability for negligence, and not strict liability. 3º Only applies to exclusion/restrictions of liability, not transfers of liability from one party to another. (2) In the case of other loss or damage, a person cannot so exclude or restrict his liability for negligence except in so far as the term or notice satisfies the requirement of reasonableness [s2(2)]. (3) Where a contract term or notice purports to exclude or restrict liability for negligence a person’s agreement to or awareness of it is not of itself to be taken as indicating his voluntary acceptance of any risk. This prevents s2 protection from being outflanked by a party relying on the notice for the purpose of establishing volenti non fit injuria; if you want to rely on the defence you’ll need to establish more than C’s awareness of/agreement to terms of the notice. (4) This section does not apply to— (a) a term in a consumer contract, or (b) a notice to the extent that it is a consumer notice, (but see the provision made about such contracts and notices in sections 62 and 65 of the Consumer Rights Act 2015).

Answer 109

(1) This section applies as between contracting parties where one of them deals as consumer or on the other’s written standard terms of business. Only applies where one party deals on the other’s written standard terms of business 1º “Standard” terms are terms so regarded by the party that advances them, and that it should habitually contract in those terms. It is a question of fact whether it is habitually enough to be standard, and if on one occasion it is modified, whether the modification is enough that it is no longer standard (Chester v McAlpine). 2º Mere negotiation over the terms will not take you out of the scope, but if the negotiations lead to modification of standard terms, then much less likely that s3 is satisfied, especially if there are significant differences between the contract proffered and the one made. 3º It must be “the other’s” standard terms, which means that adopting the standard terms of a third party will not fall into s3 unless the contracting party has adopted that term as his standard terms of business either by practice or express statement (British Fermentation Products v Compair). 4º “Written” hasn’t yet been litigated… Does it apply to contracts that are partly written and partly oral? (2) As against that party, the other cannot by reference to any contract term— (a) when himself in breach of contract, exclude or restrict any liability of his in respect of the breach; or (b) claim to be entitled— (i) to render a contractual performance substantially different from that which was reasonably expected of him, or (ii) in respect of the whole or any part of his contractual obligation, to render no performance at all, expect in so far as (in any of the cases mentioned above in this subsection) the contract term satisfies the requirement of reasonableness. S3(2)(b) would cover cases where (ex.) a holiday company purports to be entitled to offer the customer an alternative performance of a lower standard than the service originally offered, especially if the alternate service is of a lower standard (Axa v Campbell Martin). (3) This section does not apply to a term in a consumer contract (but see the provision made about such contracts in section 62 of the Consumer Rights Act 2015).

Answer 110

1) Liability for breach of the obligations arising from— (a) section 12 of the Sale of Goods Act 1979] (seller’s implied undertakings as to title, etc); (b) section 8 of the Supply of Goods (Implied Terms) Act 1973 (the corresponding thing in relation to hire-purchase), cannot be excluded or restricted by reference to any contract term. S12 and s8 can therefore not be excluded at all. (1A) Liability for breach of the obligations arising from— (a) section 13, 14 or 15 of the 1979 Act (seller’s implied undertakings as to conformity of goods with description or sample, or as to their quality or fitness for a particular purpose); (b) section 9, 10 or 11 of the 1973 Act (the corresponding things in relation to hire purchase), cannot be excluded or restricted by reference to a contract term except in so far as the term satisfies the requirement of reasonableness. These can be excluded if reasonable. (4) The liabilities referred to in this section are not only the business liabilities defined by section 1(3), but include those arising under any contract of sale of goods or hire-purchase agreement. Thus these apply even if liability is not a business liability within the meaning of s1(3), BUT the satisfactory quality and fitness for purpose implied terms only operate where the seller sells goods in the course of business! (5) This section does not apply to a consumer contract (but see the provision made about such contracts in section 31 of the Consumer Rights Act 2015).

Answer 111

(1) Where the possession or ownership of goods passes under or in pursuance of a contract not governed by the law of sale of goods or hire-purchase, subsections (2) to (4) below apply as regards the effect (if any) to be given to contract terms excluding or restricting liability for breach of obligation arising by implication of law from the nature of the contract. Thus this applies to contracts of hire, work and materials, exchange… (1A) Liability in respect of the goods’ correspondence with description or sample, or their quality or fitness for any particular purpose, cannot be excluded or restricted by reference to such a term except in so far as the term satisfies the requirement of reasonableness. Liability can also only be excluded if reasonable. (3A) Liability for breach of the obligations arising under section 2 of the Supply of Goods and Services Act 1982 (implied terms about title etc in certain contracts for the transfer of the property in goods) cannot be excluded or restricted by references to any such term. (4) Liability in respect of— (a) the right to transfer ownership of the goods, or give possession; or (b) the assurance of quiet possession to a person taking goods in pursuance of the contract, cannot [(in a case to which subsection (3A) above does not apply)] be excluded or restricted by reference to any such term except in so far as the term satisfies the requirement of reasonableness. (4A) This section does not apply to a consumer contract (but see the provision made about such contracts in section 31 of the Consumer Rights Act 2015).

Answer 112

(1) In relation to a contract term, the requirement of reasonableness is that the term shall have been 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. The time at which reasonableness test is applied is at the time of formation (not time of breach) – the aim is therefore to examine the reasonableness of the allocation of rights and responsibilities between the parties at the time of formation. (2) In determining for the purposes of section 6 or 7 above whether a contract term satisfies the requirement of reasonableness, regard shall be had in particular to the matters specified in Schedule 2 to this Act; but this subsection does not prevent the court or arbitrator from holding, in accordance with any rule of law, that a term which purports to exclude or restrict any relevant liability is not a term of the contract. While courts are only directed to look at Schedule 2 in s6 and s7 cases, in practice they often look at the Schedule even in cases that don’t fall into these sections. (3) In relation to a notice (not being a notice having contractual effect), the requirement of reasonableness under this Act is that it should be fair and reasonable to allow reliance on it, having regard to all the circumstances obtaining when the liability arose or (but for the notice) would have arisen. Thus contracts are different from notices. (4) Where by reference to a contract term or notice a person seeks to restrict liability to a specified sum of money, and the question arises (under this or any other Act) whether the term or notice satisfies the requirement of reasonableness, regard shall be had in particular (but without prejudice to subsection (2) above in the case of contract terms) to— (a) the resources which he could expect to be available to him for the purpose of meeting the liability should it arise; and (b) how far it was open to him to cover himself by insurance. In the case of limitation clauses (≠exclusion) there are two extra factors to consider (and insurance particularly has played a significant role. (5) It is for those claiming that a contract term or notice satisfies the requirement of reasonableness to show that it does. Burden of proof on the person seeking to rely on the clause to prove that it is reasonable. Reasonableness is tested on a variety of factors: equality of bargaining power, regard to the clause as a whole, the clause having no power to sever the unreasonable part from the reasonable part, and the availability of insurance (not whether the party actually has insurance)…

Answer 113

(1) To the extent that this Part of this Act prevents the exclusion or restriction of any liability it also prevents— (a) making the liability or its enforcement subject to restrictive or onerous conditions; For example, very short time limit clauses for particular remedies. (b) excluding or restricting any right or remedy in respect of the liability, or subjecting a person to any prejudice in consequence of his pursuing any such right or remedy; For example, exclusions of right of set-off. (c) excluding or restricting rules of evidence or procedure; For example, conclusive evidence clauses (“receipt of goods is conclusive evidence that the goods conform with the requirements of the contract”) and (to that extent) sections 2 and 6 to 7 also prevent excluding or restricting liability by reference to terms and notices which exclude or restrict the relevant obligation or duty. This section therefore extends the scope of s2, 6-7 beyond clauses that exclude liability to clauses that define the obligations of the parties, and yet all clauses have some role to play in this… It is difficult to interpret the difference between excluding an obligation/duty and defining the content of that duty: kitchen utensils are “only suitable on electric cookers and not with gas”, or surveyor undertakes to carry out a “valuation and not a full structural survey” (Chitty). (2) But an agreement in writing to submit present or future differences to arbitration is not to be treated under this Part of this Act as excluding or restricting any liability.

