Contract reading session 5

General Reading
McKendrick casebook Ch 8:

 Whether a statement made by one party to another forms a contractual term or merely
a representation depends on the objective intention of the parties. However the relevance
has been reduced by the availability of damages for negligent misrepresentation as well
as fraudulent misrepresentation.

 The “parol evidence” rule set out a general principle that where a contract has been
put in writing, evidence cannot be adduced to show the existence of another term, that
varies, contradicts etc the written agreement. However this rule is subject to exceptions,
changes etc.

1. Identifying Terms

i) Classifying Contractual Terms

Heilbut Symons v Buckleton [1913] AC 30: Ds were underwriting shares of what they
claimed was a rubber company. P called Ds to inquire about the shares. D said they were
"bringing out a rubber company". Based on this statement, P purchased a large amount of
shares. The shares turned out not to be for a rubber company at all, the shares did very
poorly. P sued for breach of warranty. HL denied P’s claim.

Lord Moulton: P could be successful in two ways. First, if the plaintiff could show
fraudulent misrepresentation "or what is equivalent thereto, must be made recklessly, not
caring whether it be true or not." Second, if there was intent to be held to a promise then
there may be a collateral contract, which would bind D to their representation. However,
collateral contracts are difficult to find, and, on the fact, none was found.

VC Haldance LC: the general principle is NOT to presume that a collateral contract (one
aside from the main contract) in the absence of an expression or implication to that effect.

Oscar Chess Ltd. v. Williams [1957] 1 WLR 370: P sold D a car in a part exchange. D
told P that the car he was trading in was one type of car and P reduced the amount on that
basis. It turned out that it was a different type that was worth much less. D had genuinely
believed it to be the type of car he claimed since the person who he bought it off had told
him that and the cars documents suggested that. P sued D for the difference between the
initially stated value of the car and the actual value of the car. CA found that D did not
have to pay damages.
Denning LJ: Was the statement as to the type of the car a “warranty” i.e. a guarantee?
Was it a term of the contract, breach of which demands payment? He says determining
something as a warranty or a term rather than mere representation depends on intentions
of the parties. In this case the assertion as to the type of car was a claim or a belief, not a
promise (quotes the actual speech of D which proves this). Here, D obviously had no
personal knowledge of when the car was made and had he been asked to guarantee the
type of car, he would have been unable to do so, not having any more knowledge than
what he deduced from the log-book, which P had also inspected. P therefore knew that D
was in no position to guarantee or warrant the model of the car: he could merely make an
informed guess. Also in this case P could have checked by referencing the chassis no.
with the company, but did not do so. McKendrick: P’s claim might succeed today under
Misrepresentation Act 1967 (see next week).

Dick Bentley Productions Ltd. v. Harold Smith (Motors) Ltd. [1965] 1 WLR 623: D sold
P a car but made false claims as to the mileage of the car and P sued for the difference
between the value he paid and the actual value. CA allowed his claim.

Denning LJ: If a representation is made so that P will act on it, and P does in fact act on
it, there is prima facie ground for saying that it was a warranty. This presumption can be
rebutted by D if he can show that (1) it was made innocently i.e. he had no fault in a false
representation being made, and (2) that it would not, in the circumstances, be reasonable
for him to be bound by it. In this case the prima facie warranty is not rebutted since D
was in a position to, and ought to, have found out the truth about the car. The statement
as to mileage was made without justification. This is contrasted with D in Oscar Chess
who could not have discovered the truth about the car.

L Schuler AG V. Wickman Machine Tools Sales Ltd. [1974] AC 235: See week 4

Lombard North Central v. Butterworth [1987] QB 527: P lent a computer to D on a hire-

purchase basis, stating that timely payment was to be a condition. D narrowly failed to
make the payments and P repossessed the computer and resold it. The CA upheld P’s
termination because the breach was of a condition. This shows the danger of letting the
parties decide what should be a condition and what a warranty, since the more powerful
party can simply make every small term a condition. Bad decision since Schuler shows
that this is not necessary. On the hand time might have been v important to P genuinely…

Arcos Ltd. v. E A Ronaassen & Son [1933] AC 470: P agreed to buy wood 8/16 inch
thick but D actually delivered wood 9/16 inch thick. The court considered that P could
not be bound to accept goods that did not match the description of those specified in the
contract. P was allowed to terminate, even though the goods were “merchantable”. The
real reason for p terminating was because it had made a bargain that was unprofitable to
them. This case shows the unfairness of an absolute insistence on the specified terms of
the contract.
Hong Kong Fir Shipping Co. Ltd v. Kawasaki Kisen Kaisha Ltd. [1962] 2 QB 26- see
week 4

The Hansa Nord [1976] QB 44 (see note in BBF)- see week 4

Bunge Corporation v. Tradax SA [1981] 1 WLR 711: D was shipping P’s goods and
clause 7 of their contract stated that D had to give notice of 15 days prior to shipping
regarding readiness of the ship. D gave late notification that his ship would not be ready,
and P, stating that clause 7 was a condition, argued that they could terminate the contract.
HL held that P was right.

Lord Wilberforce: this case is distinct from Hong Kong Fir since there the CA’s
reasoning was that a term which would almost certainly, and could very easily, be
breached was unlikely to be considered as a condition. However giving late notice can
only be committed in one way and is easily avoided. Therefore Hong Kong Fir reasoning
does not prevent clause 7 here from being regarded as a condition. On the facts it was
“clearly essential” that the notice be given in time.

