If an enforceable agreement – a contract – exists, the details of the contract's terms matter if one party has allegedly broken the agreement. A contract's terms are what was promised. Yet it is up to the courts to construe evidence of what the parties said before a contract's conclusion, and construe the terms agreed. Construction of the contract starts with the express promises people make to one another, but also with terms found in other documents or notices that were intended to be incorporated. The general rule is that reasonable notice of the term is needed, and more notice is needed for an onerous term. The meaning of those terms must then be interpreted, and the modern approach is to construe the meaning of an agreement from the perspective of a reasonable person with knowledge of the whole context. The courts, as well as legislation, may also imply terms into contracts generally to 'fill gaps' as necessary to fulfil the reasonable expectations of the parties, or as necessary incidents to specific contracts. English law had, particularly in the late 19th century, adhered to the laissez faire principle of "freedom of contract" so that, in the general law of contract, people can agree to whatever terms or conditions they choose. By contrast, specific contracts, particularly for consumers, employees or tenants were built to carry a minimum core of rights, mostly deriving from statute, that aim to secure the fairness of contractual terms. The evolution of case law in the 20th century generally shows an ever clearer distinction between general contracts among commercial parties and those between parties of unequal bargaining power, since in these groups of transaction true choice is thought to be hampered by lack of real competition in the market. Hence, some terms can be found to be unfair under statutes such as the Unfair Contract Terms Act 1977 or the Unfair Terms in Consumer Contract Regulations 1999 and can be removed by the courts, with the administrative assistance of the Competition and Markets Authority.
Incorporation of terms[edit | edit source]
The promises offered by one person to another are the terms of a contract, but not every representation before an acceptance will always count as a term. The basic rule of construction is that a representation is a term if it looked like it was "intended" to be from the viewpoint of a reasonable person. It matters how much importance is attached to the term by the parties themselves, but also as a way to protect parties of lesser means, the courts added that someone who is in a more knowledgeable position will be more likely to be taken to have made a promise, rather than a mere representation. In Oscar Chess Ltd v Williams Mr Williams sold a Morris car to a second hand dealer and wrongly (but in good faith, relying on a forged log-book) said it was a 1948 model when it was really from 1937. The Court of Appeal held that the car dealer could not later claim breach of contract because they were in a better position to know the model. By contrast, in Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd the Court of Appeal held that when a car dealer sold a Bentley to a customer, mistakenly stating it had done 20,000 miles when the true figure was 100,000 miles, this was intended to become a term because the car dealer was in a better position to know. A misrepresentation may also generate the right to cancel (or "rescind") the contract and claim damages for "reliance" losses (as if the statement had not been made, and so to get one's money back). But if the representation is also a contract term a claimant may also get damages reflecting "expected" profits (as if the contract were performed as promised), though often the two measures coincide.
When a contract is written down, there is a basic presumption that the written document will conterms of an agreement, and when commercial parties sign documents every term referred to in the document binds them, unless the term is found to be unfair, the signed document is merely an administrative paper, or under the very limited defence of non est factum. The rules differ in principle for employment contracts, and consumer contracts, or wherever a statutory right is engaged, and so the signature rule matters most in commercial dealings, where businesses place a high value on certainty. If a statement is a term, and the contracting party has not signed a document, then terms may be incorporated by reference to other sources, or through a course of dealing. The basic rule, set out in Parker v South Eastern Railway Company, is that reasonable notice of a term is required to bind someone. Here Mr Parker left his coat in the Charing Cross railway station cloakroom and was given a ticket that on the back said liability for loss was limited to £10. The Court of Appeal sent this back to trial for a jury (as existed at the time) to determine. The modern approach