Answer 114

In this Part of this Act— - ‘business’ includes a profession and the activities of any government department or local or public authority; The definition of “business” does not purport to be exhaustive and need not be carried out with a view of making a profit. - ‘consumer contract’ has the same meaning as in the Consumer Rights Act 2015 (see section 61); - ‘consumer notice’ has the same meaning as in the Consumer Rights Act 2015 (see section 61); - ‘goods’ has the same meaning as in [the Sale of Goods Act 1979]: - ‘hire-purchase agreement’ has the same meaning as in the Consumer Credit Act 1974; - ‘negligence’ has the meaning given by section 1(1); - ‘notice’ includes an announcement, whether or not in writing, and any other communication or pretended communication; and - ‘personal injury’ includes any disease and any impairment of physical or mental condition.

Answer 115

The matters to which regard is to be had in particular for the purposes of sections 6(1A), 7(1A) and (4), 20 and 21 are any of the following which appear to be relevant— (a) the strength of the bargaining positions of the parties relative to each other, taking into account (among other things) alternative means by which the customer’s requirements could have been met; (b) whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of entering into a similar contract with other persons, but without having to accept a similar term; (c) whether the customer knew or ought reasonably to have known of the existence and extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties); (d) where the term excludes or restricts any relevant liability if some condition is not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable; (e) whether the goods were manufactured, processed or adapted to the special order of the customer.

