Interpreting contracts in English law
Encyclopedia
Interpreting contracts in English law is an area of English contract law
, which concerns how the courts decide what an agreement means. It is settled law that the process is based on the objective view of a reasonable person
, given the context in which the contracting parties made their agreement. This approach marks a break with previous a more rigid modes of interpretation before the 1970s, where courts paid closer attention to the formal expression of the parties' intentions and took more of a literal view of what they had said.
The process of interpretation was often skewed by courts who tried to construe contracts in a way that was fair
. Before the Unfair Contract Terms Act 1977
, the courts had not developed a jurisdiction to strike down unfair terms. When faced with harsh exclusion clause
s they would often "interpret their way out" of the plain meaning of the clause through a process of strict construction against the party relying on a clause (in Latin, contra proferentum). This would often run contrary to the common sense meaning of a contractual document, and embodied a strained approach.
A remarkable example of the objective approach to interpreting a contract is found in Thake v Maurice
. A couple were assured by a private doctor that Mr Thake's vasectomy would work. They were not explicitly informed there was a small risk of it not working. They had a healthy child. They sued Dr Maurice (and his clinic) for damages to pay for bringing up the child, arguing that his failure to properly perform the operation was a breach of contract which had resulted in great financial burden for them. But the Court of Appeal held that there was no entitlement to damages because a reasonable person knows that there is inherent risk in medical operations, and the chance it could go wrong (now compare Chester v Afshar in tort law). A reasonable person knows that people providing services contract to provide the service, but do not necessarily guarantee the outcome of the service will be full proof.
The move to a contextual, or purposive approach to construing contracts is a recent feature of English contract law. For instance in 1911, in Lovell & Christmas Ltd v Wall Lord Cozens-Hardy MR stated,
Notably the move away from a literal approach came only after the courts pronounced that in interpreting statutes, they had moved from a literal to a purposive approach (see Pepper v Hart
). Now, the leading statement of interpreting contracts is found in Lord Hoffmann's decision in Investors Compensation Scheme Ltd v West Bromwich Building Society
. He referred to changes in approach led by Lord Wilberforce in cases such as Rearden Smith Lines Ltd v Hansen Tangan and said the courts should follow five general principles. When interpreting contracts courts ask,
In ICS Ltd v West Bromwich BS itself, a group of investors had been given negligent advice by various building societies (including West Bromwich BS), financial advisers and solicitors, and so had potential claims for breach of statutory duty. Under the government's Investors Compensation Scheme, the investor could simply get money from the Scheme directly, and the Scheme would carry through the expense of litigation on their behalf. However, in the contract to assign the claims, it said there was an exclusion for,
Taking a literal approach, this could mean - and the building societies were trying to argue - that any claim to rescind a contract (i.e. have it made void) would not be assigned by investors to the Scheme, whether it was for rescission based on a claim in undue influence, or any other claim. The building societies were trying to argue this, because if there was no valid assignment, then ICS would not be empowered to sue them. ICS Ltd was arguing that in fact (probably through unclear drafting) the clause was really intended to mean that claims for rescission based on undue influence would not be assigned. But others would. Lord Hoffmann and the House of Lords unanimously accepted this interpretation, since it was the correct one given the context in which the contract was signed.
. This document, which draws on principles found across most European Union member states that preliminary negotiations are relevant to interpretation. The exclusion may also be seen to be at odds with the leading case on statutory interpretation, Pepper v Hart
, in which the House of Lords held that it would have recourse to authoritative statements of purpose by ministers or promoters of Bills in Hansard
when ascertaining the meaning of a statute.
and tow
. The auction catalogue suggested that one of the batches contained both hemp and tow. But it only contained tow. When the auctioneer tried to enforce the high bid by Scriven Bros, Lawrence J held he could not, because the sale had been procured by the auctioneer's own negligence. Guenter Treitel
has argued that the case is best explained on the basis that the court will have regard to the subjective intentions of the parties - that in fact hemp and tow was being contracted for. But Ewan McKendrick
argues that this case is still explicable through taking an objective approach to the parties expressed wishes: a reasonable person in Hindley's position would not have thought there was a contract with someone misled by their negligently prepared auction catalogue.
A mistake about the contract's terms will also entitle a party to the contract to escape when the other side may have unfairly "snapped up" an offer. In Hartog v Colin & Shields Colin & Shields mistakenly advertised Argentine hare skins for 104 1/4 per pound, instead of per piece (i.e. they had made them much cheaper). In the trade, such skins were always sold by the piece. So when a Belgian called Hartog ordered the skins, Singleton J held that Colin & Shields did not need to deliver. A reasonable person could not have believed the price was not mistaken.