Lord Roskill: The use of the “innominate term” should not be used to allow escapes from
bad bargains. Where it is right to do so, terms will be construed as conditions for the sake
of commercial certainty: This is especially so where the contract is part of a chain or
string of contracts, or where it would be difficult for the court to quantify the amount lost
by P if termination were not permitted.

2. Implied Terms

Sale of Goods Act 1979, ss 12–15 (s 14 as amended by Sale and Supply of Goods to
Consumers Regulations 2002, SI 3045/2002, Reg 3):
Regarding s.14 Sales of goods act (see week 3), the circumstances to be taken into
account in determining whether the good is of adequate quality includes public
statements as to the goods’ characteristics by the seller, including advertising and
labelling. However they are not to be taken into account if at the time the contract was
made, the seller was not, and could not reasonably have been, aware of the statement;
before the contract was made, the statement had been withdrawn in public or, to the
extent that it contained anything which was incorrect or misleading, it had been corrected
in public; or the decision to buy the goods could not have been influenced by the
statement.

The Moorcock (1889) 14 PD 64: P contracted with D to unload his boat at D’s jetty,
which was unsafe and P’s boat was damaged in mooring. The court implied a term into
the contract that D had to take reasonable care to ensure the safety of the harbour, which
he had breached and for which he was liable.
Bowen LJ: An implied warranty…is in all cases founded upon the presumed intention of
the parties and upon reason”. CW: the problem here is that had P been aware of the
implied term he probably would have charged more for the contract initially.

Liverpool CC v Irwin [1977] AC 239: Ps claimed for damages from D, who ran their
block of flats, on the grounds that D had failed to maintain the flats e.g. elevator
problems etc. HL held that there was an implied duty on the part of D to take reasonable
care to ensure that the building was in repair, but on the facts there was no breach of this
duty.

Lord Wilberforce: the courts are willing to imply terms. It is very commonly done in
cases where the term to be implied would be considered by both parties to be part of the
contract anyway. A term is also implied where, without it, the contract will not work- see
Moorcock. This is a strict test. The standard for implying a term is that the term “must
not exceed what is necessary in the circumstances”. In this case, what is necessary is that
D take reasonable care to keep he buildings in reasonable repair, which D has done.

NB In CA Lord Denning MR suggested an approach that HL rejected and that Lord

Wilberforce called “dangerous”. He says that the courts can imply a term where it is
merely “reasonable” to do so (as opposed to necessary)- This is much more trigger-happy
with implying terms.

Lord Salmon (HL): said that to imply terms as freely as Denning advocates would be to
undermine the point of the contract: that the parties have agreed what terms should be
included.

Lord Cross: there is a distinction between terms implied in law and terms implied in fact:
terms implied in fact are terms that exist but are not explicitly stated i.e. a common
understanding that the term exists. However a term in law (which Lord Cross says exists
here) is a term that should apply to all legal situations of this type (i.e. letter and lessee).

Scally v Southern Health & Social Services Bd [1991] 4 All ER 563: Ps sued D (their
employer) for failing to tell them about changes to their dept. pension plan of which they
would have been able to take advantage, had D told them about it earlier (there was a
time limitation which had passed on taking advantage of the new benefit). HL held that it
was an implied term of the contract of employment that D would tell P about changes to
the pension plan.

Lord Bridge: The law will imply a duty on D to inform P in the following circumstances:
Where (1) the terms are not negotiated by the employee but by a representative body or
by reference; (2) a term in the contract makes a valuable right available to the employee,
contingent upon his action; (3) the employee “cannot, in all the circumstances, reasonably
be expected to be aware of the term unless it is drawn to his attention”. This is on the
basis that the parties intended P to be able to take advantage of the term, else why create
it?
Grogan v. Robin Meredith Plant Hire [1996] CLJ 427: P entered an agreement with D to
hire D’s driver. D’s manager was given time sheets to sign, displaying the amount of time
D’s driver had worked and hence how much P owed D. However at the bottom of the
sheet, there was an assertion that the hire was according to P’s terms. Under P’s terms D
was liable for all accidents, vehicle problems etc. CA ruled that although D signed the
time sheets, P’s terms could not be construed as becoming part of the original contract.
The question was whether the document signed was one which a reasonable man would
expect to contain, relevant contractual conditions. For this the nature and function of the
document was taken into account. In this case the document was supposed to have a
merely “administrative purpose” (Auld LJ) so that the amount owed could be worked out.

3. Exclusion Clauses

i) Incorporation of Written Terms

(a) Notice

Parker v South East Railway Co (1877) 2 CPD 416: Ps deposited bags in a cloak room
and were given a ticket for the bag stating time, date and the words “see back” on which
there were conditions. Were Ps bound by the conditions? CA said that a retrial was
needed to establish whether Ps were bound.
Where P receives a ticket, unaware that it contains writing, he is not bound. Where he is
aware that it will contain writing and believed that the writing would contain
terms/conditions, he is bound. Where, as here, Ps knew or believed that there was writing
but didn’t know or believe that the writing contained conditions or terms, he was bound,
PROVIDED that the ticket was given to him in such a way that he could see the writing
and was reasonable notice to him that it contained conditions. (Mellish LJ).
Prima facie a ticket doesn’t lead to new terms. The company here intended to modify the
contract. If the depositor was aware, or ought to be treated as aware, of this, the
depositor is bound. The depositor should be treated as aware, if he knew or had good
reason to believing the ticket contained terms, but intentionally or negligently refrained
from finding out. Without good reason to believe, he is not under obligation to examine
the ticket. Whether the plaintiff had knowledge, or good reason for belief, is a question of
fact. (Bagally LJ).
If the plaintiff had read the terms, they would have been bound, likewise if they had been
told there were terms, and refused to read them, or did nothing. Likewise if they knew
that the ticket contained terms. (Bramwell LJ).