Answer 116

``` - argued that the clause didn’t fall within UCTA because it had the effect of defining the obligations of the parties and didn’t provide D with a defence to breach. o CoA (Slade LJ): rejected because in deciding whether D is negligent, the court must leave out of account the contract term relied on in order to defeat C’s claim for breach of duty to take reasonable care. ♣ But McKendrick thinks this is difficult – why leave out the clause when the exclusion clause may be an integral part of the definition of the parties’ obligations? • CoA Argument #1 = because otherwise would make nonsense of UCTA by taking many clauses outside its scope but McKendrick says that the Act is itself based on a false premise (i.e. the assumption that the function of an exclusion clause is to provide D with a defence to a breach of duty, whereas it can be argued that the true function is to assist in defining the obligations in the first place) • CoA Argument #2 = because s13(1) extends the scope of s2 to clauses that purport to exclude or restrict the relevant obligation or duty but McKendrick says that then the problem becomes how to identify which duty-defining clause falls within it? The line between terms that genuinely reflect the rights and duties assumed by the parties, and those that retrospectively alter the character of what has gone before, is difficult to draw. ```

Answer 117

- Issue #2 = jurisdiction (transfer of liability): D argued that the clause didn’t exclude or restrict liability but merely transfers it from themselves to C. o CoA: a transfer of liability from A to B necessarily and inevitably involves the exclusion of liability as far as A is concerned [but NB Thompson v Lohan] - Issue #3 = application of reasonableness test to the clause: CoA showed great deference to the trial judge, while appearing to have sympathy with criticisms of some parts of the judgment. But CoA did confine its reasoning by saying that “in several respects this is a very special case on its facts, its evidence and its paucity of evidence”.

Answer 118

- Assesses the “reasonableness” requirement in relation to commercial contracts. In relation to consumer contracts, UCTA merely confirms the post-war judicial position towards consumer protection, but with commercial contracts there is no obvious analogue to consumer protection, no unproblematic policy for judges to follow judicial development of the statutory discretion is significant and difficult to predict. - The root of the problem is that the two leading House of Lords cases are based on conflicting underlying approaches, so that commercial contractors have no guarantee against a non-interventionist approach. o Photo Production approach discourages judges from interfering with commercial exemptions o George Mitchell enjoins no such restraint, and there are signs that it may become the governing approach, so that uncertainty will be compounded because it (i) gives trial judges a “virtual carte blanche” and (ii) introduces into UCTA a “maverick element”. - On a more positive note, the Coote thesis that exemption clauses are simply definitive of the primary obligations under a contract11 continues to find little favour with the courts. The thesis was elegantly formalistic, and ignored both the historical development of the problem, and the realities of the situation.12 Its implicit rejection by the draftsmen of U.C.T.A. was both realistic and right.13

Answer 119

o Rejects the idea that there is a substantive rule of law to the effect that a fundamental breach puts an end to the contract ab initio, or at least so as to destroy any protective clauses.17 o To say that the fate of an exemption clause depends upon the rules of construction, is not, however, to leave the matter entirely clear. As a question of construction, one might treat an exemption clause as a preclusive barrier to liability for an admitted breach of contractual obligation, or one might follow Professor Coote19 in treating exemptions as relevant to the definition of the primary contractual obligations themselves. ♣ Lord Diplock: “[In the absence of an exclusion clause], a primary obligation of Securicor under the contract, which would be implied by law, would be an absolute obligation to procure that the visits by the night patrol to the factory were conducted by natural persons who would exercise reasonable skill and care for the safety of the factory. That primary obligation is modified by the exclusion clause. Securicor's obligation to do this is not to be absolute, but is limited to exercising due diligence in its capacity as employer of the natural persons by whom the visits are conducted, to procure that those persons shall exercise reasonable skill and care for the safety of the factory.”22 ♣ Palmer and Yates: Lord Diplock, by construing Securicor's protective clauses as relevant to the definition of the primary contractual obligations, has staked an authoritative claim on behalf of the Coote approach to the construction of exemption clauses. But this approach is not apparent in the other speeches in Photo Production, nor is there much evidence of it elsewhere in the thinking of our judges, and nor is it encouraged by U.C.T.A. o The principal importance of Photo Production, we suggest, lies in Lord Wilberforce's speech: ♣ “After UCTA, in commercial matters generally, when the parties are not of unequal bargaining power, and when risks are normally borne by insurance, not only is the case for judicial intervention undemonstrated, but there is everything to be said for leaving the parties free to apportion the risks as they think fit and for respecting their decisions. ♣ There is still more to be said for leaving cases to be decided straightforwardly on what the parties have bargained for. The learned judge was (rightly) able to decide this case on normal principles of contractual law with minimal citation of authority.”24 o Two points about the judgment: ♣ Asserts a non-interventionist judicial approach to exemption clauses in commercial contracts. The intention underlying U.C.T.A., he suggests, is to leave commercial parties free to set their own terms, implying that the judges should only rarely strike down commercial exemptions as unreasonable under U.C.T.A.25 ♣ Implies that appellate courts should take a restrictive view of their jurisdiction in dealing with U.C.T.A.

Answer 120

o Lord Bridge: in deciding s11, “court must entertain a whole range of considerations and decide on which side the balance comes down. There will sometimes be room for a legitimate difference of judicial opinion. It must follow that the appellate court should treat the original decision with the utmost respect and refrain from interference with it unless satisfied that it proceeded on some erroneous principle or was plainly and obviously wrong.”26 o Thus: (i) followed Photo Production in need to uphold trial judge’s discretion, but (ii) goes against desire to leave commercial parties “free to apportion the risks as they think fit”. o The critical argument hinged on the fact that the seed suppliers, in line with usual practice, had attempted an informal compromise of the farmers' claim, by offering a sum of money in excess of that set as the ceiling of liability by their limitation clause = “estoppel factor”. ♣ Lord Bridge: “[This] decisive factor … indicated a clear recognition by seedsmen in general, and the appellants in particular, that reliance on the limitation of liability imposed by the relevant condition would not be fair or reasonable.”29 o Not entirely convincing: ♣ The seedsmen surely must have assumed that their willingness to make a more generous offer at informal compromise could not be taken as “a clear recognition” that reliance on the limitation clause would be unreasonable if negotiations for a settlement broke down. ♣ The U.C.T.A. s11 framework, strictly applied, would treat the parties' post-breach conduct (such as the seedmen's attempt to settle the farmers' claim) as irrelevant. o Without the estoppel element, the House in George Mitchell evidently saw the case as finely balanced (buyers knew about the terms, the price paid for seeds was small, proportionality).

Answer 121

o George Mitchell minus estoppel factor is in line with Photo Production – they both took into account similar considerations and the difference merely hinged on the insurance factor (seedman could easily have insured, whereas D in Photo Production not so much). o But IAO there is a fundamental difference in approach underlying the respective speeches. ♣ Starting point in Photo Production was the presumption that judges should not interfere with commercial exemption clauses ♣ George Mitchell, if not operating with the opposite presumption, at least opened with no presumption either way The upshot of this analysis of U.C.T.A. is that judges may approach the reasonableness requirement with different presumptions about the propriety of judicial intervention (in which case they are likely to disagree with one another about the reasonableness of exemptions).

Answer 122

o Facts: C, steel stockholders, hired excavators from D company on a number of occasions. On the occasion which gave rise to the litigation, the operator (Mr. Hyland) carelessly drove the excavator into collision with part of Phillips' buildings, causing considerable damage. D relied on Clause 8 of the old Contractors Plant Hire Association Conditions of Hire: ♣ Drivers “shall for all purposes in connection with their employment in the working of the plant be regarded as the servants or agents of the hirer who alone shall be responsible for all claims arising in connection with the operation of the plant by the said drivers and operators.” o Whether U.C.T.A. deprived Hamstead of a defence based on Condition 8. CoA ruled against D on all three points: ♣ (i) whether or not there was “negligence” within the meaning of section 1(1) of U.C.T.A. • D argued that UCTA presupposes breach of an obligation, whereas here the clause excludes the obligation from arising altogether rejected. ♣ (ii) whether, if so, Condition 8 was an attempt to “exclude or restrict” liability for negligence within the meaning of section 2 of U.C.T.A.; and • D argued the clause was merely “to divide and allocate the obligations arising in relation to the contract by transferring liability from the plant owners to the hirers.” rejected because the court looks at the effect of the term not the label. ♣ (iii) whether, if so, Condition 8 satisfied the requirement of reasonableness. • Trial judge: unreasonable because (i) C didn’t ordinarily hire construction plants, (ii) hire was for very short period and arranged at short notice so C lacked opportunity to study the conditions, (iii) little opportunity for C to arrange for insurance for risks arising from operator’s negligence, (iv) C had no choice of operator and no control over how he did his job it was a take it or leave it situation for C. • CoA: expressed reservations about trial judge’s holding (insurance evidence was imprecise and inconclusive…) but used George Mitchell to say that appellate courts should defer to trial judge. o Two ways of interpreting the Court of Appeal's decision. ♣ The Court really preferred the Photo Production framework and would have liked to have seen a non-interventionist approach below. Support for this reading of the decision could be found in the Court's express reservations about some aspects of the trial court reasoning. ♣ An alternative interpretation of the decision is that the Court was following the George Mitchell approach, and simply highlighting, in line with the George Mitchell philosophy, that each case is a one-off decision which must be restricted to its own special facts. The fact that the Court had some reservations about the trial judge's reasoning does not necessarily point towards a non-interventionist predilection.