is to add that if a term is particularly onerous, greater notice with greater clarity ought to be given. Denning LJ in J Spurling Ltd v Bradshaw famously remarked that "Some clauses which I have seen would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient." In Thornton v Shoe Lane Parking Ltd a car park ticket referring to a notice inside the car park was insufficient to exclude the parking lot's liability for personal injury of customers on its premises. In Interfoto Picture Library Ltd v Stiletto Ltd Bingham LJ held that a notice inside a jiffy bag of photographic transparencies about a fee for late return of the transparencies (which would have totalled £3,783.50 for 47 transparencies after only a month) was too onerous a term to be incorporated without clear notice. By contrast in O'Brien v MGN Ltd Hale LJ held that the failure of the Daily Mirror to say in every newspaper that if there were too many winners in its free draw for £50,000 that there would be another draw was not so onerous on the disappointed "winners" as to prevent incorporation of the term. It can also be that a regular and consistent course of dealings between two parties lead the terms from previous dealings to be incorporated into future ones. In Hollier v Rambler Motors Ltd the Court of Appeal held that Mr Hollier, whose car was burnt in a fire caused by a careless employee at Rambler Motors' garage, was not bound by a clause excluding liability for "damage caused by fire" on the back of an invoice which he had seen three or four times in visits over the last five years. This was not regular or consistent enough. But in British Crane Hire Corporation Ltd v Ipswich Plant Hire Ltd Lord Denning MR held that a company hiring a crane was bound by a term making them pay for expenses of recovering the crane when it sunk into marshland, after only one prior dealing. Of particular importance was the equal bargaining power of the parties.
Interpretation[edit | edit source]
One it is established which terms are incorporated into an agreement, their meaning must be determined. Since the introduction of legislation regulating unfair terms, English courts have become firmer in their general guiding principle that agreements are construed to give effect to the intentions of the parties from the standpoint of a reasonable person. This changed significantly from the early 20th century, when English courts had become enamoured with a literalist theory of interpretation, championed in part by Lord Halsbury. As greater concern grew around the mid-20th century over unfair terms, and particularly exclusion clauses, the courts swung to the opposite position, utilising heavily the doctrine of contra proferentum. Ambiguities in clauses excluding or limiting one party's liability would be construed against the person relying on it. In the leading case, Canada Steamship Lines Ltd v R the Crown's shed in Montreal harbour burnt down, destroying goods owned by Canada Steamship lines. Lord Morton held that a clause in the contract limiting the Crown's excluding liability for "damage... to... goods... being... in the said shed" was not enough to excuse it from liability for negligence because the clause could also be construed as referring to strict liability under another contract clause. It would exclude that instead. Some judges, and in particular Lord Denning wished to go further by introducing a rule of "fundamental breach of contract" whereby no liability for very serious breaches of contract could be excluded at all. While the rules remain ready for application where statute may not help, such hostile approaches to interpretation were generally felt to run contrary to the plain meaning of language.
Reflecting the modern position since unfair terms legislation was enacted, the most quoted passage in English courts on the canons of interpretation is found in Lord Hoffmann's judgment in ICS Ltd v West Bromwich BS. Lord Hoffmann restated the law that a document's meaning is what it would mean (1) to a reasonable person (2) with knowledge of the context, or the whole matrix of fact (3) except prior negotiations (4) and meaning does not follow what the dictionary says but meaning understood from its context (5) and the meaning should not contradict common sense. The objective is always to give effect to the intentions of the parties. While it remains the law for reasons of litigation cost, there is some contention over how far evidence of prior negotiations should be excluded by the courts. It appears increasingly clear that the courts may adduce evidence of negotiations where it would clearly assist in construing the meaning of an agreement. This approach to interpretation has some overlap with the right of the parties to seek "rectification" of a document, or requesting from a court to read a document not literally but with regard to what the parties can otherwise show was really intended.
