Terms, Interpretation and Restrictions/Exclusions Flashcards
Introduction: Chen-Wishart
Policy factors:
vitiating factors
- Promoting freedom of contract
- Curbing excesses of unfairness and exploitation resulting from significant inequality in bargaining power
The vitiating factors can go some way, but they are usually ineffective against standard term contracts, so that the modern increase in such contracts puts pressure on traditional contract law, premised on the model of individual negotiation.
Introduction: Chen-Wishart
The danger here is:
- The customer has no time to read them, and if he did he would probably not understand them, and even if he understood them and objected, he would be told to take it or leave it. If he then went to another supplier the result would be the same. Freedom of contract must surely imply some choice or room for bargaining (Suisse Atlantique v NV Rotterdamsche Kolen Centrale (1967) per Lord Reid)
Introduction: Chen-Wishart
Courts limit the effect of unfair terms by:
- Implied term in favour of adhering party
- Holding that insufficient notice has been given of onerous or unusual standard terms in unsigned documents
- Interpreting an unfair term in a way less advantageous to the adhering party
- Holding the unfair term unenforceable
A – What are Terms?
1/ Express terms
a/ The parole evidence rule
Parties are generally barred from adducing extrinsic evidence to add to/vary/contradict a document that purports to record the parties’ agreement (Jacobs v Batavia).
A – What are Terms?
1/ Express terms
a/ The parole evidence rule
Exceptions:
- Claim that contract is vitiated
- Claim that the contract includes additional terms than those in the document (express or implied)
- Claim to rectification
A – What are Terms?
1/ Express terms
a/ The parole evidence rule
How should we understand the parole evidence rule?
Thus it is better to understand the rule as an easily rebuttable presumption that the document contains the entire contract. It is problematic because:
- The reasoning to support it is circular: the document is presumed to contain the whole contract, unless the parties did not so intend (such intention requiring extrinsic evidence to show) (Allen v Pink)
- Its application is questionable – in Shogun Finance v Hudson HL held that the parole evidence rule bars extrinsic evidence in claim of mistaken identity (though in this case is the rule relevant where it is not what is the contract but whether there is a contract at all that is in question?)
A – What are Terms?
1/ Express terms
b/ Collateral terms and collateral contracts
- For D’s assurance to amount to a collateral term C must show that it was the decisive influence on the transaction, the very thing that induces the contract (Mendelssohn v Normand, Phillimore LJ) (≠ it was merely a cause, which is the test for misrepresentation)
- It used to be thought that collateral terms could only add to but not vary the written contract, so courts sidestepped the problem by finding a collateral contract (a second unilateral contract containing the promise, in consideration of the promisee entering the main contract)
They both perform the same function:
1) Confer remedial advantages for breach of the collateral term/contract (better than misrepresentation because C might want their expectation interest)
2) Override privity (ex. Shanklin v Detel)
3) Override inconsistent terms in the main contract by circumventing the parole evidence rule
Entire agreement clauses (clauses that say the written document contains the entire contract and no other collateral terms may be added) are enforceable (Inntrepreneur v East Crown).
A – What are Terms?
1/ Express terms
c/ Incorporation of terms
i/ Signature:
- Signature is binding except:
o Non est factum
o Misrepresentation
o Other vitiating factor (mistake, undue influence, unconscionability, duress, incapacity
o Non-contractual nature of the signed document (ex. Time sheets in Grogan v Robin) - Criticism:
o McCutcheon v David MacBrayne, Lord Devlin: the rule is premised on a “world of make-belief” in that standard form contracts are not made to be read and the signature is about as significant as a handshake
o Spencer and Waddams in response to L’estrange
o Tilden v Clendenning
o European Draft Common Frame of Reference: terms not individually negotiated are not sufficiently brought to the other party’s attention by mere reference to them in a document, even if that party signs the document.
A – What are Terms?