Answer 123

o The House of Lords in Photo Production and George Mitchell has established two different frameworks for the employment of the U.C.T.A. reasonableness requirement relative to commercial exemptions. o The robust approach of the Court of Appeal in Phillips suggests that the courts are likely to see themselves as having a serious regulatory role under U.C.T.A. vis-à-vis commercial contracts. o It seems likely that trial court rulings will have little precedent value. In Phillips the Court of Appeal went out of its way to emphasise the one-off nature of the decision. Difficulties will be compounded by a narrow Appeal Court jurisdiction.

Answer 124

- There are indications that George Mitchell may establish itself as the ruling U.C.T.A. framework for commercial contracts. - The question in the lead-up to UCTA that divided English and Scottish Law Commissions was whether reasonableness should be assessed at time of incorporating the term, or reasonableness of reliance in all circumstances. o Scottish Law Commission (incorporation): fear that the possibility that the reasonableness test, if linked to reliance rather than incorporation, might undermine the planning of relationships, the avoidance of risk, and the settlement of claims that one associates with commercial contracts. Photo Productions more aligned to this view o English Law Commission (reliance): judges must not be inhibited from taking account of all the circumstances, because it is only when an exemption clause is seen fully in perspective that a judge will be able to assess its reasonableness. This is because the raison d'être of the regulation of exemptions is the control of the reasonableness of defences, and not reasonableness of contracts George Mitchell more akin to this view - But George Mitchell (and the prospect of ad hoc litigation): o Threatens commercial calculability and security. It undermines one of the law of contract's supposedly primary functions, namely the facilitation of the planning of transactions and business relationships. o Is out of touch with the facts of commercial life (where you shouldn’t strike down exclusion clauses based on inaccurate insurance information, or inaccurate reliance on the “estoppel factor”) o Danger of proliferation of one-off decisions on reasonableness of standard form provisions undermines the chances of standard form exemptions being consistently upheld as reasonable and obstructs revision of standard form exemptions that have been struck down.

Answer 125

- Facts: an excavator and driver were hired out by D1, to a third party. C’s husband was killed in an accident caused by the driver’s negligence. C successfully sued D1 in negligence, and D1 sought an indemnity from the third party pursuant to a clause in the contract that was substantially identical to the clause invalidated in Phillips. - Held (CoA, Fox LJ): s2(1) UCTA does not apply to the clause because there was a “sharp distinction” between this case and Phillips in that in Phillips there was liability in negligence from C to D, whereas here C is not prejudiced in any way by the operation sought to be established by the clause, which merely means that D1 and the third party have agreed between themselves who is to bear the consequences of the driver’s negligent acts. o S2(1) is concerned with protecting the victim of negligence, and not arrangements made by the wrongdoers with other persons as to the sharing or bearing of the burden of compensating the victim. The liability is not in dispute; the fact that Ds have between themselves chosen to bear it in a particular way doesn’t affect (i.e. restrict or exclude) that liability.

Answer 126

1º So while in Phillips the CoA refused to draw a distinction between “excluding” and “transferring” liability, here the CoA drew a clear distinction between excluding and “sharing” liability. 2º Establishes that s2(1) only regulates exclusions of liability towards the victim of the negligence, which means that in Phillips, if it had been the property of a third party and not C that had been damaged, then the clause would have been able to be relied on. But why should such a distinction be drawn – the clause is still as unreasonable no matter whose property is damaged?

Answer 127

Do exclusion clauses define the obligations that the parties assumed, or provide a defence to a breach of obligation? Judges often take the latter view and UCTA (except s3(2)(b) and 13(1)) assumes it. But challenged by Coote: - “Type A” = clauses whose effect is upon the accrual of particular primary rights (ex. clause that takes away the buyer’s right to reject goods, exclusions as to warranties about quality…) o Direct (“sound except for hunting” no primary right in respect of soundness for hunting) o Indirect (total exclusion of enforceability an unenforceable right is illusory so prevents the primary right from accruing) - “Type B” = clauses that qualify primary or secondary rights without preventing the accrual of any particular primary right (ex. time limits, limitations as to the amount recoverable…) o Act directly on a primary (substantive) right (ex. time limit) o Act indirectly on sanctioning (procedural) rights (ex. limit on the amount recoverable) Attacked by Adams and Brownswood as “elegantly formalistic” and ignoring the historical source of the problem and realities of the situation. However, McKendrick thinks that the origin of the “elegantly formalistic” is UCTA itself and not Coote, because by declining to enact a general control over all unreasonable terms in standard form contracts, it gave way for jurisdictional issues to arise as in Thompson and Phillips.

Answer 128

- Held: a valuer instructed by a prospective mortgagee to carry out a valuation of a modest house for the purpose of deciding whether or not to grant a mortgage on it to the prospective mortgagor owed a duty of care to the mortgagor to exercise reasonable skill and care in carrying out the valuation if he was aware that the mortgagor would probably purchase the house in reliance on the valuation without an independent survey. A disclaimer of liability by or on behalf of a valuer was a notice which purported to exclude liability for negligence within the meaning of the Unfair Contract Terms Act 1977 and would be ineffective by virtue of section 2(2) unless it satisfied the requirement of reasonableness provided by section 11(3) of the Act; and that, since the valuer was a professional man, whether he was acting as an independent contractor or as an employee of the mortgagee, whose services were paid for by the mortgagor, who might or might not be supplied with a copy of the valuation report, it would not be fair and reasonable to allow the valuer to rely on such a disclaimer to exclude his liability to the mortgagor for the accuracy of the valuation.

Answer 129

Here the Court relied on s13 for the proposition that the clause excluded liability and did not prevent the obligation from arising, and was caught by the Act. - “I read [s13] as introducing a 'but for' test in relation to the notice excluding liability. They indicate that the existence of the common law duty to take reasonable care, referred to in section 1(1)(b), is to be judged by considering whether it would exist 'but for' the notice excluding liability. The result of taking the notice into account when assessing the existence of a duty of care would result in removing all liability for negligent misstatements from the protection of the Act.” - Also cites Phillips.

Answer 130

- Facts: A clause in C’s general conditions of sale stipulated that D was not entitled to withhold payment of any sum due to C under the contract by reason of “any payment, credit, set-off … or for any other reason whatsoever”. C brought proceedings to recover price paid and D claimed that they were entitled to claim against C a greater sum by way of set-off than that claimed against them, and that the clause was ineffective by UCTA. - Held (CoA): s13(1)(b) UCTA extended the scope of s3 to any contract term excluding or restricting any right or remedy in respect of any liability prevented by s3. - Lord Donaldson: s3 UCTA applies where one party deals on the other’s written standard terms, but it only applies to terms excluding or restricting liability or entitling the other party to render no contractual performance or a substantially different performance. The clause in this case is not such a clause, but s3 is relevant to consideration of s13. C argued that s13 only caught unreasonable terms that indirectly achieved the exclusion or restriction that, if achieved directly, would fall within the scope of other sections. D argued that it had wider scope. IJO the clause falls within s13(1)(b) (excluding or restricting any right or remedy in respect of the liability…) because it restricts D’s right to set-off.

Answer 131

- (6) The plaintiff did “deal on defendant's written standard terms of business” , because although there were technically negotiations concerning terms, the defendant's general conditions remained untouched throughout the negotiations. - (7) The decision of the judge of first instance that the defendant's limitation clause did not satisfy the statutory requirement of reasonableness was not founded upon erroneous principle nor plainly and obviously wrong. Consequently, the finding of unreasonableness was upheld (applying Mitchell v Finney Lock Seeds). NB Sir Ian Glidewell: Computer disks, as tangible media, qualified as “goods” within the definition of section 18 of the Sale of Goods Act 1979. A computer program, as intangible software, did not so qualify. Logically, a disk sold or hired by a computer manufacturer which contains a defective program would prima facie be a breach of the terms as to quality and fitness for purpose implied by the Sale of Goods Act 1979.

Answer 132

- consequential losses whether arising from negligence or otherwise. In no event shall [Sanderson's] liability under the Contract exceed the price paid by [Watford] to [Sanderson] for the Equipment connected with any claim.” There was also an entire agreement clause. Watford’s own standard terms had a similar exclusion clause. - Held (CoA, Chadwick LJ, Buckley and Gibson LJJ agreeing): - The appellate court should not interfere with the finding below on whether a term satisfies the requirement of reasonableness under section 3 of the Unfair Contract Terms Act 1977 unless the appellate court is satisfied that the finding below proceeded upon some erroneous principle or was plainly and obviously wrong. George Mitchell (Chesterhall) Ltd v. Finney Lock Seeds Ltd [1983] 2 A.C. 803 applied .