But the order for rectification is rare. The reason for this is the necessity of promoting certainty. In The Olympic Pride Mustill LJ remarked,
Generally, a unilateral mistake by itself is not enough to win an order. An exception, however, is made where it is proven beyond reasonable doubt that one party is aware of the other's mistake and idly stands by as the wrong details are recorded. The conduct must be unconscionable, perhaps by diverting one's attention with false and misleading leading statements, but not amounting to a mistake caused by misrepresentation. So for instance, in George Wimpey UK (Ltd) v VI Construction Ltd a land buyer misunderstood the formula for assessing extra payments if the sale price of flats exceeded a particular figure. But it was not shown that any dishonesty was involved on the part of the seller, and so no rectification was granted.
But before 1977, legislation to directly regulate unfair terms did not exist, and jurisprudence on implied terms was underdeveloped. Even now, with one notable exception, the courts have not accepted that they have any inherent jurisdiction to control unfair terms. It is only under legislation that authority appears to exist. This meant that modes of interpretation were much more important to control unfair terms. In Gillespie Bros v Roy Bowles Ltd Lord Denning remarked,
But apart from Lord Denning, courts are still unwilling to reserve for themselves an explicit role to regulate contractual terms that could result in manifest unfairness. They have left the job to Parliament.
rule has waned. There has not been such a need to "interpret the contract out" of unfairness.
A seed sale contract clause said the sellers gave ‘no warranty express or implied’ as to the seeds’ description. The seeds did not match the description.
Held, that the clause only applied to a warranty, and the description was actually a condition of the contract.
In a contract for ‘new Singer cars’ the clause was ‘all conditions, warranties and liabilities implied by statute, common law or otherwise are excluded.’ One car delivered was used.
Greer LJ noted they were probably trying to avoid Wallis but the defendants had forgotten about express terms. Here an express term was broken.
Ten large handkerchiefs were lost by the laundry. ‘The maximum amount allowed for lost or damaged articles is twenty times the charge made for laundering.’ That was 11s 5d. The cost of the handkerchiefs was £5.
Lord Greene MR held the limitation clause did apply, because although negligence was not mentioned, the defendants could only have been liable for the handkerchiefs if they had been negligent.
Clause 8 said the Crown would keep a freight shed in repair, where Canada Steamship’s goods were being stored. This was at St. Gabriel Basin, on a wharf of the inner harbour of Montreal. Unfortunately, while trying to keep the shed in repair with an oxy-acetylene torch, an employee started a fire and burned down the shed. He should have used a hand drill because sparks flew and lit some cotton bales. $533,584 of goods were destroyed, $40,714 belonging to Canada Steamship. Clause 7 said ‘the lessee shall not have any claim… for… damage… to… goods… being… in the said shed.’ Clause 17 said “the lessee shall at all times indemnify ... the lessor from and against all claims ... by whomsoever made ... in any manner based upon, occasioned by or attributable to the execution of these presents, or any action taken or things done ... by virtue hereof, or the exercise in any manner of rights arising hereunder.”
Lord Morton of Henryton for the Privy Council said that clause 7 did not exclude negligence liability in clear enough terms and clause 17 was ambiguous and would be construed against the Crown. The Crown could realistically be said to have been strictly liable for damage to the goods (e.g. by breach of obligation to keep the shed in repair) and were therefore negligence should not be covered. He set out these principles.
(1) if a clause expressly excludes liability for negligence (or an appropriate synonym ) then effect is given to that. If not,
(2) ask whether the words are wide enough to exclude negligence and if there is doubt that is resolved against the one relying on the clause. If that is satisfied then
(3) ask whether the clause could cover some alternative liability other than for negligence, and if it can it covers that.
Securicor was watching the Aberdeen harbour’s boats. Clause 2(f) said if any liability to a customer would exceed ‘£1000 in respect of any one claim arising from any duty assumed by the company… which involves the provision of any service not solely related to the prevention or detection of fire or theft.’ ACF’s boat was sunk on New Year’s Eve after another boat crashed into it. The judge held Securicor’s negligence caused that and awarded £55,000 in damages. The Court of Appeal reduced it to £1000.
Lord Wilberforce held the limitation clause did apply. It is ‘a question of construction of that clause in the context of the contract as a whole.’ Exclusions for negligence are contra proferentum, but a strained construction is no good, the ‘relevant words must be given, if possible, their natural, plain meaning.’
‘Clauses of limitation are not regarded by the courts with the same hostility as clauses of exclusion: this is because they must be related to other contractual terms, in particular to the risks to which the defending party may be exposed, the remuneration which he receives, and possibly also the opportunity of the other party to insure.’