Chapelton v Barry UDC [1940] 1 KB 532: deck chairs were advertised at a certain price
for hire and a man hired one, and was given a ticket with conditions of hire written on the
back. P had no idea that there were terms or conditions written on them. The court held
that the advertisement was an offer and therefore the conditions on the ticket were
irrelevant since the contract had already come into force when he was given the ticket
(which was really a receipt). The object of giving the ticket had been to evidence the
payment that had been made for the deck chairs for the attendant: NOT to add to the
original contract.

Olley v Marlborough Court Ltd [1949] 1 KB 532: P was staying in D’s hotel, paid for his
room and only once in his room did he see the notice exempting D’s liability for theft etc.
When D’s staff negligently let a thief into P’s room, P sued D. The CA held that the sign
was not valid since the contract was already concluded by the time P was able to see the
sign. Therefore to allow the sign to have effect would amount to a unilateral variation of
terms, which is impossible.

Thornton v Shoe Lane Parking [1971] 2 QB 163: P drove into D’s car park and parked.
There were clauses written on the back of the ticket, not capable of being viewed before
entering the car park (and paying for a ticket), stating that the car park would not be liable
for injury to users caused by D. D’s negligence led to a car crash in which P was injured
and he sued D. CA allowed P’s claim.

Lord Denning: The contract has already been formed by the time that the tickets are
dispensed so any terms written on them are meaningless. The only way a P could be
bound, is if he knows, or D gave reasonably sufficient notice, that the ticket would be
issued subject to a certain type of condition e.g. “exemption condition” (simply stating
“subject to conditions” is inadequate since P might consider that these would be mere
regulatory conditions).

Interfoto Picture Library v Stiletto Visual Programmes [1988] 1 All ER 348: Ds rented
certain photos from P. P, upon delivery, also included a delivery note in the bag, which
was unlikely to draw any attention. In fact it included with terms and conditions, one of
which set out the large amounts payable by D in the case of late return. When D was
ordered to pay this (£3,800 for 10 days overdue), it refused and P sued D. CA denied P’s
claim.

Dillon LJ: Thornton is NOT confined to cases of exemption clauses. He recognises that
people tend not to read terms and conditions or have time to do so. Therefore it is logical
that where a condition is particularly onerous or unusual, the party imposing terms must
prove that it was “fairly brought to the recipient’s attention” in order to enforce it.

Bingham LJ: the “sufficiency of notice cases [above]” are an attempt to get round
England’s lack of a “good faith” principle. He agrees With Dillon LJ’s reasoning. He
says that these cases are not just, therefore, about conceptual analysis, but “at another
level they are concerned with…whether it would, in all the circumstances, be fair (or
reasonable) to hold a party bound by any conditions or by a particular condition of an
unusual and stringent nature.”

AEG v Logic Resource Ltd [1996] CLC 265: D made purchases from P on P’s standard
order form (to sell on to D’s customers in Iran) which stated that a full set of terms and
conditions was available on request. D didn’t request it. Not included in the order form
and not drawn to D’s attention was a clause unusual to the industry, that defective
equipment was to be returned to P for repair/replacement at D’s own expense. P refused
to pay the cost of bringing the machine back from Iran and P sued him for it.

Hirst LJ: As the condition was onerous and unusual, to determine whether the condition
had been incorporated into the contract, the correct test was whether notice of the
condition had fairly and reasonably been brought to the attention of the defendant.

Hobhouse LJ: He said the rule was less important now that the “Unfair Contract Terms
Act” had effect but the rule could still apply to cases that fell outside its protection.

(b) By course of dealing

McCutcheon v MacBrayne [1964] 1 All ER 430: P shipped his car to the mainland with
D on 4 occasions, always being asked to sign a risk note, stating that the risk was with
him. On one occasion he was not asked to sign a risk note and the ship sank, losing P’s
car. He sued the company, who claimed that their “usual practice” meant that the risk
terms were effective despite P not signing anything to that effect. HL allowed P’s claim.

Lord Reid: the “course of dealing” defence can sometimes apply: If P and D make a
series of contracts all containing certain conditions and then make another without
expressly including those conditions, they can be implied, provided the “officious
bystander” would understand it to be their intention that the terms be included. However
this isn’t the case here.

Lord Devlin: A term that is usually used cannot be implied into a contract that omits it
unless there is knowledge of that term by both parties. If D was unaware of a term that
was used 99 times, and omitted from the 100th contract, there can be no implication.
Knowledge is a “critical factor”.

Hollier v Ramber Motors [1972] 2 QB 71: P left his car with D to be repaired 4 times in 5
years and on the first three occasions had been asked to sign an invoice excluding D from
liability. On the 4th time he was not asked to and his car was destroyed in a fire at D’s
garage. D tried to rely on the fact that in their previous dealings P had signed the
exclusion clauses. CA allowed P’s claim on the grounds that the dealings between D and
P were not frequent enough to constitute a course of dealing.