Answer 133

o He interpreted the scope of the exclusion clause too widely. ♣ On its proper construction clause 7.3 contained two terms which had to be considered separately. Both the judge below and the parties had wrongly considered the clause on the basis it was indivisible. ♣ The first sentence of clause 7.3 was intended to exclude contractual claims for indirect and consequential losses. It was not, contrary to the judge below's finding, intended to exclude claims in respect of pre-contractual representations. The entire agreement clause was important because it meant the first term had to be construed on the basis that the parties intended their whole agreement to be contained in their written agreement. Therefore there was no reason why the parties would have intended to exclude liability for pre-contract representations. ♣ The second sentence was intended to limit liability for direct loss to a specified sum of money, namely the price of the equipment or software connected with the claim. o He said that the addendum (that Sanderson could not rely upon clause 7.3 to exclude claims for indirect or consequential loss unless it could show that it did use its best endeavours to allocate appropriate resources to the project to minimise losses resulting from failures of performance) was meaningless, but in reality Sanderson committed itself, by the addenda, to use best endeavours to allocate appropriate resources to the project “to minimise any losses that may arise from the contract”. That obligation is superimposed on the obligations under the relevant standard terms and conditions. o He said that the fact that Watford's own standard terms and conditions excluded liability for indirect loss was irrelevant, although this is clearly relevant because they show that Watford was well aware of the commercial considerations which lead a supplier to include a provision restricting liability for indirect or consequential loss; and, in particular, was well aware that a supplier would be likely to determine the price at which it was prepared to sell its products by reference (amongst other things) to its exposure to the risk of unquantifiable claims to indirect or consequential losses which might be suffered by the customer if things went wrong. In my view, Watford's obvious appreciation of the problem which the limit of liability clause was intended to meet—and its own method of dealing with that problem in the standard terms under which it supplied goods to its own customers—were very relevant to a consideration of the matter which the judge had to decide.

Answer 134

o Section 11(4) of the 1977 Act did not apply to the term excluding indirect or consequential loss but it was nevertheless proper to have regard to the resources which could be expected to be available to each party for the purpose of meeting the indirect or consequential loss resulting from failure of the equipment or software and to the possibility that such loss could be covered by insurance. o The term excluding liability for indirect or consequential loss was a fair and reasonable one to include in the contract: ♣ (i) that there is a significant risk that a non-standard software product, ‘customised’ to meet the particular marketing, accounting or record-keeping needs of a substantial and relatively complex business (such as that carried on by Watford), may not perform to the customer's satisfaction, ♣ (ii) that, if it does not do so, there is a significant risk that the customer may not make the profits or savings which it had hoped to make (and may incur consequential losses arising from the product's failure to perform), ♣ (iii) that those risks were, or ought reasonably to have been, known to or in the contemplation of both Sanderson and Watford at the time when the contract was made, ♣ (iv) that Sanderson was in the better position to assess the risk that the product would fail to perform but (v) that Watford was in the better position to assess the amount of the potential loss if the product failed to perform, ♣ (vi) that the risk of loss was likely to be capable of being covered by insurance, but at a cost, and (vii) that both Sanderson and Watford would have known, or ought reasonably to have known, at the time when the contract was made, that the identity of the party who was to bear the risk of loss (or to bear the cost of insurance) was a factor which would be taken into account in determining the price at which the supplier was willing to supply the product and the price at which the customer was willing to purchase. o Thus, it is reasonable to expect that the contract will make provision for the risk of indirect or consequential loss to fall on one party or the other.

Answer 135

In circumstances in which parties of equal bargaining power negotiate a price for the supply of product under an agreement which provides for the person on whom the risk of loss will fall, it seems to me that the court should be very cautious before reaching the conclusion that the agreement which they have reached is not a fair and reasonable one. Where experienced businessmen representing substantial companies of equal bargaining power negotiate an agreement, they may be taken to have had regard to the matters known to them. They should, in my view be taken to be the best judge of the commercial fairness of the agreement which they have made; including the fairness of each of the terms in that agreement. They should be taken to be the best judge on the question whether the terms of the agreement are reasonable. The court should not assume that either is likely to commit his company to an agreement which he thinks is unfair, or which he thinks includes unreasonable terms. Unless satisfied that one party has, in effect, taken unfair advantage of the other—or that a term is so unreasonable that it cannot properly have been understood or considered—the court should not interfere.

Answer 136

- Law Commission and Scottish Law Commission joint report (2005) to o replace UCTA and UTCCR with one piece of legislation + o should be possible for small businesses to challenge unfair standard terms in the same way as consumers + o in other B2B contracts, remove s6(3) and 7(3) UCTA (reasonableness test for exclusion clauses for liability for description and quality of goods even if the clause was negotiated) because s3(2)(a) is enough protection

Answer 137

IAO B2B contract terms should only be struck down as unreasonable if they took the other party by surprise:

Answer 138

o Substantive unfairness = should a B2B term ever be invalidated solely because of substantive unfairness? IAO no. ♣ Seems old-fashioned and paternalistic even in consumer contracts, why should a sufficiently informed consumer be able to take the risk if they want to? Perhaps the number of consumers who can make a well-informed choice is so small that it is simpler just to have a blanket rule? ♣ In B2B contracts IAO we should never invalidate exclusion clauses solely because of their substance. o Inequality of bargaining power (“take it or leave it”) = IAO no. ♣ 1º Doubtful whether there is actual problem of inequality of bargaining power in B2B. There are indeed often harsh terms, but they are often found in relatively competitive markets for a variety of reasons. Economists suggest that monopolists are no less willing to alter terms. ♣ 2º Why should we interfere with a contract merely because of inequality of bargaining power? If it is to correct market failure, then IAO this rests on a mistaken assumption that the change to businesses’ standard terms sought by a particular customer would be preferred by the majority of the business’ customers. o Unfair surprise/transparency = ♣ “Ticket” cases (Interfoto etc.) already provide adequate protection against clauses that parties are not aware of, so only real problem is L’Estrange v Graucob (where Interfoto doesn’t apply), though mistake might provide a solution in certain circumstances (though IAO it doesn’t and shouldn’t apply where the customer simply doesn’t know that the clause is in the agreement (≠positively believes that the clause is not in the document) even if the other party knows this)

Answer 139

o “Surprising clauses”, but it is arguable that our law already goes too far in allowing terms to be challenged because of uncertainty etc. o UCTA already offers sufficient protection because s3 (written standard terms) is wider than exclusion clauses and captures a lot of terms (including, IAO, terms that make a particular term into a condition when it wouldn’t be under common law), but it would not cover terms that increase the obligations of the other party. Law Comm originally wanted this covered, but: ♣ Concern of people challenging as a delaying tactic ♣ Concern of people not negotiating the term at the time of contract knowing that they can just challenge it later

Answer 140

(1) This Part applies to a contract between a trader and a consumer. (2) This does not include a contract of employment or apprenticeship. (3) A contract to which this Part applies is referred to in this Part as a “consumer contract”. (4) This Part applies to a notice to the extent that it— (a) relates to rights or obligations as between a trader and a consumer, or (b) purports to exclude or restrict a trader’s liability to a consumer. (5) This does not include a notice relating to rights, obligations or liabilities as between an employer and an employee. (6) It does not matter for the purposes of subsection (4) whether the notice is expressed to apply to a consumer, as long as it is reasonable to assume it is intended to be seen or heard by a consumer. (7) A notice to which this Part applies is referred to in this Part as a “consumer notice”. (8) In this section “notice” includes an announcement, whether or not in writing, and any other communication or purported communication. 1º “Trader” defined in s2(1) (and incorporated by s76) as a person “acting for purposes relating to that person’s trade, business, craft or profession”, used in preference of “seller or supplier” in the Directive and the 1999 Regs. 2º “Consumer” defined in s2(3) as “an individual acting for purposes that are wholly or mainly outside the individual’s trade, business, craft or profession” companies don’t qualify; the definition covers individuals acting in the course of business but the contract is an incidental or infrequent part of that business. “Wholly or mainly” is not in the Directive. Protection extended because burden of proof on trader (s2(4)). 3º Part II includes both consumer contracts and consumer notices.

Answer 141