1/ Express terms
c/ Incorporation of terms
ii/ Unsigned documents:
- At or before contract formation (Olley, Thornton)
- Contract document not something that a party is expected to know to contain contract terms (Chapelton v Barry)
- Reasonable notice:
o that the document contains terms (even if C actually remained ignorant of the terms) (Parker v SE Railway)
o of onerous or unusual terms (ex. Interfoto v Stiletto), based on the presumed intention of the party being bound that there are no unreasonable conditions to the party tendering the document and not insisting on it being read (Bramwell LJ, Parker)
A – What are Terms?
2/ Implied Terms
Since the “implication of terms is so potentially intrusive”, contract law imposes “strict constraints on the exercise of this extraordinary power” (Lord Bingham, Phillips v B Sky).
A – What are Terms?
2/ Implied Terms
a/ Terms implied in Fact
- Traditional tests:
o Business efficacy (The Moorcock)
o Officious bystander (Shirlaw) - The test in AG of Belize v Belize Telecom:
o Implying terms in fact is an exercise in the construction of the instrument as a whole (which has been approved and welcomed for promoting the “internal coherence of the law” – Arden LJ in Stena Line v Merchant Navy)
o The different tests are not really tests but are a collection of different ways in which judges have tried to express the central idea that the implied term must spell out what the contract actually means
o The rule that an implied term cannot contradict an express term is subject to contextual interpretation of the express term itself to avoid defeating the overriding purpose of the term
A – What are Terms?
2/ Implied Terms
b/ Terms implied in law
the test of necessity
- Test is necessity but less stringent than terms implied in fact, though Lord Denning’s reasonable test is rejected by the HL (Liverpool CC v Irwin), although:
o Whether or not it made any difference is debatable (CF Atiyah – that the difference is “unreal”)
o Lord Denning thinks that such terms are not founded on the intentions of the parties but whether the law has already defined the obligation or its extent (Shell UK v Lostock Garages)
o Dyson LJ thinks that rather than focus on the elusive concept of necessity, it is better to recognize that the existence and scope of standardized implied terms raise questions of reasonableness, fairness and the balancing of competing policy considerations.
o Peden (approved by CoA) thinks that courts should consider (i) whether the implied term is consistent with existing law, (ii) how it would affect the parties, and (iii) wider issues of fairness in society. He thinks that the underlying idea is to maximize the social utility of the relationship, i.e. ensure cooperation between the parties and compliance with society’s standards.
o Collins thinks, however, that such open-ended considerations are neither appropriate nor necessary but we should have a two-stage inquiry:
♣ What rule achieves an efficient allocation of risks between the parties?
♣ Is this consistent with the reasonable expectations of the parties?
A – What are Terms?
2/ Implied Terms
b/ Terms implied in law
restriction on the court’s power to imply terms
- Though the court’s power to imply terms in law are restricted to terms that fit the generality of contracts of that class, sometimes courts have implied a term in a very narrow class of contracts, thus narrowing the gap between terms implied in law and in fact.
o Scally v Southern Health and Social Services Board – term implied where a particular term (a) resulting from collective bargaining (b) confers a valuable right contingent on the employee taking an action, and (c) the employee cannot reasonably be expected to know of the term without being notified
o Freedland: there are “few if any other situations” where this would happen in employment contexts
B – What do the terms mean? (Interpretation)
Intro
- Traditionally, literal interpretation (consistently with the parole evidence rule) – a contract’s meaning was discoverable within the four corners of the document without reference to extrinsic evidence.
- However, words don’t always have a single, immutable, clear meaning, so a change in approach was consolidated in Investors Compensation Scheme v West Bromich (Lord Hoffmann):
o The overall aim of interpretation is ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parites in the situation they were in at time of contract.
o The scope of contextual information admissible is everything which would have affected the way in which the language of the document would have been understood by a reasonable man, subject to reasonable availability to parties and exceptions. - Thus it is the weight and not admissibility that will be emphasized.
B – What do the terms mean? (Interpretation)
When will the court depart from the literal meaning of words used?
- “The background may not merely enable the reasonable man to choose between the possible meanings of words that are ambiguous, but even to conclude that the parties must have used the wrong words or syntax” (Lord Hoffmann).