Lord Fraser, the Canada Steamship ‘principles are not applicable in their full rigour when considering the effect of clauses merely limiting liability.’ They are read contra proferentum and must be clear, but that is it. The purpose of the rules for excluding liability is ‘the inherent improbability that the other party… intended to release the proferens from a liability that would otherwise fall upon him. But there is no such high degree of improbability’ for limitations.
Chase Manhattan was acted as leader of a loan syndicate funding five films. An insurance contract between HIH and Chase Manhattan had a ‘truth of statement’ clause. But there was a general exclusion for misrepresentation. It was held not to exclude liability for fraudulent misrepresentation or non-disclosure. But obiter, negligent misrepresentation and non-disclosure were excluded effectively (even though Canada would say it is not, given liability for innocent misrepresentation and non-disclosure was also a possibility).
The paramount task of the court is to give effect to the parties’ intentions, Lord Bingham [6], Lord Hoffmann [61-3], Lord Hobhouse [95] and Lord Scott [116]. But the rules will be retained where they give effect to the parties’ intentions. Lord Bingham [11], ‘There can be no doubting the general authority of [Lord Morton’s principles], which have been applied in many cases, and the approach indicated is sound. The courts should not ordinarily infer that a contracting party has given up rights which the law confers upon him to an extent greater than the contract terms indicate he has chosen to do.’
There is no general power to strike down unreasonable exclusion clauses.
English contract law
English contract law is a body of law regulating contracts in England and Wales. With its roots in the lex mercatoria and the activism of the judiciary during the industrial revolution, it shares a heritage with countries across the Commonwealth , and the United States...
, which concerns how the courts decide what an agreement means. It is settled law that the process is based on the objective view of a reasonable person
Reasonable person
The reasonable person is a legal fiction of the common law that represents an objective standard against which any individual's conduct can be measured...
, given the context in which the contracting parties made their agreement. This approach marks a break with previous a more rigid modes of interpretation before the 1970s, where courts paid closer attention to the formal expression of the parties' intentions and took more of a literal view of what they had said.
The process of interpretation was often skewed by courts who tried to construe contracts in a way that was fair
Fair
A fair or fayre is a gathering of people to display or trade produce or other goods, to parade or display animals and often to enjoy associated carnival or funfair entertainment. It is normally of the essence of a fair that it is temporary; some last only an afternoon while others may ten weeks. ...
. Before the Unfair Contract Terms Act 1977
Unfair Contract Terms Act 1977
The Unfair Contract Terms Act 1977 is an Act of Parliament of the United Kingdom which regulates contracts by restricting the operation and legality of some contract terms. It extends to nearly all forms of contract and one of its most important functions is limiting the applicability of...
, the courts had not developed a jurisdiction to strike down unfair terms. When faced with harsh exclusion clause
Exclusion clause
An exclusion clause is a term in a contract that seeks to restrict the rights of the parties to the contract.Traditionally, the district courts have sought to limit the operation of exclusion clauses...
s they would often "interpret their way out" of the plain meaning of the clause through a process of strict construction against the party relying on a clause (in Latin, contra proferentum). This would often run contrary to the common sense meaning of a contractual document, and embodied a strained approach.
Objectivity
For some time it had been orthodox to take an objective view of interpretation, best demonstrated by Smith v Hughes. Where Mr Smith thought, after testing a sample, he was buying old oats but in fact was buying green oats, he was not able to assert that he was unbound by his agreement. "If, whatever a man's real intention may be," said Blackburn J,A remarkable example of the objective approach to interpreting a contract is found in Thake v Maurice
Thake v Maurice
Thake v Maurice [1986] QB 644 is an English contract law case, concerning the standard of care that must be exercised by surgeons in performing operations.-Facts:...
. A couple were assured by a private doctor that Mr Thake's vasectomy would work. They were not explicitly informed there was a small risk of it not working. They had a healthy child. They sued Dr Maurice (and his clinic) for damages to pay for bringing up the child, arguing that his failure to properly perform the operation was a breach of contract which had resulted in great financial burden for them. But the Court of Appeal held that there was no entitlement to damages because a reasonable person knows that there is inherent risk in medical operations, and the chance it could go wrong (now compare Chester v Afshar in tort law). A reasonable person knows that people providing services contract to provide the service, but do not necessarily guarantee the outcome of the service will be full proof.
- Proforce Recruit Ltd v The Rugby Group Ltd [2006] EWCA Civ 69
- Chartbrook Ltd v Persimmon Homes LtdChartbrook Ltd v Persimmon Homes LtdChartbrook Ltd v Persimmon Homes Ltd [2009] is an English contract law case concerning interpretation of contracts. It creates a so called "red ink" rule, that there is no limit to verbal rearrangement that the court may deploy to give a commercial sensible meaning when construing a contract in...