(1) An unfair term of a consumer contract is not binding on the consumer. (2) An unfair consumer notice is not binding on the consumer. (3) This does not prevent the consumer from relying on the term or notice if the consumer chooses to do so. (4) A term is unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer. 1º “Significant imbalance” appears to involve an examination of the content of the term rather than the procedure that led to the conclusion of the contract. - It would be satisfied if “a term is so weighted in favour of the supplier as to tilt the parties’ rights and obligations under the contract significantly in his favour” (DG of Fair Trading v First National Bank, UKHL). - Regard is had to the extent to which the consumer was being deprived of an advantage which he would enjoy under national law in the absence of the term (Aziz, CJEU) However, since “there is a large area of overlap between the concepts of good faith and significant imbalance” (First National Bank), there is unlikely to be a water-tight definition. 2º “Contrary to the requirement of good faith” relationship between good faith and significant imbalance: - Is “good faith” redundant because a finding of significant imbalance automatically means contrary to good faith? - Is “significant imbalance” a threshold requirement that excludes cases where the imbalance is insignificant, so that good faith is the predominant test? - Are they both important and one should not subordinate the other? But if so, what is the difference between them? Meaning of good faith: - It is a requirement of fair and open dealing (First National Bank, Lord Bingham) o Openness requires terms to be fully expressed, legible, no concealed traps, prominence to terms disadvantageous to consumer. o Fair dealing requires the supplier not to take advantage of the consumer’s necessity, indigence, lack of experience, weak bargaining position or other Schedule II [1994 Regs] factors. - Regard is to be had as to whether it could be reasonably assumed that the consumer would have agreed to the term in individual contract negotiations (Aziz) (5) Whether a term is fair is to be determined— (a) taking into account the nature of the subject matter of the contract, and (b) by reference to all the circumstances existing when the term was agreed and to all of the other terms of the contract or of any other contract on which it depends. 1º Assessment at time of contract, so it is the fairness of the allocation of rights and liabilities that is subject to scrutiny, not whether it operated in a fair manner on the facts. 2º The term must be considered in the context of the contract as a whole. (6) A notice is unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations to the detriment of the consumer. (7) Whether a notice is fair is to be determined— (a) taking into account the nature of the subject matter of the notice, and (b) by reference to all the circumstances existing when the rights or obligations to which it relates arose and to the terms of any contract on which it depends. (8) This section does not affect the operation of— (a) section 31 (exclusion of liability: goods contracts), (b) section 47 (exclusion of liability: digital content contracts), (c) section 57 (exclusion of liability: services contracts), or (d) section 65 (exclusion of negligence liability). This subsection avoids potential conflict between s62(4) and sections in the Act that expressly provide that a liability cannot be excluded, making it clear that those sections trump s62.

Answer 142

(1)Part 1 of Schedule 2 contains an indicative and non-exhaustive list of terms of consumer contracts that may be regarded as unfair for the purposes of this Part. The precise status of this list is unclear – some argue it raises a rebuttable presumption of unfairness, others say that it is only a guide and not a presumption (so burden of proof lies on the consumer). However, if a consumer is alleging that a term not within Part I Schedule II is unfair, he will probably have the burden of proof. (2) Part 1 of Schedule 2 is subject to Part 2 of that Schedule; but a term listed in Part 2 of that Schedule may nevertheless be assessed for fairness under section 62 unless section 64 or 73 applies to it. (3) The Secretary of State may by order made by statutory instrument amend Schedule 2 so as to add, modify or remove an entry in Part 1 or Part 2 of that Schedule. (4) An order under subsection (3) may contain transitional or transitory provision or savings. (5) No order may be made under subsection (3) unless a draft of the statutory instrument containing it has been laid before, and approved by a resolution of, each House of Parliament. (6) A term of a consumer contract must be regarded as unfair if it has the effect that the consumer bears the burden of proof with respect to compliance by a distance supplier or an intermediary with an obligation under any enactment or rule implementing the Distance Marketing Directive.

Answer 143

(1) A term of a consumer contract may not be assessed for fairness under section 62 to the extent that— (a) it specifies the main subject matter of the contract, or “Specifies the main subject matter of the contract” differs from the 1999 Regs (“definition of the main subject matter of the contract”). “Definition” to “specifies” is probably inconsequential, but addition of word “main” is important because it is not any term that specifies any aspect of the subject matter that is exempt, only the “main” subject matter. (b)the assessment is of the appropriateness of the price payable under the contract by comparison with the goods, digital content or services supplied under it. This is not confined to the “main” price term, and in principle catches any term purporting to assess the appropriateness of price payable. The predecessor (Art 6(2)(b) 1999 Regs) generated a lot of conflicting caselaw: - First National Bank: the term was not exempt because (now) s64(1(b) should be interpreted restrictively or would enable the main purpose of the scheme to be frustrated by endlessly formalistic arguments as to whether a provision is definitional or exclusionary (Lord Steyn) - Abbey National: the overdraft term was excluded insofar as they were in plain intelligible language. This was because the section didn’t exempt the clause from assessment as such, but only from certain forms of assessment (i.e. price/quality ratio) but could be challenged on other grounds. However, Abbey National said that First National Bank remained good law, but that the relevant term in that case was a “default provision” (Lord Steyn). However, it may be that after Abbey National only “default provisions” (terms that require ancillary payments not part of the price for goods or services to be supplied under its terms” will fall into First National Bank. (2)Subsection (1) excludes a term from an assessment under section 62 only if it is transparent and prominent. 1º “Transparent and prominent” replaces “plain and intelligible language” (which is essentially incorporated into “transparent” by s64(3)). Plain and intelligible language is a demanding test: - Not the same as contra proferentem (Abbey National) - a written term is not necessarily transparent merely because its true meaning is unambiguous. 2º “Prominent” means a reasonably well-informed, observant and circumspect consumer would have been aware of the term the trader must take steps to make the consumer aware. 3º A “commendable effort” to make the terms plain and intelligible is not enough (Abbey National) – it will only be exempt if it is transparent and prominent. (3) A term is transparent for the purposes of this Part if it is expressed in plain and intelligible language and (in the case of a written term) is legible. (4) A term is prominent for the purposes of this section if it is brought to the consumer’s attention in such a way that an average consumer would be aware of the term. (5) In subsection (4) “average consumer” means a consumer who is reasonably well-informed, observant and circumspect. (6) This section does not apply to a term of a contract listed in Part 1 of Schedule 2.

Answer 144

(1) A trader cannot by a term of a consumer contract or by a consumer notice exclude or restrict liability for death or personal injury resulting from negligence. (2) Where a term of a consumer contract, or a consumer notice, purports to exclude or restrict a trader’s liability for negligence, a person is not to be taken to have voluntarily accepted any risk merely because the person agreed to or knew about the term or notice. (3) In this section “personal injury” includes any disease and any impairment of physical or mental condition. (4) In this section “negligence” means the breach of— (a) any obligation to take reasonable care or exercise reasonable skill in the performance of a contract where the obligation arises from an express or implied term of the contract, (b) a common law duty to take reasonable care or exercise reasonable skill, (c) the common duty of care imposed by the Occupiers’ Liability Act 1957 or the Occupiers’ Liability Act (Northern Ireland) 1957, or (d) the duty of reasonable care imposed by section 2(1) of the Occupiers’ Liability (Scotland) Act 1960. (5) It is immaterial for the purposes of subsection (4)— (a) whether a breach of duty or obligation was inadvertent or intentional, or (b) whether liability for it arises directly or vicariously. (6) This section is subject to section 66 (which makes provision about the scope of this section).

Answer 145

1) Section 65 does not apply to— (a) any contract so far as it is a contract of insurance, including a contract to pay an annuity on human life, or (b) any contract so far as it relates to the creation or transfer of an interest in land. (2) Section 65 does not affect the validity of any discharge or indemnity given by a person in consideration of the receipt by that person of compensation in settlement of any claim the person has. (3) Section 65 does not— (a) apply to liability which is excluded or discharged as mentioned in section 4(2)(a) (exception to liability to pay damages to relatives) of the Damages (Scotland) Act 2011, or (b) affect the operation of section 5 (discharge of liability to pay damages: exception for mesothelioma) of that Act. (4) Section 65 does not apply to the liability of an occupier of premises to a person who obtains access to the premises for recreational purposes if— (a) the person suffers loss or damage because of the dangerous state of the premises, and (b) allowing the person access for those purposes is not within the purposes of the occupier’s trade, business, craft or profession. These sections are the consumer equivalent of s2(1) UCTA.

Answer 146

Where a term of a consumer contract is not binding on the consumer as a result of this Part, the contract continues, so far as practicable, to have effect in every other respect. Means that if the term is fundamental to the contract, the consequence may be that the entire contract will cease to bind the parties.

Answer 147

(1) A trader must ensure that a written term of a consumer contract, or a consumer notice in writing, is transparent. (2) A consumer notice is transparent for the purposes of subsection (1) if it is expressed in plain and intelligible language and it is legible. Doesn’t state the consequences of a term not being transparent, but McKendrick thinks that it will be taken into account in the court’s assessment of unfairness.

Answer 148

(1) If a term in a consumer contract, or a consumer notice, could have different meanings, the meaning that is most favourable to the consumer is to prevail. (2) Subsection (1) does not apply to the construction of a term or a notice in proceedings on an application for an injunction or interdict under paragraph 3 of Schedule 3. McKendrick thinks this is a mere statutory contra proferentem rule. How are the general rules enforced?