- In such cases, language that flouts business common sense must be made to yield to business common sense. If it is clear that (i) something has gone wrong with the language AND (ii) what the parties meant, then there is no limit to the amount of verbal rearrangement or correction the court is allowed (Lord Hoffmann, Chartbrook)
- But courts don’t easily accept that people made linguistic mistakes:
o Not enough to show that the contract is unduly favorable to one party (Chartbrook).
o Where parties used unambiguous language, the courts must apply it (Rainy Sky).
o Chartbrook should only be seen as an opportunity to remedy by construction a clear error of language which could not have been intended (Rainy Sky) - The expansive scope of interpretation means that it might overlap with rectification and implied terms:
o Buxton = the process of rectification is virtually identical to Lord Hoffmann’s principles of interpretation in ICS.
B – What do the terms mean? (Interpretation)
Inadmissibility of previous negotiations and subsequent conduct:
- Evidence of previous negotiations is inadmissible to contract interpretation, but the exclusion does not apply to evidence of negotiations as evidence to (i) establish a fact that may be relevant as background known to the parties, (ii) claim for rectification, or (iii) estoppel (Lord Hoffmann, Chartbrook).
- Evidence of conduct subsequent to contract formation is also inadmissible because the meaning of contracts cannot change over time (Schuler v Wickman).
C – Interpretation of exclusion clauses
- Before, they were often given very strained meanings in order to get around them, but UCTA has reduced the need to do this so that “any need for this kind of judicial distortion of the English language has been banished”. It is wrong to place a strained construction upon words in exclusion clauses that are clear and fairly susceptible to one meaning only (Lord Diplock, Photo Production).
However, this may be somewhat of an overstatement because there are still rules on interpreting clauses that exclude/limit liability:
C – Interpretation of exclusion clauses
1/ Fundamental Breach
You can’t exclude liability for a breach that goes to the very root of the contract. Though Lord Denning advocated it as a rule of law that applies irrespective of the parties’ intention, it is now regarded as a rule of construction (the more unreasonable, the less likely the parties intended it):
- Photo Production said that the doctrine of fundamental breach had served a useful purpose, but this is no longer necessary because of UCTA.
Thus, very clear words are required (and will) exclude liability for:
- Breach of terms that go to the root of the contract or
- Deliberate repudiation of the contract (Chartbrook)
C – Interpretation of exclusion clauses
2/ Contra proferentem
Any ambiguity in a contract term is construed against the party who introduced it, which means that words alleged to exclude liability are given their narrowest possible interpretation.
C – Interpretation of exclusion clauses
2/ Contra proferentem
The extent to which contra proferentem is and should be applied today:
- “Original rule” = a rule of last resort if the ordinary rules of interpretation leave an unresolved ambiguity
- “Exemption rule” = a more extensive role: it is permissible, for the purposes of interpretation only, to identify certain clauses as seeking to derogate from one party’s “basic obligation” or common law duty that arises apart from contract, and to require that these be sufficiently indicated as representing the parties’ intention.
C – Interpretation of exclusion clauses
2/ Contra proferentem
The exemption rule has a more extensive role:
- UCTA did not herald the demise of contra proferentem, as made clear by Lord Wilberforce (Photo Production v Securicor); the trigger of application is not ambiguity but the perception that D seeks to escape from the consequence of his own wrongdoing.
- IAO the ICS statement (removing strained constructions etc) does not and should not include contra proferentem, and indeed it has been applied after ICS (ex. through the Canada Steamship rules).
C – Interpretation of exclusion clauses
2/ Contra proferentem
Applied to exemptions of consequential loss:
- The term “consequential loss” in such cases refers only to those that fall within the second limb of Hadley v Baxendale (those that should have been reasonably contemplated by D as going beyond the ordinary course of things known to D) which means that (ex.) loss of ordinary profits will often fall into the first limb (Victoria Laundry) and not be consequential.
- IAO to the extent that the clause purports to depart from the implied obligation to pay damages at the level determined by general law, it should be construed contra proferentem.