[2008] EWCA Civ 183 - Attorney General of Belize v Belize Telecom LtdAttorney General of Belize v Belize Telecom LtdAttorney General of Belize v Belize Telecom Ltd [2009] is a case on which the Privy Council gave advice, relevant for contract law, company law and constitutional law...
[2009] UKPC 11
Purpose and context
it is the duty of the court… to construe the document according to the ordinary grammatical meaning of the words used therein.
Notably the move away from a literal approach came only after the courts pronounced that in interpreting statutes, they had moved from a literal to a purposive approach (see Pepper v Hart
Pepper v Hart
Pepper v Hart [1992] UKHL 3, is a landmark decision of the House of Lords on the use of legislative history in statutory interpretation...
). Now, the leading statement of interpreting contracts is found in Lord Hoffmann's decision in Investors Compensation Scheme Ltd v West Bromwich Building Society
Investors Compensation Scheme Ltd v West Bromwich Building Society
Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] is the most cited English contract law case, and one of the most cited contract cases today. It laid down that a contextual approach must be taken to interpretation of contracts...
. He referred to changes in approach led by Lord Wilberforce in cases such as Rearden Smith Lines Ltd v Hansen Tangan and said the courts should follow five general principles. When interpreting contracts courts ask,
- what the document conveys to a reasonable person
- with regard to all relevant background circumstances, or the "matrix of fact"
- except prior negotiations
- that the meaning of words is not their literal, dictionary meaning, but one that would be understood from the context
- that the meaning construed should not run contrary to a common sense viewpoint.
In ICS Ltd v West Bromwich BS itself, a group of investors had been given negligent advice by various building societies (including West Bromwich BS), financial advisers and solicitors, and so had potential claims for breach of statutory duty. Under the government's Investors Compensation Scheme, the investor could simply get money from the Scheme directly, and the Scheme would carry through the expense of litigation on their behalf. However, in the contract to assign the claims, it said there was an exclusion for,
"Any claim (whether sounding in rescissionRescissionIn contract law, rescission has been defined as the unmaking of a contract between parties. Rescission is the unwinding of a transaction. This is done to bring the parties, as far as possible, back to the position in which they were before they entered into a contract .-In court:Rescission is an...
for undue influenceUndue influenceUndue influence is an equitable doctrine that involves one person taking advantage of a position of power over another person. It is where free will to bargain is not possible.-Undue influence in contract law:...
or otherwise)"
Taking a literal approach, this could mean - and the building societies were trying to argue - that any claim to rescind a contract (i.e. have it made void) would not be assigned by investors to the Scheme, whether it was for rescission based on a claim in undue influence, or any other claim. The building societies were trying to argue this, because if there was no valid assignment, then ICS would not be empowered to sue them. ICS Ltd was arguing that in fact (probably through unclear drafting) the clause was really intended to mean that claims for rescission based on undue influence would not be assigned. But others would. Lord Hoffmann and the House of Lords unanimously accepted this interpretation, since it was the correct one given the context in which the contract was signed.
- Staffordshire Area Health Authority v South Staffordshire Waterworks Co [1978] 3 All ER 769, per Lord Denning MR
Negotiations?
One point of controversy was Lord Hoffmann's acceptance that the courts would not look at negotiations prior to the contract as an aid to interpretation. Professor G McMeel has argued that, "The best way forward is for the matter to be one of weight rather than admissibility." In other words, that evidence of negotiations may not necessarily weigh very heavily in the face of contradictory evidence in a contract itself, but it should not be barred entirely. Declarations of subjective intent, prior negotiations and subsequent conduct should not be ruled out as irrelevant where they could be a valuable aid to interpretation. Lord Nicholls has also been supportive of this view, and has argued that in fact evidence of prior negotiations and conduct subsequent to the conclusion of a contract are already admissible for cases on rectification (e.g. The Karen Oltman [1976] 2 Lloyd’s Rep 708). He argues the courts are well accustomed to determining what weight should be place on admissible evidence. Finally, the absolute bar on admissibility on prior negotiations also stands at odds with art 5-102(a), Principles of European Contract LawPrinciples of European Contract Law
-Definition:The Principles of European Contract Law is a set of model rules drawn up by leading contract law academics in Europe. It attempts to elucidate basic rules of contract law and more generally the law of obligations which most legal systems of the member states of the European Union hold...
. This document, which draws on principles found across most European Union member states that preliminary negotiations are relevant to interpretation. The exclusion may also be seen to be at odds with the leading case on statutory interpretation, Pepper v Hart
Pepper v Hart
Pepper v Hart [1992] UKHL 3, is a landmark decision of the House of Lords on the use of legislative history in statutory interpretation...