Answer 149

(1) Schedule 3 confers functions on the Competition and Markets Authority and other regulators in relation to the enforcement of this Part. (2) For provision about the investigatory powers that are available to those regulators for the purposes of that Schedule, see Schedule 5. Regulators are important because consumers might be unwilling or unable to bring actions to ensure that the legislation is effective in practice. The 1999 Regs gave enforcement to OFT, but CRA gives main role to CMA (Common Market Authority), but also roles to the Department of Enterprise, Trade and Investment, Financial Conduct Authority… The Consumers’ Association is also given a role even though it is not a public body but essentially a consumer advocacy group. Any regulator other than the CMA wishing to consider a complaint must notify the CMA, consider the complaint, and if it decides not to apply for an injunction, give reasons to the person who made the complaint. If a general challenge succeeds, an injunction will restrain future uses of the term and the court can also prevent the seller from continuing to enforce it in existing contracts. If a general challenge fails, an individual challenge may still succeed.

Answer 150

(1) Subsection (2) applies to proceedings before a court which relate to a term of a consumer contract. (2) The court must consider whether the term is fair even if none of the parties to the proceedings has raised that issue or indicated that it intends to raise it. (3) But subsection (2) does not apply unless the court considers that it has before it sufficient legal and factual material to enable it to consider the fairness of the term. Duty for court to consider issues of unfairness ex officio.

Answer 151

(1) This section applies if a term of a contract (“the secondary contract”) reduces the rights or remedies or increases the obligations of a person under another contract (“the main contract”). (2) The term is subject to the provisions of this Part that would apply to the term if it were in the main contract. (3) It does not matter for the purposes of this section— (a) whether the parties to the secondary contract are the same as the parties to the main contract, or (b) whether the secondary contract is a consumer contract. (4) This section does not apply if the secondary contract is a settlement of a claim arising under the main contract. Equivalent of s10 UCTA, purpose of which is to prevent the creation of a secondary contract that would deprive the consumer of their rights under Part II.

Answer 152

(1) This Part does not apply to a term of a contract, or to a notice, to the extent that it reflects— (a) mandatory statutory or regulatory provisions, or (b) the provisions or principles of an international convention to which the United Kingdom or the EU is a party. (2) In subsection (1) “mandatory statutory or regulatory provisions” includes rules which, according to law, apply between the parties on the basis that no other arrangements have been established.

Answer 153

A term which has the object or effect of excluding or limiting the trader’s liability in the event of the death of or personal injury to the consumer resulting from an act or omission of the trader.  Because negligence causing death or personal injury is regulated by s65, this paragraph applies only to death or personal injury resulting from a non-negligent act or omission of the trader.

Answer 154

2A term which has the object or effect of inappropriately excluding or limiting the legal rights of the consumer in relation to the trader or another party in the event of total or partial non-performance or inadequate performance by the trader of any of the contractual obligations, including the option of offsetting a debt owed to the trader against any claim which the consumer may have against the trader.  Scope wide but uncertain, “inappropriately” not defined. Appears to be a “catch-all” provision.

Answer 155

3A term which has the object or effect of making an agreement binding on the consumer in a case where the provision of services by the trader is subject to a condition whose realisation depends on the trader’s will alone.  Scope is conditional service provision (i.e. a term that is binding on one party before binding the other). But does the effect of unfairness make the entire contract not bind either party, or bind both parties?

Answer 156

A term which has the object or effect of permitting the trader to retain sums paid by the consumer where the consumer decides not to conclude or perform the contract, without providing for the consumer to receive compensation of an equivalent amount from the trader where the trader is the party cancelling the contract.  Scope is the retention of deposits. Apparently originates in the Civil law rule (with no common law counterpart) that a party can dissolve on forfeiture of a deposit or return of double the amount. However, doesn’t apply to forfeiture conferred by law.

Answer 157

A term which has the object or effect of requiring that, where the consumer decides not to conclude or perform the contract, the consumer must pay the trader a disproportionately high sum in compensation or for services which have not been supplied.  Overlaps with the penalty clause rule if the consumer concludes but doesn't perform, but confers additional protection if the consumer doesn’t enter into the contract.

Answer 158

6A term which has the object or effect of requiring a consumer who fails to fulfil his obligations under the contract to pay a disproportionately high sum in compensation.  Overlaps with penalty clause rule, and courts sometimes take into account same factors to decide something is not unfair and not a penalty rule (ParkingEye). But Treitel argues that it may be wider than penalty clause rule because it may not be confined to sums payable on breach because someone who fails to fulfill obligations may not be in breach (ex. in Interfoto).

Answer 159

7A term which has the object or effect of authorising the trader to dissolve the contract on a discretionary basis where the same facility is not granted to the consumer, or permitting the trader to retain the sums paid for services not yet supplied by the trader where it is the trader who dissolves the contract.  Where the trader can dissolve but not the consumer, but only applies to retention of sums paid for services not yet supplied.

Answer 160

7A term which has the object or effect of authorising the trader to dissolve the contract on a discretionary basis where the same facility is not granted to the consumer, or permitting the trader to retain the sums paid for services not yet supplied by the trader where it is the trader who dissolves the contract.  Where the trader can dissolve but not the consumer, but only applies to retention of sums paid for services not yet supplied.

Answer 161

8A term which has the object or effect of enabling the trader to terminate a contract of indeterminate duration without reasonable notice except where there are serious grounds for doing so.  Cancellation clauses in contracts of indeterminate duration (though Treitel points out that since the list is non-exhaustive courts can also say clauses in fixed-term contracts are unfair)

Answer 162

A term which has the object or effect of automatically extending a contract of fixed duration where the consumer does not indicate otherwise, when the deadline fixed for the consumer to express a desire not to extend the contract is unreasonably early.  Terms that give the trader the right to unilaterally extend contracts of fixed duration - long term hire contracts, may also apply to Interfoto cases.

Answer 163

10A term which has the object or effect of irrevocably binding the consumer to terms with which the consumer has had no real opportunity of becoming acquainted before the conclusion of the contract.  Scope is unclear. It applies to terms that incorporate terms of other documents not accessible to the consumer, but McKendrick thinks that it does not challenge L’Estrange v Graucob.

Answer 164

11A term which has the object or effect of enabling the trader to alter the terms of the contract unilaterally without a valid reason which is specified in the contract.  Unilateral alteration clauses

Answer 165

12A term which has the object or effect of permitting the trader to determine the characteristics of the subject matter of the contract after the consumer has become bound by it.

Answer 166

13A term which has the object or effect of enabling the trader to alter unilaterally without a valid reason any characteristics of the goods, digital content or services to be provided.  Unilateral alteration clauses without a valid reason the characteristics of goods, though a “valid reason” is not defined.

Answer 167

14A term which has the object or effect of giving the trader the discretion to decide the price payable under the contract after the consumer has become bound by it, where no price or method of determining the price is agreed when the consumer becomes bound.  Where a contract binds the consumer without having decided the price and allows the trader to decide the price.

Answer 168

15A term which has the object or effect of permitting a trader to increase the price of goods, digital content or services without giving the consumer the right to cancel the contract if the final price is too high in relation to the price agreed when the contract was concluded.  But what is the effect of a finding of unfairness? No contract? Contract at a “reasonable price”? Contract at the original price?

Answer 169

16A term which has the object or effect of giving the trader the right to determine whether the goods, digital content or services supplied are in conformity with the contract, or giving the trader the exclusive right to interpret any term of the contract.

Answer 170

17A term which has the object or effect of limiting the trader’s obligation to respect commitments undertaken by the trader’s agents or making the trader’s commitments subject to compliance with a particular formality.

Answer 171

18A term which has the object or effect of obliging the consumer to fulfil all of the consumer’s obligations where the trader does not perform the trader’s obligations.

Answer 172

19A term which has the object or effect of allowing the trader to transfer the trader’s rights and obligations under the contract, where this may reduce the guarantees for the consumer, without the consumer’s agreement.  But this is the position under the common law anyway, so section doesn’t add anything.

Answer 173

20A term which has the object or effect of excluding or hindering the consumer’s right to take legal action or exercise any other legal remedy, in particular by— (a) requiring the consumer to take disputes exclusively to arbitration not covered by legal provisions, (b) unduly restricting the evidence available to the consumer, or (c) imposing on the consumer a burden of proof which, according to the applicable law, should lie with another party to the contract.

Answer 174