C – Interpretation of exclusion clauses
3/ Limitation-exclusion distinction
Courts are less hostile to limitation clauses than exclusion clauses because parties are more likely to agree to limit than exclude, and limitation clauses play a legitimate role in risk allocation (Ailsa v Malvern).
But the distinction is artificial because exclusion clauses can also serve legitimate risk allocation (ex. Photo Production) whereas limitations might be so severe as to amount in substance to total exclusion.
UCTA doesn’t distinguish between the two.
HCA rejected the distinction.
C – Interpretation of exclusion clauses
4/ Exemptions of negligence liability
Courts are more hostile towards exclusions/limitations for negligence, because inherently improbable that innocent party would have agreed to it. Thus there are two questions (Canada Steamship):
C – Interpretation of exclusion clauses
5/ Exemptions for indirect and consequential loss
These are also restrictively interpreted (sometimes the court will hold that the losses actually incurred were direct and not consequential loss so not covered by the clause):
- Hotel Services v Hilton (claimed cost of removing and storing a defective minibar, and loss of profits): held that the losses were direct because (relying on Hadley v Baxendale remoteness test) “direct” loss was loss arising naturally from the breach and indirect loss was reasonably contemplated in view of special known facts.
But this interpretation seems inconsistent with the natural meaning of “consequential loss” (which should cover loss of profits).
I - Interpretation
|*Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912-913 (Lord Hoffmann)
- The fundamental change in contractual interpretation has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of “legal” interpretation has been discarded.
- The principles may be summarised as follows.
o (1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
o (2) Subject to the requirement that it should have been reasonably available to the parties and to theexception to be mentioned next, background includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.
o (3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent.
o (4) The meaning which a document would convey to a reasonable man is not the same thing as the meaning of its words. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax.
o (5) The “rule” that words should be given their “natural and ordinary meaning” reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had.
1º “Almost all the old intellectual baggage of “legal” interpretation has been discarded” was said to include the “artificial rules” relating to the construction of exclusion clauses (BCCI v Ali; Photo Production, Lord Hoffmann)… But this is not so straightforward, esp. Canada Steamship line of cases.
I - Interpretation
|*Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38
Clarifies Lord Hoffmann’s third principle in confirming the existence of a general exclusionary principle
- Lord Hoffmann:
o The law of contract is designed to enforce promises with a high degree of predictability, and the more one allows conventional meanings to be displaced by inferences drawn from background, the less predictable.
o There is no clearly established case for departing from the exclusionary rule. The rule may well mean that parties are sometimes held bound by a contract in terms which a reasonable observer would not have taken them to have intended. But a system which sometimes allows this to happen may be justified in the more general interest of economy and predictability inobtaining advice and adjudicating disputes.
EXAM POINT
Excellent quote about the need for contract law to balance the interests of the contracting parties and the wider interests of the community at large.
o It is, after all, usually possible to avoid surprises by carefully reading the documents before signing them and there are the safety nets of rectification and estoppel by convention (if the parties have negotiated an agreement upon some common assumption, which may include an assumption that certain words will bear a certain meaning, they may be estopped from contending that the words should be given a different meaning), both of which lie outside the exclusionary rule.
2º Rectification and estoppel by convention operate very narrowly and are unlikely to provide “safety nets”, but then the UKSC made a broader exception that pre-contractual negotiations that form part of the factual matrix may be admissible (Oceanbulk Shipping).
I - Interpretation
|*Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38
Clarifies Lord Hoffmann’s points (4) and (5):
- Lord Hoffmann:
o It requires a strong case to show that something has gone wrong with the language; it is necessary to demonstrate more than that a particular interpretation results in an outcome especially favourable to one party.