, in which the House of Lords held that it would have recourse to authoritative statements of purpose by ministers or promoters of Bills in Hansard
Hansard
Hansard is the name of the printed transcripts of parliamentary debates in the Westminster system of government. It is named after Thomas Curson Hansard, an early printer and publisher of these transcripts.-Origins:...
when ascertaining the meaning of a statute.
- Chartbrook Ltd v Persimmon Homes LtdChartbrook Ltd v Persimmon Homes LtdChartbrook Ltd v Persimmon Homes Ltd [2009] is an English contract law case concerning interpretation of contracts. It creates a so called "red ink" rule, that there is no limit to verbal rearrangement that the court may deploy to give a commercial sensible meaning when construing a contract in...
[2009] UKHL 38
Mistake and rectification
The general rule in English law is that if one party to the contract is mistaken about the terms of the contract, this is not an excuse to fail to perform, the classic case being Smith v Hughes. There has been debate about whether at any point courts do in fact have regard to the subjective intentions of the parties. In Scriven Bros & Co v Hindley & Co Scriven Bros made a bid at an auction (the auctioneer was trading as Hindley & Co) for bales of hempHemp
Hemp is mostly used as a name for low tetrahydrocannabinol strains of the plant Cannabis sativa, of fiber and/or oilseed varieties. In modern times, hemp has been used for industrial purposes including paper, textiles, biodegradable plastics, construction, health food and fuel with modest...
and tow
Tow
In the composites industry, a tow is an untwisted bundle of continuous filaments, and it refers to man-made fibres, particularly carbon fibres ....
. The auction catalogue suggested that one of the batches contained both hemp and tow. But it only contained tow. When the auctioneer tried to enforce the high bid by Scriven Bros, Lawrence J held he could not, because the sale had been procured by the auctioneer's own negligence. Guenter Treitel
Guenter Treitel
Sir Guenter Heinz Treitel, QC, FBA, is a German-born English academic and retired Vinerian Professor of English Law.Treitel is the son of a leading Berlin lawyer and came to England on the Kindertransport...
has argued that the case is best explained on the basis that the court will have regard to the subjective intentions of the parties - that in fact hemp and tow was being contracted for. But Ewan McKendrick
Ewan McKendrick
Ewan Gordon McKendrick is Herbert Smith Professor of English Private Law at the University of Oxford. He is known for his academic work on the law of contract, as well as publications in the law of unjust enrichment and commercial law.-Life:...
argues that this case is still explicable through taking an objective approach to the parties expressed wishes: a reasonable person in Hindley's position would not have thought there was a contract with someone misled by their negligently prepared auction catalogue.
A mistake about the contract's terms will also entitle a party to the contract to escape when the other side may have unfairly "snapped up" an offer. In Hartog v Colin & Shields Colin & Shields mistakenly advertised Argentine hare skins for 104 1/4 per pound, instead of per piece (i.e. they had made them much cheaper). In the trade, such skins were always sold by the piece. So when a Belgian called Hartog ordered the skins, Singleton J held that Colin & Shields did not need to deliver. A reasonable person could not have believed the price was not mistaken.
Rectification
It may however be that a contractual document has failed to adequately reflect the intentions of the parties, in which case they can ask the court to "rectify" the agreement (i.e. pretend the words written down were different and give an order accordingly). Asking a court to rectify a document does not mean asking for the contract to be changed. It just asks for the recording of the document to be changed. Rectification is an equitable discretionary remedy, and therefore unavailable to claimants who delay excessively and it has no effect against a bona fide purchaser for value without notice. There is a fine line between interpretation and rectification, since evidence assisting in interpretation is also evidence which can give rise to rectification. Claimants can ask for both.But the order for rectification is rare. The reason for this is the necessity of promoting certainty. In The Olympic Pride Mustill LJ remarked,
The Court is reluctant to allow a party of full capacity who has signed a document with opportunity of inspection, to say afterwards that it is not what he meant. Otherwise, certainty and ready enforceability would be hindered by constant attempts to cloud the issue by reference to pre-contractual negotiations. These considerations apply with particular force in the field of commerce, where certainty is so important. Various expressions have been employed in the reported cases to describe the standard of proof required of the person who seeks rectification. Counsel in the present case were agreed that the standard can adequately be stated by saying that the Court must be "sure" of the mistake, and of the existence of a prior agreement or common intention before granting the remedy.
Generally, a unilateral mistake by itself is not enough to win an order. An exception, however, is made where it is proven beyond reasonable doubt that one party is aware of the other's mistake and idly stands by as the wrong details are recorded. The conduct must be unconscionable, perhaps by diverting one's attention with false and misleading leading statements, but not amounting to a mistake caused by misrepresentation. So for instance, in George Wimpey UK (Ltd) v VI Construction Ltd a land buyer misunderstood the formula for assessing extra payments if the sale price of flats exceeded a particular figure. But it was not shown that any dishonesty was involved on the part of the seller, and so no rectification was granted.