Salmon LJ: Knowledge is needed of the clause to import it into the main contract + in
McCutcheon the dealings were too infrequent to constitute a course of dealing, then
certainly there is no course here, where it is even less frequent.
British Crane Hire v Ipswich Plant Hire [1975] QB 303: D urgently needed to hire a
crane form P, who agreed charges with D and then sent them the crane immediately.
They then sent a form of printed conditions for D to sign. Before they could be signed,
the crane sank and was destroyed due to nobody’s fault. Included in the unsigned forms
was a clause placing strict liability on D should the crane be destroyed, and this was a
standard industry condition. CA allowed P’s claim, saying that the term of the unsigned
form of conditions that placed risk with D could be implied into the contract.

Lord Denning MR: There was a “course of dealing” because the term was so standard to
the industry, while this case can be distinguished from Hollier on the grounds that here
the parties are of equal bargaining power. Bargaining power might have been a
motivation for Salmon LJ’s decision above but was NOT the ratio: the ratio was that 4
visits in five years does not equal a course of dealing and the one-off deal here could be
held in the same light. The true distinction is that here both parties knew of the term and
knew it was standard practice and would be imposed.

c) Signatures

L’ Estrange v Graucob [1934] 2 KB 394: P bought a machine off D and signed a sales
agreement, which maintained that payment was still required even if the machine was
faulty. The machine stopped working and D refused to pay, claiming that the sales
agreement was misrepresented to her as an order form, so that she was misled as to the
purpose of the form and couldn’t be bound by the terms therein. CA found no
misrepresentation and held that although P had failed to read the small print, she was still
bound by the agreement. This case demonstrates the general rule that a signature is taken
to mean that the signer has agreed to the terms.

Maugham LJ: There are two ways of escaping contractual obligations where the party has
signed: (1) where there is a “non est factum” i.e. where through no fault of the signer
(usually fraud) the contents are fundamentally different from those he assumed to be
present; (2) misrepresentation induced her to sign. Neither applied here.

Curtis v Chemical Cleaning Co [1951] 1 KB 805: P took a dress to be cleaned by CCD,

who asked him to sign a receipt that exempted CCD from liability for any damage to the
dress caused by CCD. P only signed after CCD assured him that the clause only related to
the beads and sequins but not to the dress itself. When the dress was badly stained, P sued
and CA prevented CCD from relying on the exemption clause.

Denning LJ: What is sufficient misrepresentation to negate the signature agreeing to the
clause? “any behaviour, by words or by conduct…if it is such as to mislead the other
party about the existence or extent of the exemption”. Anything that creates a false
impression, whether intentionally or innocently, is enough.
ii) Construction

Alderslade v Hendon Laundry [1945] KB 189: D lost P’s handkerchiefs sent in for
cleaning and P sued D. D was allowed by the court to rely on a condition that “The
maximum amount allowed for lost or damaged articles is twenty times the charge made
for laundering” to limit their liability. Since they could only be sued in tort this condition
was held to be effective against tort actions as well as contractual ones.

Greene MR: The obligation primarily under the contract is to launder the items and the
secondary obligation is to keep them safe. Breach of secondary obligations, which relate
to taking reasonable care are to be brought in tort and not in contractual actions.
Therefore since this clause could only relate to negligence, it must be construed as being
a limitation in tortious actions (else the term would have no content at all). “Where the
head of damage…rests on negligence and nothing else, the clause must be construed as
extending to that head of damage, because it would otherwise lack subject-matter.
Where…the head of damage may be based on some other ground than that of negligence,
the general principle is that the clause must be confined in its application to loss
occurring through that other cause to the exclusion of loss arising through negligence…If
a contracting party wishes in such a case to limit his liability in respect of negligence, he
must do so in clear terms in the absence of which the clause is construed as relating to a
liability not based on negligence.”

Mackinnon LJ: He quotes with approval Scrutton LJ’s guiding principles: “In construing
an exemption clause certain general rules may be applied: First, the defendant is not
exempted from liability for the negligence of his servants unless adequate words are
used; secondly, the liability of the defendant apart from the exempting words must be
ascertained; then the particular clause in question must be considered; and if the only
liability of the party pleading the exemption is a liability for negligence, the clause will
more readily operate to exempt him.”

Suisse Atlantique v Rotterdamsche Kolen [1967] 1 AC 1: D chartered a boat off P with a

contractual term that D had to finish loading at each port within a specified time limit.
When D failed to unload in several ports within the time limits, P considered that the
contract was breached and that they could terminate. In the contract was a demurrage
clause which agreed on a set figure to be paid by D when they delayed in leaving the
port. However P realised that in fact the cost to them from the late departure (fines,
freight charges etc) would be greater than this set figure and tried, rather than accept the
set figure, to terminate the contract and claim for actual damages suffered. HL held that
the contract could not be terminated due to the delays but P could merely sue for damages
on the set, contractually agreed sum.

Lord Wilberforce: How is the demurrage (set figure damages) clause to be interpreted?
Not penalty clause since it isn’t disproportionate. Not a limitation clause either since
often the set sum will be payable even though no actual loss to the owners has occurred
i.e. they are doing well out of the term. On a true construction the clause is one of
liquidated damages i.e. it applies to this case as the agreed level of damages and the
contract is not terminated. The fact that Ps allowed Ds o continue with voyages after
several delays in loading at ports shows that this term was not so fundamental as to
qualify for termination grounds. His reasoning was based on “the more unreasonable the
result, the less likely the parties are to have intended it” (CW) unlike the “fundamental
breach” approach of Denning in earlier cases.