Implied terms[edit | edit source]
Part of the process of construction includes the courts and statute implying terms into agreements. Courts imply terms, as a general rule, when the express terms of a contract leave a gap to be filled. Given their basic attachment to contractual freedom, the courts are reluctant to override express terms for contracting parties. Legislation can also be a source of implied terms, and may be overridden by agreement of the parties, or have a compulsory character. For contracts in general, individualised terms are implied (terms "implied in fact") to reflect the "reasonable expectations of the parties", and like the process of interpretation, implication of a term of a commercial contract must follow from its commercial setting. In Equitable Life Assurance Society v Hyman the House of Lords held (in a notorious decision) that "guaranteed annuity rate" policy holders of the life insurance company could not have their bonus rates lowered by the directors, when the company was in financial difficulty, if it would undermine all the policy holders' "reasonable expectations". Lord Steyn said that a term should be implied in the policy contract that the directors' discretion was limited, as this term was "strictly necessary... essential to give effect to the reasonable expectations of the parties". This objective, contextual formulation of the test for individualised implied terms represents a shift from the older and subjective formulation of the implied term test, asking like an "officious bystander" what the parties "would have contracted for" if they had applied their minds to a gap in the contract. In AG of Belize v Belize Telecom Ltd, Lord Hoffmann in the Privy Council added that the process of implication is to be seen as part of the overall process of interpretation: designed to fulfill the reasonable expectations of the parties in their context. The custom of the trade may also be a source of an implied term, if it is "certain, notorious, reasonable, recognised as legally binding and consistent with the express terms".
In specific contracts, such as those for sales of goods, between a landlord and tenant, or in employment, the courts imply standardised contractual terms (or terms "implied in law"). Such terms set out a menu of "default rules" that generally apply in absence of true agreement to the contrary. In one instance of partial codification, the Sale of Goods Act 1893 summed up all the standard contractual provisions in typical commercial sales agreements developed by the common law. This is now updated in the Sale of Goods Act 1979, and in default of people agreeing something different in general its terms will apply. For instance, under section 12-14, any contract for sale of goods carries the implied terms that the seller has legal title, that it will match prior descriptions and that it is of satisfactory quality and fit for purpose. Similarly the Supply of Goods and Services Act 1982 section 13 says services must be performed with reasonable care and skill. As a matter of common law the test is what terms are a "necessary incident" to the specific type of contract in question. This test derives from Liverpool City Council v Irwin where the House of Lords held that, although fulfilled on the facts of the case, a landlord owes a duty to tenants in a block of flats to keep the common parts in reasonable repair. In employment contracts, multiple standardised implied terms arise also, even before statute comes into play, for instance to give employees adequate information to make a judgment about how to take advantage of their pension entitlements. The primary standardised employment term is that both employer and worker owe one another an obligation of "mutual trust and confidence". Mutual trust and confidence can be undermined in multiple ways, primarily where an employer's repulsive conduct means a worker can treat herself as being constructively dismissed. In Mahmud and Malik v Bank of Credit and Commerce International SA the House of Lords held the duty was breached by the employer running the business as a cover for numerous illegal activities. The House of Lords has repeated that the term may always be excluded, but this has been disputed because unlike a contract for goods or services among commercial parties, an employment relation is characterised by unequal bargaining power between employer and worker. In Johnstone v Bloomsbury Health Authority the Court of Appeal all held that a junior doctor could not be made to work at an average of 88 hours a week, even though this was an express term of his contract, where it would damage his health. However, one judge said that result followed from application of the Unfair Contract Terms Act 1977, one judge said it was because at common law express terms could be construed in the light of implied terms, and one judge said implied terms may override express terms. Even in employment, or in consumer affairs, English courts remain divided about the extent to which they should depart from the basic paradigm of contractual freedom, that is, in absence of legislation.
Unfair terms[edit | edit source]
In the late 20th century, Parliament passed its first comprehensive incursion into the doctrine of contractual freedom in the Unfair Contract Terms Act 1977. The topic of unfair terms is vast, and could equally include specific contracts falling under the Consumer Credit Act 1974, the Employment Rights Act 1996 or the Landlord and Tenant Act 1985. Legislation, particularly regarding consumer protection, is also frequently being updated by the European Union, in laws like the Flight Delay Compensation Regulation, or the Electronic Commerce Directive, which are subsequently translated into domestic law through a statutory instrument authorised through the European Communities Act 1972 section 2(2), as for example with the Consumer Protection (Distance Selling) Regulations 2000. The primary legislation on unfair consumer contract terms deriving from the EU is found in the Consumer Rights Act 2015. The Law Commission had drafted a unified Unfair Contract Terms Bill, but Parliament chose to maintain two extensive documents.