- Frederick E Rose (London) Ltd v William H Pim Junior & Co LtdFrederick E Rose (London) Ltd v William H Pim Junior & Co LtdFrederick E Rose Ltd v William H Pim Junior & Co Ltd [1953] 2 QB 450 is an English contract law case concerning rectification of contractual documents and interpreting contracts in English law.-Facts:...
[1953] 2 QB 450
- Joscelyne v Nissen [1970] 2 QB 86, a father agreed with his daughter that she would buy his business and in return pay his home gas, electricity and coal bills. The contract did not express this ‘continuing common intention’. Russell, Sachs and Phillimore LJJ held that there could be rectification, because there was ‘convincing proof’ (98) of the intention.
Exclusion clauses
In order to tackle the unfairness that can result from the use of exclusion clauses, courts have a variety of tools at their disposal. They can,- choose to not incorporate a term, e.g. Thornton v Shoe Lane Parking Ltd
- interpret a clause restrictively, e.g. Hollier v Rambler Motors Ltd
- restrict its effect through construction with an implied term, e.g. Johnstone v Bloomsbury Health AuthorityJohnstone v Bloomsbury Health AuthorityJohnstone v Bloomsbury Health Authority [1991] 2 All ER 293 is an English contract law case, concerning implied terms and unfair terms under the Unfair Contract Terms Act 1977.-Facts:...
- apply the Unfair Contract Terms Act 1977Unfair Contract Terms Act 1977The Unfair Contract Terms Act 1977 is an Act of Parliament of the United Kingdom which regulates contracts by restricting the operation and legality of some contract terms. It extends to nearly all forms of contract and one of its most important functions is limiting the applicability of...
- apply the Unfair Terms in Consumer Contracts Regulations 1999Unfair Terms in Consumer Contracts Regulations 1999The Unfair Terms in Consumer Contracts Regulations 1999 is a UK statutory instrument, which implements the EU Unfair Consumer Contract Terms Directive into domestic law.Implemented under the European Communities Act 1972. See also, L95 OJ 29...
But before 1977, legislation to directly regulate unfair terms did not exist, and jurisprudence on implied terms was underdeveloped. Even now, with one notable exception, the courts have not accepted that they have any inherent jurisdiction to control unfair terms. It is only under legislation that authority appears to exist. This meant that modes of interpretation were much more important to control unfair terms. In Gillespie Bros v Roy Bowles Ltd Lord Denning remarked,
judges have… time after time, sanctioned a departure from the ordinary meaning. They have done it under the guise of ‘construing’ the clause. They assume that the party cannot have intended anything so unreasonable. So they construe the clause ‘strictly’. They cut down the ordinary meaning of the words and reduce them to reasonable proportions. They use all their skill and art to that end.
But apart from Lord Denning, courts are still unwilling to reserve for themselves an explicit role to regulate contractual terms that could result in manifest unfairness. They have left the job to Parliament.
Contra proferentem
Contra proferentem means an exclusion clause is interpreted strictly against the party seeking to rely on it, so any ambiguity is resolved against them. As a mode of interpretation it is used particularly against exclusion clauses for negligence on the basis that the courts regard it as inherently unlikely that one party will agree to allow the other contracting party to exclude liability for his own negligence. However since the enactment of UCTA 1977, the extent to which courts have employed the contra proferentemContra proferentem
Contra proferentem is a doctrine of contractual interpretation which provides that an ambiguous term will be construed against the party that imposed its inclusion in the contract or, more accurately, against the party who imposed it. The interpretation will therefore favor the party that did not...
rule has waned. There has not been such a need to "interpret the contract out" of unfairness.
- Wallis, Son and Wells v Pratt and Haynes [1911] AC 394
A seed sale contract clause said the sellers gave ‘no warranty express or implied’ as to the seeds’ description. The seeds did not match the description.
Held, that the clause only applied to a warranty, and the description was actually a condition of the contract.
- Andrews Bros (Bournemouth) Ltd v Singer and Co Ltd [1934] 1 KB 17
In a contract for ‘new Singer cars’ the clause was ‘all conditions, warranties and liabilities implied by statute, common law or otherwise are excluded.’ One car delivered was used.
Greer LJ noted they were probably trying to avoid Wallis but the defendants had forgotten about express terms. Here an express term was broken.
- BCCI SA v Ali [2001] UKHL 8, Lord Hoffmann [60] (dissenting), the doctrine ‘is a desperate remedy, to be invoked only if it is necessary to remedy a widespread injunstice.’ So contra proferentum should only operate where there is real ambiguity.