Hollier v Rambler Motors [1972] 2 QB 71- see above

Photo Productions v Securicor [1980] 1 All ER 556- see week 3. NB “death knell” for
fundamental breach doctrine (doctrine that where a fundamental condition of the contract
is breached, no exemption/limitation clauses, no matter how explicitly intended to apply,
can reduce/extinguish the damages that would normally be owed). Also exemption clause
not unreasonable under UCTA since D should have had insurance anyway, while a
security team might have had more difficulty in finding insurance.

Ailsa Craig Fishing v Malvern Fishing [1983] 1 WLR 964: D agreed to supply security to
P’s boats, subject to an exclusion clause and a limitation clause regarding D’s liability.
P’s boat was destroyed due to D’s failure to protect it and P sued D. HL held that the
limitation clause applied but the exclusion clause did not.

Lord Fraser: Limitation clauses have to be clear, unambiguous and contra proferentem
(rule where an ambiguous clause is to be construed against the interests of the party that
included it in the contract). The stricter rules that apply to exemption clauses do not apply
to limitation clauses. This is because a party would be less likely to have intended to give
the proferens complete escape from liability than mere limitation of damages. The
exclusion clause didn’t apply to this case.

George Mitchell v Finney Lock Seeds [1983] 2 All ER 737: D sold seed to P subject to 4
conditions: (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. Due to the use of dodgy
seed supplied, P lost £60,000 in repairing damage caused by use of wrong seed, even
though price charged was only £200. P sued D for damages.

HL held that the limitation terms were unenforceable since under para 11, schedule 1 of
s.55 of Sale of Goods Act (NOW REPEALED but similar to schedule 2 of the Unfair
Contract Terms Act 1977) the court could void terms, reliance upon which would be
“unfair and unreasonable”.

Lord Bridge: An appellate court should refrain from interfering with a lower court’s
interpretation of “fair and reasonable” unless “plainly and obviously wrong”.
EE Caledonia v Orbit Valve [1995] 1 All ER 174: D agreed to carry out work on P’s oil
rig, subject to the clause that “any claim… or liability… arising by reason of… death of
any employee… of the indemnifying party, resulting from or… connected with the
performance of this order”. One of D’s employees died due to P’s negligence and P paid
a settlement to the deceased’s family, and then claimed the settlement money from D
under the clause. CA rejected P’s claim, since the clause was to allocate the risk so that
each party would be liable for his own negligence. Thus P couldn’t force D to pay for P’s
negligence.

Steyn LJ: He approves the dictum of Lord Morton that regarding exemption/indemnity
clauses, (1) an express exemption of P from liability in cases of negligence is effective;
(2) if negligence is not mentioned expressly the court must consider whether the terms
used are wide enough to cover negligence cases; (3) If they are wide enough, then the
court must consider if, realistically, there is another head of damage under which the
exemption clause could be invoked, then P cannot rely on it in negligence claims.

Investors Compensation Scheme Ltd. v. West Bromwich Building Society [1998] 1 All
ER 98 per Lord Hoffmann:

HL expands the interpretation of contracts to “contextual objectivity” i.e. interpretation of

persons, not words, including anything relevant to a reasonable person’s interpretation
(CW).

Lord Hoffman: He restated 5 principles of contract law: (1) objective intention i.e. what
would the reasonable bystander with same background knowledge as the parties believe
the intention to be; (2) The scope of context/background facts to be taken into account is
wide. “subject to the requirement that it should have been reasonably available to the
parties and to the exception to be mentioned next, it includes absolutely anything that
would have affected the way in which the language would have been understood by the
reasonable man.”; (3) previous declarations of intent and previous negotiations are NOT
admissible as relevant background facts (since parties are free to change their bargaining
postures); (4) the courts are concerned with the “meaning of persons” i.e. the courts are
not bound strictly by the words of the document and can conclude that the wrong syntax
etc was used or the wrong words; (5) there is a presumption against irrationality i.e.
unless we conclude that something “must have gone wrong” with the language used, we
are to interpret the words within the “natural and ordinary meaning”.

iii) Statutory Control

Unfair Terms in Contracts, Law Commission Consultation Paper No 166 (2002), pp xii-
xviii (executive summary):
 Although parties might agree to terms, one party might not understand
what the terms mean or be aware of a term, while a party with a standard
form contract might be unwilling to change a term for one individual and
therefore legal controls are needed to protect the parties.
  The terms that are currently unenforceable under the current unfair
contract terms act should continue to have no effect; some should only
have effect if they are “fair and reasonable”, and this should apply whether
or not there was some negotiation since, even if there was negotiation, one
party may still fail to understand what is meant by a term; the “adequacy
of the price” should be exempt from review provided that having to make
the payment is not substantially different to what the consumer should
reasonably expect and is not under a subsidiary term. The price must also
be stated in plain language (transparent).”; in determining “fair and
reasonable” the courts should take account of how intelligible the
language of the term is and whether it is easy to find etc; Legislation
should make a list of terms that will be considered unfair unless the
business shows otherwise (i.e. a rebuttable presumption).

 An unfair term should have no effect except insofar as it benefits the

consumer.

 For businesses the same requirement of “fairness and reasonableness”

should apply in non-negotiated or “standard” terms; HOWEVER in
negotiated terms there should be no such requirements since businesses
should be expected to understand the terms of a contract (unlike the
current “reasonableness” requirements. Existing exemptions from the
UCTA should continue; like with consumer-business contracts, there
should be a list putting the burden on the business imposing terms to prove
their fairness or reasonableness, unlike terms not on the list, in which case
the burden should be on the party accepting the terms.