The Unfair Contract Terms Act 1977 regulates clauses that exclude or limit terms implied by the common law or statute. Its general pattern is that if clauses restrict liability, particularly negligence, of one party, the clause must pass the "reasonableness test" in section 11 and Schedule 2. This looks at the ability of either party to get insurance, their bargaining power and their alternatives for supply, and a term's transparency. In places the Act goes further. Section 2(1) strikes down any term that would limit liability for a person's death or personal injury. Section 2(2) stipulates that any clause restricting liability for loss to property has to pass the "reasonableness test". One of the first cases, George Mitchell Ltd v Finney Lock Seeds Ltd saw a farmer successfully claim that a clause limiting the liability of a cabbage seed seller to damages for replacement seed, rather than the far greater loss of profits after crop failure, was unreasonable. The sellers were in a better position to get insurance for the loss than the buyers. Under section 3 businesses cannot limit their liability for breach of contract if they are dealing with "consumers", defined in section 12 as someone who is not dealing in the course of business with someone who is, or if they are using a written standard form contract, unless the term passes the reasonableness test. Section 6 states the implied terms of the Sale of Goods Act 1979 cannot be limited unless reasonable. If one party is a "consumer" then the SGA 1979 terms become compulsory under the CRA 2015. In other words, a business can never sell a consumer goods that do not work, even if the consumer signed a document with full knowledge of the exclusion clause. Under section 13, it is added that variations on straightforward exemption clauses will still count as exemption clauses caught by the Act. So for example, in Smith v Eric S Bush the House of Lords held that a surveyor's term limiting liability for negligence was ineffective, after the chimney came crashing through Mr Smith's roof. The surveyor could get insurance more easily than Mr Smith. Even though there was no contract between them, because section 1(1)(b) applies to any notice excluding liability for negligence, and even though the surveyor's exclusion clause might prevent a duty of care arising at common law, section 13 "catches" it if liability would exist "but for" the notice excluding liability: then the exclusion is potentially unfair.
Relatively few cases are ever brought directly by consumers, given the complexity of litigation, cost, and its worth if claims are small. In order to ensure consumer protection laws are actually enforced, the Competition and Markets Authority has jurisdiction to bring consumer regulation cases on behalf of consumers after receiving complaints. Under the Consumer Rights Act 2015 section 70 and Schedule 3, the CMA has jurisdiction to collect and consider complaints, and then seek injunctions in the courts to stop businesses using unfair terms (under any legislation). The CRA 2015 is formally broader than UCTA 1977 in that it covers any unfair terms, not just exemption clauses, but narrower in that it only operates for consumer contracts. Under section 2, a consumer is an "individual acting for purposes that are wholly or mainly outside that individual's trade, business, craft or profession." However, while the United Kingdom could always opt for greater protection, when it translated the Directive into national law it opted to follow the bare minimum requirements, and not to cover every contract term. Under section 64, a court may only assess the fairness of terms that do not specify "the main subject matter of the contract", or terms which relate to "appropriateness of the price payable" of the thing sold. Outside such "core" terms, a term may be unfair, under section 62 if it is not one that is individually negotiated, and if contrary to good faith it causes a significant imbalance in the rights and obligations of the parties. A list of examples of unfair terms are set out in Schedule 2. In DGFT v First National Bank plc the House of Lords held that given the purpose of consumer protection, the predecessor to section 64 should be construed tightly and Lord Bingham stated good faith implies fair, open and honest dealing. This all meant that the bank's practice of charging its (higher) default interest rate to customers who had (lower) interest rate set by a court under a debt restructuring plan could be assessed for fairness, but the term did not create such an imbalance given the bank wished only to have its normal interest. This appeared to grant a relatively open role for the Office of Fair Trading to intervene against unfair terms. However, in OFT v Abbey National plc the Supreme Court held that if a term related in any way to price, it could not by virtue of section 64 be assessed for fairness. All the High Street banks, including Abbey National, had a practice of charging high fees if account holders, unplanned, exceeded through withdrawals their normal overdraft limit. Overturning a unanimous Court of Appeal, the Supreme Court viewed that if the thing being charged for was part of a "package" of services, and the bank's remuneration for its services partly came from these fees, then there could be no assessment of the fairness of terms. This controversial stance was tempered by their Lordships' emphasis that any charges must be wholly transparent, though its compatibility with EU law is not yet established by the European Court of Justice, and it appears questionable that it would be decided the same way if inequality of bargaining power had been taken into account, as the Directive requires.