- The UTCC Regulations adopted an administrative model of enforcement with OFT (Office of Fair Trading) given power to investigate complaints. - Three contexts where challenges of unfairness can arise: o Pre-emptive challenge (negotiations between OFT and suppliers) o Negative systems of control (OFT seeks to prevent suppliers from continuing to use unfair terms by applying for injunctions etc.) o Ex casu challenge - Meaning of Regulation 5(1) is debated: o “Significant imbalance” refers to substantive unfairness, but does it also include procedural unfairness? o Does “contrary to the requirement of good faith” add anything? o If “good faith” is an additional hurdle, is it procedural, substantive or both? - Meaning of Regulation 6(1) (unfairness assessment to be made with reference to all the circumstances at the time of contracting) how is this to be used in general use challenges where there is no particular contractual relationship to examine? - Effectiveness of the UK system: majority of cases dealt with by negotiation and informal undertakings quite effective, and only one injunctive application was needed (First National Bank).

Answer 175

- 1º Is there a procedural component to the good faith requirement in Reg 5(1)? YES, because otherwise reference to good faith would be mere surplus. o If so, do general use challenges and ex casu challenges operate differently? ♣ Depends on what you mean by procedure: IAO there should be a three-stage classification with the first two being “procedural”: • Transparency issues (size of print, style of language, length, unfair surprise) • Bargaining issues (professional advice, accessibility, contractual choice) • Substantive issues (rights and obligations are one-sided) ♣ Thus, general use challenges can still look at issues of transparency etc. o If so, can good procedure save potentially unfair clauses, so that general use challenges should adopt a narrow approach to intervention because a supplier can avoid unfairness in individual contracts through good procedure? - 2º If procedure does have a role to play, does that mean that substantive imbalance alone will not be sufficient for unfairness, and conversely, can procedural irregularity alone suffice? o Is substantive fairness alone enough? (YES) if good faith is purely procedural, and sets an additional hurdle, then no. However, in First National Bank, Lord Steyn rejects the argument that good faith is predominantly procedural. The question is significant imbalance contrary to good faith, and some terms are sufficiently unbalanced to be unfair even in the absence of procedural defects. o Is procedural unfairness alone enough? ??

Answer 176

- Two broad issues: o Relationship between substance and procedure in the test for fairness no clarity as to the extent to which procedural issues alone can constitute good grounds for unfairness (especially when the problem is absence of real choice for the consumer) o Relationship between preventive work of OFT and judicial approaches to the Regs OFT adopted a purposive approach to promote consumer protection and encourage respect for the interests of the other contracting party, but unclear to what extent courts have adopted a similar approach. ♣ Indeed the arguments by OFT that the clause in First National Bank is unfair and unanimous upholding by HL as fair suggests a divergence in approach. ♣ The focus on procedure by Lord Bingham suggests a risk that the judicial climate will be reluctant to strike down an unfair clause where there is no sign of procedural abuse.

Answer 177

- The effect of private actions is limited because (i) they only mean the term doesn’t bind that consumer not that it won’t be used in the future, (ii) most consumers prefer to deal with matters informally. - The administrative model of enforcement is much more effective in preventing the continuing use of unfair terms and changing contracting practices. o Most cases are dealt with by negotiation, and if found unfair, the business will be required to provide an undertaking to discontinue use of the term. o Court action is seen as a last resort, and businesses are usually very willing to comply – why? ♣ Perhaps by fear of bad publicity ♣ Perhaps because terms are only unfair in part so the trader can still get the protection it wants while also being fair. ♣ Perhaps because mostly dealt with trade associations, who are often anxious to present a positive public image, and then pass down changes to trading bodies that use the association’s standard terms. ♣ Less expensive to change the term than go to court. - The administrative model was not mandated by the Directive and other MSs have gone other ways: o Allowing consumer organizations to bring actions (France) o Possibly criminal sanctions NB extension of enforcement powers beyond the OFT may not be in the interest of the consumers, depending on whether they can forge a coherent and effective enforcement strategy.

Answer 178

The UTCCR requirements of “plain and intelligible language” (reg.7(1)), and significant imbalance in contravention of good faith (reg.5(1)) express the dual purposes of preventing market failure due to consumers' inability to understand what they are buying, and preventing substantive unfairness to consumers. Regulation 6(2) imposes an important caveat. In Office of Fair Trading v Abbey National Plc [2009] UKSC 6; [2009] 3 W.L.R. 1215, the Supreme Court held that reg.6(2)(b) covers any price or remuneration terms including unarranged overdraft bank charges. This reverses the decisions of Andrew Smith J. and the Court of Appeal that only “core” or “essential” price terms are exempt and that the bank charges fell outside this exemption. The Supreme Court also held that reg.6(2) only exempts review for unfairness on the ground of “the adequacy of the price or remuneration” (i.e. the price/quality ratio), and not from assessment for unfairness “on other grounds”.

Answer 179

o UTCCR Sch.2 para.1(i): are indicatively unfair, “terms which have the object or effect of … irrevocably binding the consumer to terms with which he had no real opportunity of becoming acquainted before the conclusion of the contract” (and arguabley customers don’t have a real opportunity to become acquainted with the bank charges). However: ♣ Lord Mance states that “the consumer is to be assumed to be capable of reading the relevant terms and identifying whatever is objectively the price and remuneration under the contract into which he or she enters” (at [113]) and that “the starting point would be that the banks' customers committed themselves, under plain, intelligible language, to pay the Relevant Charges … and in return for the package of services offered by the banks” (at [116]). ♣ Chitty suggests that para.1(i) requires the identification of “terms which have the object or effect of … binding consumers to [other ] terms” without adequate notice, and not simply terms of which the consumer has inadequate notice. o Challenge fairness of “the method of pricing”. Lord Phillips notes that the “it may be open to question whether it is fair to subsidise some customers by levies on others who experience contingencies that they did not foresee when entering into their contracts” (at [79]-[80]). ♣ While Lady Hale of Richmond thought the banks' charging structure was not “necessarily unfair when viewed as a whole” (at [93]), Andrew Smith J. rightly observed that “the Directive and the 1999 Regulations are concerned with the fairness of the individual contract between the seller or supplier and a particular consumer and are not directly concerned with whether seller or supplier treats fairly consumers as a body”. ♣ Arguable that charging one group of customers nearly two-and-a-half times more than another group is discriminatory, contravenes good faith and causes significant imbalance to the detriment of consumers subject to the charges. However, it is equally open to a court to find that the contingent bank charges apply to all customers so that unfairness must be judged on the impossible basis previously discussed.

Answer 180

o UKSC’s interpretation leaves little scope for unfairness test under reg.5(1) because “in a broad sense all terms of the contract are in some way related to the price or remuneration” and the exemption cannot be so widely construed (Lord Steyn). o While the Court of Appeal undoubtedly went too far in justifying the exempt “core” terms on the basis that they are more likely to be, or are in fact, negotiated (since UTCCR only subjects nonnegotiated terms to review for unfairness), their Lordships went too far the other way. Lord Walker and Lord Mance interpret reg.6(2) as prioritising freedom of contract by reference to Brandler and Ulmer's influential article which supports furthering consumer protection by improving transparency rather than by controlling the reasonableness of contracts. ♣ They conclude that, “any monetary price or remuneration payable under the contract would naturally fall within the language of paragraph (b)” (at [41] and [112]) including the bank charges; it is irrelevant that they are contingent, only incurred by a minority of customers or only constitute part of the price. The lower courts' approach is rejected as necessitating a “complex and uncertain value judgment” which is exacerbated by their appeal to the perspective of “the typical consumer” (at [108] and [40]). ♣ This takes a rather narrow approach to “transparency”, the demands of which clearly go beyond requiring “plain and intelligible language”. The problem for consumers faced with dense text standard terms, as the lower courts recognise, is less lack of comprehension and more the prohibitive transaction cost of comprehension. Consumer protection law should take cognisance of the fact that rational consumers do not read lengthy and complicated standard form contracts for the goods or services they need, whether or not in plain intelligible language. ♣ Thus, Lord Mance's operating assumption that the typical consumers will read and seek to understand all contractual terms prior to entering contracts (at [113]) is unrealistic. Lord Denning recognised this paradigm as “a fiction. No customer in a thousand ever read the conditions” (Thornton v Shoe Lane Parking Ltd [1971] 2 Q.B. 163 CA at 169). ♣ This is why reg.6(2) does not exempt all terms which are in “plain intelligible language”. Since even “rationally ignorant” consumers will appreciate the core (main or essential), and logically more transparent, terms of the contracts they enter, these are the terms that reg.6(2) justifiably exempts from review, in the name of consumer choice.

Answer 181

- Held (HL): though the charge could be said to reflect an imbalance in the rights of the parties, it did not arise contrary to the requirement of good faith: o ParkingEye had a legitimate interest in making the charge given that their business model also gave users an entitlement to free parking for two hours. o Even though the hypothetical negotiated agreement was artificial, the majority (Lord Toulson dissenting) thought that the reasonable motorist in C’s position would have agreed to the charge if they overstayed in return for free parking for two hours.

Terms, Interpretation and Restrictions/Exclusions Flashcards

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