♣ But in this case requirement satisfied because the interpretation would not only make it favorable to one party, but would make the structure and language of other provisions in the contract irrational and arbitrary.
o When the language used in an instrument gives rise to difficulties of construction, the process of interpretation does not require one to formulate some alternative form of words which approximates as closely as possible to that of the parties. It is to decide whata reasonable person would have understood the parties to have meant by using the language which they did. The fact that the court might have to express that meaning in language quite different from that used by the parties is no reason for not giving effect to what they appear to have meant.
o There is no limit to the amount of red ink or verbal rearrangement or correction which the court is allowed. All that is required is that it should be clear that something has gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant. In my opinion, both of these requirements are satisfied.
3º This appears to make interpretation no different from rectification, and has been criticized for confusing the meaning of what the parties said with what they meant but did not say (Buxton).
However, this principle only applies where BOTH the fact that there is a mistake AND what the reasonable person would have understood the parties to have meant ARE CLEAR. Thus, Arnold v Britton failed because the second requirement wasn’t satisfied:
I - Interpretation
|*Arnold v Britton [2015] UKSC 36, [2015] 2 WLR 1593 esp [14]-[23]
- Lord Neuberger:
o When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to “what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean” (citing Lord Hoffmann, Chartbrook)
o The court focuses on the meaning of the relevant words in their documentary, factual and commercial context, so meaning is assessed in light of:
♣ (i) the natural and ordinary meaning of the clause,
♣ (ii) any other relevant provisions of the lease,
♣ (iii) the overall purpose of the clause and the lease,
♣ (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and
♣ (v) commercial common sense, but
♣ (vi) disregarding subjective evidence of any party’s intentions
o Seven important factors:
♣ Save perhaps in a very unusual case, the meaning is most obviously to be gleaned from the language of the provision because the parties have control over it whereas they don’t have control over commercial common sense and surrounding circumstances
♣ The less clear the words are/the worse their drafting, the more ready is the court to depart from natural meaning. But that does not justify the court embarking on an exercise of searching for drafting infelicities in order to facilitate a departure from the natural meaning. If there is a specific error in the drafting, it may often have no relevance to the issue of interpretation which the court has to resolve.
♣ Commercial common sense is not to be invoked retrospectively. The mere fact that a contract has worked out badly, or even disastrously, for one party is not a reason to depart from natural language.
♣ A court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of hindsight. It is not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice, so courts, when interpreting, should avoid rewriting it in an attempt to assist an unwise party or penalize an astute party.
♣ Can only take into account facts or circumstances which existed at the time that the contract was made, and which were known or reasonably available to both parties (and not only one party).
I - Interpretation
|*Arnold v Britton [2015] UKSC 36, [2015] 2 WLR 1593 esp [14]-[23]
- Lord Hodges:
o Accepts unitary process of construction: in interpreting, “the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other” (citing Lord Clarke, Rainy Sky)
o This requires an iterative process by which each rival meaning is checked against the provisions of the contract and its commercial consequences are investigated.
o But there must be a basis in the words used and the factual matrix for identifying a rival meaning. The question for the court is not whether a reasonable and properly informed tenant would enter into such an undertaking. This would rewrite the parties’ bargain in the name of commercial good sense, which the court cannot do.
I - Interpretation
® *Wood v Capita Insurance Services Ltd [2017] UKSC 24
Lord Nicholls, “My Kingdom for a Horse: The Meaning of Words” (2005) 121 LQR 577
The problem is that under the current approach a party to a contract cannot proffer evidence of the parties’ action intention – should address the problem without resorting to rectification or estoppel.
It is said to be that since objective approach is not concerned with identifying actual intention, pre-contractual negotiations must be irrelevant. But this is too broad and rigid – the content of pre-contractual negotiations is a background fact (Collins). Admitting evidence would not depart from the objective approach but would merely enable the notional reasonable person to be more fully informed of the background context.
We should regard the exclusion of pre-contractual negotiations as not absolute because:
- Injustice: exclusion disables the court from considering helpful evidence, and allows a party to contend for a meaning he knows was not intended.