References[edit | edit source]
- See in particular George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd  QB 284 and Johnson v Unisys Ltd  UKHL 13
- Heilbut, Symons & Co v Buckleton  UKHL 2,  AC 30, 50–1, Lord Moulton, 'The intention of the parties can only be deduced from the totality of the evidence.'
-  1 WLR 370
-  EWCA Civ 2
- (1877) 2 CPD 416
- See Allen v Pink (1838) 4 M&W 140, on the parol evidence "rule". The better view appears to be that this is not a rule, but a presumption: KW Wedderburn, 'Collateral Contract'  CLJ 58. See also City and Westminster Properties (1934) Ltd v Mudd  Ch 129 on collateral contracts. In California, the rule has been circumvented, see Pacific Gas & Elec. Co. v. G. W. Thomas Drayage Co., 69 Cal. 2d 33 (1968)
- L'Estrange v F Graucob Ltd  2 KB 394, the purchaser of a faulty cigarette machine could not get a refund, because she had signed a document exempting the seller for any liability if it did not work. However, today this would be found unfair under UCTA 1977 ss 3, 6 and Sch 2
- See Grogan v Robin Meredith Plant Hire  CLC 1127 and Gallie v Lee  UKHL 5,  AC 1004.
- Autoclenz Ltd v Belcher  UKSC 41
- See the Unfair Terms in Consumer Contracts Directive 93/13/EEC and UTCCR 1999
- e.g. Bankway Properties Ltd v Pensfold-Dunsford  EWCA Civ 528, 
-  EWCA Civ 3,  1 WLR 461. See also Olley v Marlborough Court  1 KB 532, where Denning LJ held a notice behind a door to a washbasin in a hotel guest's room was not prominent enough to exclude the hotel's liability for failing to prevent a thief stealing Mrs Olley's fur coat.
-  2 QB 163
-  EWCA Civ 6,  QB 433
-  EWCA Civ 1279
-  2 QB 71
-  EWCA Civ 6,  QB 303
- See also Henry Kendall Ltd v William Lillico Ltd  2 AC 31 and Scheps v Fine Art Logistics Ltd  EWHC 541
-  UKHL 28,  1 WLR 896
- e.g., Lovell & Christmas Ltd v Wall (1911) 104 LT 85, Lord Cozens-Hardy MR stated, "it is the duty of the court… to construe the document according to the ordinary grammatical meaning of the words used therein."
-  AC 192
- See Curtis v Chemical Cleaning and Dyeing Co  1 KB 805, Harbutt's Plasticine Ltd v Wayne Tank Pump Co Ltd  1 QB 47 and Photo Production Ltd v Securicor Transport Ltd  AC 827
- See also Hollier v Rambler Motors Ltd  2 QB 71, where Salmon LJ held that even if the clause excluding liability for fire had been incorporated through a course of dealings, because a reasonable person would not believe it referred to the business' negligence, it would be construed to not cover that.
- See George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd  QB 284, and also Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd  UKHL 12,  1 WLR 964, Lord Fraser notes Lord Morton's principles do not apply fully to limitation as opposed to exclusion clauses.
- Lord Wilberforce in Rearden Smith Lines Ltd v Hansen Tangan  1 WLR 989 was taken as inspiration by Lord Hoffmann, a judgment passed as it was clear unfair terms legislation was to be enacted.