Unfair Contract Terms Act 1977 ss 1-14, Schs 1&2 (s12 as amended by Sale and Supply
of Goods to Consumers Regulations 2002, SI 3045/2002, Reg 14):
 S.1(2): Ss.2-7 only apply to business liability i.e. “things done in the
course of business” or from the occupation of a premises used for the
business purposes of the occupier
 S.2: in cases of death or personal injury, a contractual term cannot exempt
a party from negligence liability nor restrict it. Equally it cannot in other
types of loss caused by negligence (e.g. property damage), unless the term
satisfies the requirements of “reasonableness”. Also the fact that a person
may have agreed to the contract including such a term or was aware of it
does NOT indicate voluntary acceptance of risk.
 S.3: In cases of a consumer (C)-business (B) contract on B’s standard
terms, where B claims that an exemption/limitation clause
reduces/prevents its liability for breach OR that the clause allows for B’s
partial or non-performance, that clause has to be shown to be
“reasonable”.
 S.4: A term cannot make a consumer indemnify another person in respect
of liability that may be incurred by the other for negligence or breach of
 contract, except in so far as the contract term satisfies the requirement of
reasonableness.
 S.5: Re goods used normally for private consumption, where loss arises
from the goods being defective or loss results from the manufacturer’s or
distributors’ negligence, liability cannot be restricted or exempted.
“Consumer goods” for private use are any goods being used not for
business purposes exclusively.
 Liability for breach of the obligations arising from—
(a) [section 12 of the Sale of Goods Act 1979]1 (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.
(2) As against a person dealing as consumer, liability for breach of the
obligations arising from—
(a) [section 13, 14 or 15 of the 1979 Act]2 (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
any contract term.
 S.9: If an exemption clause is effective then breach and termination
doesn’t change its effect
 Where a contract is breached but affirmed by a party who has the right to
terminate it, the contract proceeds as before and an effective exemption
clause remains effective. Equally the “reasonableness” requirement
remains if it applies.
 S.10 “A person is not bound by any contract term prejudicing his rights
from another contract, so far as those rights extend to the enforcement of
another's liability which this Part of this Act prevents that other from
excluding or restricting.”
 S.11: Reasonableness is defined as “fair and reasonable” with regard to “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.”
Where D tries to restrict liability to a specified amount of money, regard is
had to the resources D could expect to be available to him should the
liability arise, and how far it was open to D to insure against the liability.
The burden of reasonableness is on the one claiming that the clause is
reasonable.
 S.13: To the extent that this Part of this Act prevents the exclusion or
restriction of any liability it also prevents making the liability or its
enforcement subject to restrictive or onerous conditions; 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; excluding or restricting rules of evidence or procedure. NB
arbitration is unaffected by this.
  S.12: A party is a consumer if “he neither makes the contract in the course
of a business nor holds himself out as doing so; and the other party does
make the contract in the course of a business”.

Unfair Terms in Consumer Contracts Regulations 1999 (SI 2083/99): These affect
consumer-business contracts ONLY

S.3: A Consumer (C) “means any natural person who, in contracts covered by these
Regulations, is acting for purposes which are outside his trade, business or profession”

S.5: A term not individually negotiated which is contrary to good faith and “causes a
significant imbalance in the parties' rights and obligations arising under the contract, to
the detriment of the consumer” is unfair. A non- individually negotiated contract is one
which whose terms have been drafted in advance and whose substance can’t be
influenced by consumer. Even if a specific term or some aspects have been individually
negotiated, this section still applies where “overall assessment of it indicates that it is a
pre-formulated standard contract.” Burden is on business (B) to show that a contract was
individually negotiated. Burden of proof can’t be changed by contract.

S.6: “fairness” takes into account all circumstances except adequacy of

payment/remuneration or definition of main subject matter.

S.7: any vagueness n a term will lead to it being interpreted in the way most favourable to
the consumer.

S.8 an unfair term is not binding. If it is capable of doing so, the contract stays in effect
despite the unfair term being voided.

S.10 The Director of Fair Trading can apply for injunctions following complaints made to
him about unfair contract terms

Schedule 2 Para 1: non-exhaustive list of unfair terms:

Schedule 2: reasonableness is to be determined with reference to the strength of the

parties’ bargaining positions; whether the consumer had an inducement to agree to the
term or had an opportunity of entering a similar contract without that term; whether the
customer knew or should have known of the term; whether the goods were processed by
special order of the customer.