- Alderslade v Hendon Laundary Ltd [1945] KB 189
Ten large handkerchiefs were lost by the laundry. ‘The maximum amount allowed for lost or damaged articles is twenty times the charge made for laundering.’ That was 11s 5d. The cost of the handkerchiefs was £5.
Lord Greene MR held the limitation clause did apply, because although negligence was not mentioned, the defendants could only have been liable for the handkerchiefs if they had been negligent.
- Canada Steamship Lines Ltd v The King [1952] AC 192
Clause 8 said the Crown would keep a freight shed in repair, where Canada Steamship’s goods were being stored. This was at St. Gabriel Basin, on a wharf of the inner harbour of Montreal. Unfortunately, while trying to keep the shed in repair with an oxy-acetylene torch, an employee started a fire and burned down the shed. He should have used a hand drill because sparks flew and lit some cotton bales. $533,584 of goods were destroyed, $40,714 belonging to Canada Steamship. Clause 7 said ‘the lessee shall not have any claim… for… damage… to… goods… being… in the said shed.’ Clause 17 said “the lessee shall at all times indemnify ... the lessor from and against all claims ... by whomsoever made ... in any manner based upon, occasioned by or attributable to the execution of these presents, or any action taken or things done ... by virtue hereof, or the exercise in any manner of rights arising hereunder.”
Lord Morton of Henryton for the Privy Council said that clause 7 did not exclude negligence liability in clear enough terms and clause 17 was ambiguous and would be construed against the Crown. The Crown could realistically be said to have been strictly liable for damage to the goods (e.g. by breach of obligation to keep the shed in repair) and were therefore negligence should not be covered. He set out these principles.
(1) if a clause expressly excludes liability for negligence (or an appropriate synonym ) then effect is given to that. If not,
(2) ask whether the words are wide enough to exclude negligence and if there is doubt that is resolved against the one relying on the clause. If that is satisfied then
(3) ask whether the clause could cover some alternative liability other than for negligence, and if it can it covers that.
- Hollier v Rambler Motors (AMC) LtdHollier v Rambler Motors (AMC) LtdHollier v Rambler Motors Ltd [1972] 2 QB 71 is an English contract law case, concerning the incorporation of terms into a contract and the contra proferentum rule of interpretation. It shows an example of a very hostile interpretation of exclusion clauses.-Facts:Walter Hollier took his Rambler car...
[1972] 1 All ER 399
- The Raphael [1982] 2 Lloyd’s Rep 42, the above three rules are merely aids to identify the parties’ intentions. You cannot pick ‘fanciful or remote’ alternatives to negligence. Stephenson LJ said if the alternative was sufficiently realistic for the parties to intend the clause to apply that was enough. Lord Donaldson MR and May LJ said the question was ultimately one of construction.
- Dorset CC v Southern Felt Roofing Ltd (1989) 48 Build LR 96, an example of passing the second rule only to fall foul of the third. McKendrick, 230, says the rules put conflicting demands on draftsmen because (2) requires a widely drafted clause but (3) says the wider it is drafted the more likely it will exclude something other than negligence.
- Schenker & Co (Aust) Pty Ltd v Malpas Equipment and Services Pty Ltd [1990] VR 834, 846, McGarvie J said the rules were contrary to ordinary rules of contstruction from Darlington Futures.
- EE Calendonia Ltd v Orbit Valve Co Europe [1993] 4 All ER 165, 173, Hobhouse J asserted the rules should be applied because draftspeople expect courts to follow established principles, and they can always change their drafting.
- These rules on interpretation are like exclusion clauses themselves. The courts send out one message with general principles of construction, and then surreptitiously add another. Fighting fire with fire just fans the flames of confusion. It would be preferable to be forthright and say unreasonable clauses will be struck down, while applying ordinary principles of construction.
- Rules also endorsed in The Fiona [1994] 2 Lloyd’s Rep 506 and Shell Chemicals UK Ltd v P&O Roadtanks Ltd [1995] 1 Lloyd’s Rep 297, 301.
- McKendrick, 231, suggests that the rules frustrate the intention of parties, especially when they want a clause to cover negligence and something else (e.g. late delivery) and should not be applied, or ‘quietly laid to rest’ (233).
- Alisa Craig Fishing Co Ltd v Malvern Fishing Co Ltd [1983] 1 WLR 964
Securicor was watching the Aberdeen harbour’s boats. Clause 2(f) said if any liability to a customer would exceed ‘£1000 in respect of any one claim arising from any duty assumed by the company… which involves the provision of any service not solely related to the prevention or detection of fire or theft.’ ACF’s boat was sunk on New Year’s Eve after another boat crashed into it. The judge held Securicor’s negligence caused that and awarded £55,000 in damages. The Court of Appeal reduced it to £1000.