- See HIH Casualty and General Insurance Ltd v Chase Manhattan Bank  UKHL 6. This position reflects most civil law countries since the 19th century, e.g. in Germany BGB §133 where "the actual will of the contracting party, not the literal sense of words, is to be determined"
- Chartbrook Ltd v Persimmon Homes Ltd  UKHL 38
- e.g. Lord Steyn, 'Contract Law: Fulfilling the Reasonable Expectations of Honest Men' (1997) 113 LQR 433
- Oceanbulk Shipping & Trading SA v TMT Asia Ltd  UKSC 44
- See Frederick E Rose (London) Ltd v William H Pim Jnr & Co Ltd  2 QB 450
- Attorney General of Belize v Belize Telecom Ltd  UKPC 10
- However where contracts are avoidable for lack of good faith, misrepresentation, duress or undue influence, or lack of capacity, and an order to reverse unjust enrichment is imposed, the same functional result may be reached.
- For instance, the Model Articles for companies incorporated under the Companies Act 2006 contain many such default rules, while the terms of the Employment Rights Act 1996 cannot be contracted out of.
- Equitable Life Assurance Society v Hyman  UKHL 39,  1 AC 408, 459. The same test is used for implying contracts, Baird Textiles Holdings Ltd v Marks & Spencer plc  EWCA Civ 274,  1 All ER (Comm) 737.
-  1 AC 408, 459. See also Paragon Finance plc v Nash  1 WLR 685 and AG of Belize v Belize Telecom Ltd  UKPC 10, -
- The Moorcock (1889) 14 PD 64 and Southern Foundries (1926) Ltd v Shirlaw  AC 701
-  UKPC 10
- Cunliffe-Owen v Teather & Greenwood  1 WLR 1421, per Ungoed Thomas LJ. See also Hutton v Warren  EWHC Exch J61
-  1 AC 408
-  AC 329. The judgment of Lord Denning MR in the Court of Appeal,  QB 319, is notable for asserting that the judiciary should be able to imply terms whenever it is reasonable.
- See Scally v Southern Health and Social Services Board  1 AC 294, cf Crossley v Faithful & Gould Holdings Ltd  EWCA Civ 293
- e.g. Wilson v Racher  ICR 428
-  AC 20
-  QB 333
-  QB 333, respectively Leggatt LJ at 347–349, Sir Nicholas Browne-Wilkinson VC at 349–352, and Stuart Smith LJ at 340–347.
- See EC Regulation 261/2004
- See EU Directive 2000/31/EC
- See SI 1999/2083, implementing the EU Unfair Consumer Contract Terms Directive 93/13/EC
- Law Commission, Unfair Terms in Contracts (2005) Law Com 292
- UCTA 1977 s 11(4)(b), Sch 2(a) and 2(c). Although Sch 2 stipulates that its criteria are only for ss 6(3), 7(3)-(4) and 20–21, the courts say these criteria are relevant for the rest of the Act, per Clarke J in Woodman v Photo Trade Processing Ltd (7 May 1981) Unreported, Exeter County Court, and R Lawson (1981) 131 NLJ 933.
-  EWCA Civ 5,  QB 284 and  2 AC 803
- e.g. in Timeload Ltd v BT plc  EMLR 459 Sir Thomas Bingham MR held it was arguable that BT's standard term that it could terminate a business customer's phone connection "at any time" on one month's notice was unreasonable because it did not require that BT gave any kind of good reason.
-  UKHL 1,  1 AC 831
- c.f. R&B Customs Brokers Ltd v United Dominions Trust Ltd  1 WLR 321, where under UCTA 1977 the Court of Appeal held that an incorporated small business could count as a consumer.
-  UKHL 52
-  UKSC 6
-  EWCA 116
-  UKSC 6, , per Lord Mance.
- See also, the Unfair Contract Terms Bill (2005) Law Com 292, in clause 4(5) says price "does not include any amount, payment of which would be incidental or ancillary to the main purpose of the contract".