- Prior negotiations is often the best evidence: it should be admissible whenever it would influence the notional reasonable person in his understanding of the meaning intended by the parties
- There are already a lot of exceptions: misrepresentation, rectification, estoppel, variation, ambiguity in written document…
- Comparative law: exclusions are inconsistent with most other legal systems and international restatements of contract law
I - Interpretation
® *Wood v Capita Insurance Services Ltd [2017] UKSC 24
Lord Nicholls, “My Kingdom for a Horse: The Meaning of Words” (2005) 121 LQR 577
Counter-arguments:
- Uncertainty but admitting pre-contract that furnishes clear insight into the intended meaning, we are furthering certainty not diminishing it
- Third parties (who acquire an interest under the contract, because unlikely to know about pre-contract) but courts already taken into account “objective” background matters known to the parties but not others
- Unhelpful (Lord Wilberforce, Prenn v Simmonds) because only the final document records a consensus but this doesn’t apply where pre-contract is helpful
- Subverts the objective approach (by giving too much weight to subjective factors over words of the contract: Mason J) yes but it doesn’t justify excluding relevant evidence from a trial.
Parties’ subsequent conduct may also be a useful guide, and though problems are mostly solved by estoppel by convention, the law should still recognize this openly.
I - Interpretation
|Leggatt, “Making sense of contracts: the rational choice theory”(2015) LQR 454
Argues that “objective” contractual interpretation has three possible meanings:
- (i) weak meaning = must infer what the parties intended from their words and actions because we have no direct access to the minds of other people but it can’t be anything else, so it’s just a truism.
- (ii) orthodox view (reasonable person test) = confines materials from which intention is inferred to matters within their common knowledge when the contract was made (ICS test) but this doesn’t reflect the actual practice and is insufficiently objective because it suggests that interpretation involves an inquiry into the state of mind of the parties.
- (iii) preferred “more strongly objective” meaning (rational choice theory) = objective meaning is located by assuming that (i) the parties chose the language of their contract to express a shared intention, and (ii) the parties are rational people. This means that contractual documents are interpreted as having the meaning which best explains why rational parties who were using the language to express a shared intention would have chosen that language this promotes certainty, facilitates commerce and respects the autonomy of contracting aprties by treating them as having made a rational choice.
I - Interpretation
|Leggatt, “Making sense of contracts: the rational choice theory”(2015) LQR 454
1º ARGUMENT
we should reject the “psychological theory” because the task of interpreting a contract cannot require the interpreter to discover a shared intention, because in most cases where the meaning of a contract is disputed, and different interpretations are put forward, it is likely that at least one party had no intention or understanding that the words bore any of the suggested meanings, at the time of contract.
- They haven’t read the provision.
- Contracts are binding even in circumstances that the parties didn’t envisage when they made it.
- If one party didn’t have a relevant intention, there can be no shared intention.
- Thus, a system that attached meaning to the language of contracts only when the meaning was actually intended would be one where contractual documents have very limited legal effect.
I - Interpretation
|Leggatt, “Making sense of contracts: the rational choice theory”(2015) LQR 454
2º CAVEAT #1
where there is an actual shared intention, the law should enforce it, but shared intention is the only form of actual intention that the law has reason to enforce. But how?
- Interpret the language of the contract in accordance with a proven shared intention? Early English approach (The Karen Oltmann)
- Interpret contractual language objectively, but where there is a conflicting proven shared intention, allow rectification (or estoppel by convention)? Modern English approach (Chartbrook v Persimmon Homes, overruling The Karen Oltman because it infringed the rule on exclusion of negotiations, saying that situations in The Karen Oltman can be solved through rectification)
I - Interpretation
|Leggatt, “Making sense of contracts: the rational choice theory”(2015) LQR 454
2º ARGUMENT #2
we should adopt rational choice theory (i.e. a theory of contractual interpretation that depends on the two above assumptions), and only depart from this if a proven shared intention conflicts with this interpretation, and do this through rectification. Thus, objective interpretation does not depend on what (if anything) the parties actually meant, or would be understood to mean by a reasonable person, when the contract was made.
I - Interpretation
|McLaughlin, “A better way of making sense of contracts?” (2016) LQR 577.