Lord Wilberforce held the limitation clause did apply. It is ‘a question of construction of that clause in the context of the contract as a whole.’ Exclusions for negligence are contra proferentum, but a strained construction is no good, the ‘relevant words must be given, if possible, their natural, plain meaning.’
‘Clauses of limitation are not regarded by the courts with the same hostility as clauses of exclusion: this is because they must be related to other contractual terms, in particular to the risks to which the defending party may be exposed, the remuneration which he receives, and possibly also the opportunity of the other party to insure.’
Lord Fraser, the Canada Steamship ‘principles are not applicable in their full rigour when considering the effect of clauses merely limiting liability.’ They are read contra proferentum and must be clear, but that is it. The purpose of the rules for excluding liability is ‘the inherent improbability that the other party… intended to release the proferens from a liability that would otherwise fall upon him. But there is no such high degree of improbability’ for limitations.
- Darlington Futures Ltd v Delco Australia Pty Ltd (1987) 61 ALJR 76, refused to differentiate between exclusions and limitations; but it was affirmed by Lord Bridge in George Mitchell Ltd v Finney Lock Seeds Ltd
- HIH Casualty and General Insurance Ltd v Chase Manhattan BankHIH Casualty and General Insurance Ltd v Chase Manhattan BankHIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6 is an English contract law case, concerning misrepresentation.-Facts:...
[2003] UKHL 6
Chase Manhattan was acted as leader of a loan syndicate funding five films. An insurance contract between HIH and Chase Manhattan had a ‘truth of statement’ clause. But there was a general exclusion for misrepresentation. It was held not to exclude liability for fraudulent misrepresentation or non-disclosure. But obiter, negligent misrepresentation and non-disclosure were excluded effectively (even though Canada would say it is not, given liability for innocent misrepresentation and non-disclosure was also a possibility).
The paramount task of the court is to give effect to the parties’ intentions, Lord Bingham [6], Lord Hoffmann [61-3], Lord Hobhouse [95] and Lord Scott [116]. But the rules will be retained where they give effect to the parties’ intentions. Lord Bingham [11], ‘There can be no doubting the general authority of [Lord Morton’s principles], which have been applied in many cases, and the approach indicated is sound. The courts should not ordinarily infer that a contracting party has given up rights which the law confers upon him to an extent greater than the contract terms indicate he has chosen to do.’
Fundamental breach
The courts tried to control and strike down very extreme exclusion clauses, those which excluded liability for very serious breaches of contract. The simple rule now, is that it is a matter of construction whether an exclusion clause covers a fundamental breach which occurred. Lord Denning wanted a ‘rule of law’ approach so that liability for some fundamental breaches of contract could never be excluded no matter how widely the clause was drafted. But Suisse Atlantique Societe d’Armament Maritime SA v NV Rotterdamsche Kolen Centrale [1967] 1 AC 361 held that the preferable ‘rule of construction’ approach was to interpret the clause against the party relying on it. In Harbutt’s Plasticine Ltd v Wayne Tank Pump Co Ltd [1970] 1 QB 477, Lord Denning MR seized on the judgments ambiguities and resurrected his own rule. But that was stopped at last in…- Photo Production Ltd v Securicor Transport Ltd [1980] AC 827
- Clauses which exempt someone from a serious breach, such as for a term going to the contract’s root (Karsales (Harrow) Ltd v Wallis [1956] 1 WLR 936) or a deliberate refusal to perform (Sze Hai Tong Bank Ltd v Rambler Cycle Co Ltd [1959] AC 576) must be very expressly excluded.
- Curtis v Chemical Cleaning and Dyeing Co Ltd [1951] 1 KB 805, a party cannot rely on an exclusion clause if he has misrepresented its effect.
- Couchman v Hill [1947] KB 554, a written exclusion clause can be overridden by express and inconsistent undertakings at the time of the contract.
There is no general power to strike down unreasonable exclusion clauses.
See also
- Contractual terms in English lawContractual terms in English lawContractual terms in English law is a topic which deals with four main issues.*which terms are incorporated into the contract*how are the terms of the contract to be interpreted*whether terms are implied into the contract...
- Unfair terms in English law
- English contract lawEnglish contract lawEnglish contract law is a body of law regulating contracts in England and Wales. With its roots in the lex mercatoria and the activism of the judiciary during the industrial revolution, it shares a heritage with countries across the Commonwealth , and the United States...
- Law Commission, Unfair Terms in Contracts (Report No. 292, 2005) produced an Unfair Contract Terms BillUnfair Contract Terms BillThe Unfair Contract Terms Bill is a proposed Act of Parliament of the United Kingdom, which would consolidate two existing pieces of consumer protection legislation, the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999 into one Act...