Terms which have the object or effect of–

(a) excluding or limiting the legal liability of a seller or supplier in the event of the death
of a consumer or personal injury to the latter resulting from an act or omission of that
seller or supplier;
(b) inappropriately excluding or limiting the legal rights of the consumer vis-a-vis the
seller or supplier or another party in the event of total or partial non-performance or
inadequate performance by the seller or supplier of any of the contractual obligations,
including the option of offsetting a debt owed to the seller or supplier against any claim
which the consumer may have against him;
(c) making an agreement binding on the consumer whereas provision of services by the
seller or supplier is subject to a condition whose realization depends on his own will
alone;
(d) permitting the seller or supplier to retain sums paid by the consumer where the latter
decides not to conclude or perform the contract, without providing for the consumer to
receive compensation of an equivalent amount from the seller or supplier where the latter
is the party cancelling the contract;
(e) requiring any consumer who fails to fulfil his obligation to pay a disproportionately
high sum in compensation;
(f) authorising the seller or supplier to dissolve the contract on a discretionary basis
where the same facility is not granted to the consumer, or permitting the seller or supplier
to retain the sums paid for services not yet supplied by him where it is the seller or
supplier himself who dissolves the contract;
(g) enabling the seller or supplier to terminate a contract of indeterminate duration
without reasonable notice except where there are serious grounds for doing so;
(h) automatically extending a contract of fixed duration where the consumer does not
indicate otherwise, when the deadline fixed for the consumer to express his desire not to
extend the contract is unreasonably early;
(i) irrevocably binding the consumer to terms with which he had no real opportunity of
becoming acquainted before the conclusion of the contract;
(j) enabling the seller or supplier to alter the terms of the contract unilaterally without a
valid reason which is specified in the contract;
(k) enabling the seller or supplier to alter unilaterally without a valid reason any
characteristics of the product or service to be provided;
(l) providing for the price of goods to be determined at the time of delivery or allowing a
seller of goods or supplier of services to increase their price without in both cases giving
the consumer the corresponding right to cancel the contract if the final price is too high in
relation to the price agreed when the contract was concluded;
(m) giving the seller or supplier the right to determine whether the goods or services
supplied are in conformity with the contract, or giving him the exclusive right to interpret
any term of the contract;
(n) limiting the seller's or supplier's obligation to respect commitments undertaken by his
agents or making his commitments subject to compliance with a particular formality;
(o) obliging the consumer to fulfil all his obligations where the seller or supplier does not
perform his,
(p) giving the seller or supplier the possibility of transferring his rights and obligations
under the contract, where this may serve to reduce the guarantees for the consumer,
without the latter's agreement;
(q) excluding or hindering the consumer's right to take legal action or exercise any other
legal remedy, particularly by requiring the consumer to take disputes exclusively to
arbitration not covered by legal provisions, unduly restricting the evidence available to
him or imposing on him a burden of proof which, according to the applicable law, should
lie with another party to the contract.
E C Directive on Unfair Terms in Consumer Contracts (93/13/EEC of 5 April 1993, OJ
L95/29) (N.B. In contrast to UCTA 1977 the Unfair Terms Regulations 1999 are not
confined to exclusion, limitation and indemnity clauses but extend to all unfair terms.):
Directive given effect by the regulations above.

George Mitchell (Chesterhall) v Finney Lock Seeds [1983] 2 AC 803, HL- see above

Phillips Products v Hyland [1987] 2 All ER 620: D loaned P a machine and a person to
operate it. D’s employee seconded to operate the machine caused damage to P’s building.
P sued D, who tried to rely on an exemption clause which stated that the hirer (P) would
be liable for all claims in connection with damage caused by the seconded employee. CA
allowed P’s claim on the grounds that the clause was unreasonable within the meaning of
s.2 (2).

Slade LJ: S.11(5) shows the burden to be on D to demonstrate the reasonableness of the
exemption clause. He quotes Lord Bridge’s dictum above as to when the appellate courts
should interfere. The clause was unreasonable because: the hirers couldn’t play a part in
choosing which employee (and the quality of the employee) seconded to them; there was
little P could do about the clause since it was used industry-wide and therefore probably
non-negotiable; absence of warranties as to the seconded employee’s skill level. CA also
ruled that the condition quoted above WAS an exemption clause (contrary to D’s
argument).

Thompson v Lohan (Plant Hire) Ltd [1987] 2 All ER 631: Same clause and facts apply as
in Phillips Products except that the damage was not done to the hirer (H) but to a TP who
was killed and whose widow sued H. H then sought to claim from D (party who loaned
them a machine + employee). However CA held that the condition was effective. This
was because the question was not whether the party relying on the clause was seeking to
exempt liability, but whether the victim would be excluded from compensation by it.
Since, in this scenario, the victim was not prevented from recovering damages, the
condition was beyond the control of the UCTA. Exemption clauses transferring liability
are not subject to UCTA provided that the liability is not being transferred to the victim
and the victim isn’t being deprived of a remedy.

This is NOT what the Act said: it spoke of whether the defendant should be able to
exempt or restrict his own liability in cases of death. Furthermore the act was not
intended to be victim-centric but to protect the weaker bargaining party against
exploitative terms. This is applicable here.

R & B Customs Brokers v UDT [1988] 1 All ER 847: P bought a car from D with a term
stating that there were no implied warranties as to quality or condition. The car was
defective and the CA allowed P’s claim on the grounds that P was dealing as a consumer
and therefore S.6 applied so that D could not contract out of liability for supplying
defective goods. CA held that had P not been a consumer, the clause would have been
valid. As it was, the clause was invalid and the Sale of Goods Act s.14 could apply i.e.
impliedly satisfactory condition. CA held that the contract was only “incidental” to P’s
business activity.

Dillon LJ: The purchase was not an “integral part of the business carried on”. A “high
degree of regularity” of that type of purchase has to occur before that type of purchase (in
this case buying company cars) can be considered part of the business activity.

This is dodgy: businesses don’t buy company cars for personal use or pleasure but for
the running of the company/as a perk to incentivise people to apply to work there. It is
unrealistic to describe the company as a consumer.

Smith v Eric Bush [1989] 2 All ER 514: P had a contract with D for D to value his house.
D inserted a clause that he would not be liable for his actions in the course of his work. D
incorrectly valued the house, causing P loss and it had been held that he had a tortious
duty to P. HL ruled that the disclaimer of liability was ineffective and did not shield D
from liability.

Lord Griffiths: S.11 (3) and s.13(1) of UCTA create a “but for” test: would a tortious
remedy be available but for the existence of the exclusion of liability? The act is intended
(according to LC) to apply to exclusion clauses regarding tortious liability that would
arise in the course of someone’s business (as well as normal contractual exemption
clauses). Hence the act’s controls apply here. The next step is to ask whether the
exclusion clause satisfies the reasonableness requirements of s.2(2) of the act. The burden
is on D (the surveyor) to show that the exemption notice (the disclaimer) is reasonable.
Some factors (not exhaustive list) to be considered: relative bargaining power of parties;
Availability of alternative sources of advice e.g. in this case other surveyors, though this
would be far more costly and time consuming; difficulty of the task being undertaken (in
this case it is not too burdensome on D to require reasonable skill); practical
consequences on the decision regarding reasonableness (in this case it would prevent
careless surveyors from relying on their absence of insurance, which they ought to have,
while it would NOT lead to a floodgate of claims). Given these considerations, the
exemption disclaimer failed to satisfy the reasonableness requirements.

Lord Templeman: To allow the disclaimer to stand would be to legitimise all standard
form disclaimers and “emasculate the 1977 Act”.

Lord Jauncey: “But for” the notice, it would be undeniable that D would be liable to P for
negligence. He supports Lord Griffith’s reasoning behind the conclusion that the
disclaimer was unreasonable.

Stewart Gill v Horatio Myer [1992] 2 QB 600: P installed a machine for D and claimed
for the money still owed, requesting the court to give summary judgment (i.e. not giving
D a full right to defend themselves in trial), which D contested on the basis that they had
certain claims against P, which they wanted to be set off against the outstanding payment.
P’s request for summary judgment and refusal of D’s counterclaims was on the basis that
a clause in the contract stated that the money was due immediately upon completion and
could not be delayed by counterclaims etc. CA held that such a clause came within s.13
(1) (b) which disallowed terms to deny ordinarily available remedy to the extent that
other limitations are disallowed. Thus it was for P to show that the clause was reasonable,
which it had not done at the original trial and a full case (NOT summary) would be
required. P also had to show that the whole of the clause was reasonable and the court
would not carve up and preserve the reasonable bits of it.

Stuart-Smith LJ: “the term as a whole that has to be reasonable and not merely some part
of it”. Otherwise there would be no predictability to the law since it would be a guessing
game as to which bits the court keeps.

St Albans DC v International Computers [1995] FSR 686; [1996] 4 All ER 481: D agreed
to supply P with a computer system for administration of tax collection, with a clause
limiting D’s liability for faults at £100,000 from D’s standard form contract. The
defective system caused P loss greater than this and P sued for the full amount of
damages, which CA awarded. The limitation clause was unreasonable given that the
potential and actual losses were far greater than this, and D had insurance of over £50m.

Nourse LJ: He applies Lord Bridge’s dictum above and can find no reason for
overturning the trial judge’s finding that the term was unreasonable.

Director General of Fair Trading v First National Bank plc [2002] 1 All ER 97: NB this
case concerns 19954 regulations which are materially the same as 1999 ones except the
terms are in different places. The numbering for the 1999 regulations are given: D was a
bank with a clause in its standard terms that said that if a customer should default on a
loan repayment, D could recover the whole value of the loan account, interest owed and
the costs of seeking judgment. HL held that the term was not unfair within the 1999
Regulations.

Lord Steyn: Article 6(2)(a) must be interpreted restrictively so as to avoid endless

disputes on whether a term is definitional or an exclusionary provision. The same is true
of 6(2)(b) since, on a liberal interpretation, one could argue that every term in a contract
is in some way remuneration. Reg. 5 has 3 requirements: contrary to good faith, causes
imbalance and is to detriment of consumer. GF = “open and fair dealing”. “Significant
imbalance” refers to the “substantive unfairness” of the contract, but also overlaps with
GF. The clause in the contract here isn’t unfair.

Lord Hope: It isn’t unfair since the bank has a right to collect the money owed to it.

Lord Bingham: Like Lord Steyn, he says only the most important terms are “definitional”
since a broad approach that includes lots of terms would reduce the scope of the
regulation greatly (only non-definitional terms are covered by the regulations). This term
is NOT definitional. GF= same as Steyn’s definition, but “open and fair dealing” itself
prevents the exploitation, by the supplier, of the consumer’s “necessity, indigence, lack of
experience, unfamiliarity with the subject matter of the contract, weak bargaining
position [etc]”.

Watford Electronics Ltd v Sanderson CFL Ltd [2001] All ER (Comm) 696: D sold faulty
equipment to P and used various terms to limit liability. One term excluded liability for
indirect or consequential loss whether arising from negligence or otherwise and the
second limited the defendant's total liability under the contract. CA held that the term
excluding liability for indirect loss was fair and reasonable since still left D exposed to
significant liability e.g. didn’t exempt him from loss related to breach of warranty. This
was a case where the judge’s decision was so obviously wrong that Lord Bridge’s dictum
was no barrier to overturning the initial finding (that it was unreasonable).

Chadwick LJ: The indirect loss exemption is fair and reasonable since The parties were
of equal bargaining strength; the inclusion of the term was, plainly, likely to affect
Sanderson's decision as to the price at which was prepared to sell its product; Watford
must be taken to have appreciated that; Watford knew of the term, and must be taken to
have understood what effect it was intended to have; the product was, to some extent,
modified to meet the special needs of the customer.