Argues that Leggatt’s rational choice theory is unpersuasive because (contrary to Leggatt’s suggestion) Lord Hoffmann’s principles in ICS do not represent “psychological theory” but are as objective as you can get. The inquiry is, under the current approach, into apparent intention, i.e. the intention that a reasonable person aware of the background would attribute to the parties (not an inquiry into the states of mind of the parties).
IAO Leggatt’s treatment of shared intention in rectification is selective; a more principled approach would be that where it is proven that the parties negotiated on the basis of a common understanding that term X had meaning Y, that meaning is the meaning of the term. Thus, rectification is inappropriate to situations like The Karen Oltman because the parties didn’t attach a particular meaning to the chosen words, they just failed to appreciate that those words didn’t have the intended effect, and assumed that they sufficed.
Leggatt claims that his theory is advantageous because:
- It sheds light on the nature of disagreements about questions of contract interpretation and on the difference between interpreting an existing contract and creating a new or better one but it sheds no more light than Lord Hoffmann’s principles.
- It is fair and respects people’s autonomy to treat them as reasonable people but this merely justifies an objective theory and not necessarily his.
- It promotes certainty and facilitates commerce
o by giving content to contractual obligations even in circumstances which the parties did not specifically envisage
o by allowing parties to predict with a reasonable degree of certainty when entering into a contract how its provisions will be interpreted
o by allowing third parties to ascertain the meaning of contracts without being privy to the actual intentions
o by allowing judges to adjudicate on the basis of relatively little information and without need for expensive factual inquiry
these claims seem “exaggerated”; if they exist, hard to see how they are less achieved by the ICS approach.
I - Interpretation
|Lord Sumption, “A Question of Taste: The Supreme Court and the Interpretation of Contracts”
Argues that the trend in contractual interpretation was for a period to depart from the strict language and replace it with a broad notion of intention (esp. Lord Hoffmann), but recently the court has gone back to an IAO “more defensible position”.
The construction of contract can never be entirely free of artifice, and the main artifice is that the parties understood what they were signing up to as completely as a judge armed with a mass of objectively relevant and carefully analyzed background information and the advantages of hindsight.
I - Interpretation
|Lord Sumption, “A Question of Taste: The Supreme Court and the Interpretation of Contracts”
The HL’s departure from strict language depended on surrounding circumstances and commercial common sense:
- Originally Lord Wilberforce in Prenn v Simmonds said that you had to have regard to the “origin and purpose of the transaction and circumstances in which it would fall to be performed”, but he was restrained – he was not saying that circumstances were an alternative way of discovering the parties’ intention, just that they were facts that assisted in interpreting the words.
- However, later cases went too far: in The Antaios, Lord Diplock said that “if detailed semantic analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense” suggests that common sense is no longer just a means of understanding the language, but of overriding it. This is IAO “unnecessary and wrong”.
I - Interpretation
|Lord Sumption, “A Question of Taste: The Supreme Court and the Interpretation of Contracts”
IAO The real distinction is not between a literal and a commercial interpretation
It is between an approach to contractual construction which elucidates the meaning of the words, and an approach which modifies or contradicts the words in pursuit of what appears to a judge to be a reasonable result.
- Then in ICS Lord Hoffmann’s principles included the fifth principle, that the “natural and ordinary meaning” of the language is no more than a (rebuttable) presumption, that if the background suggest something has “gone wrong with the words”, the law may attribute a different intention. But by this phrase, Lord Hoffmann doesn’t seem to have meant something was accidentally omitted, but that the background may be used to show that the parties cannot as reasonable people have meant what they said, so that the court is entitled to substitute something else.
- Subsequent caselaw (ex. Charbrook, Rainy Sky) shows that this has led to commonly treating background circumstances as an alternative guide to the parties’ intention instead of a means of interpreting the language.
I - Interpretation
|Lord Sumption, “A Question of Taste: The Supreme Court and the Interpretation of Contracts”
IAO this approach is problematic because:
- The language of the agreement is the only direct evidence of their intention which is admissible, and it is not true to say that language is only meaningful in relation to some background – most language and all properly drafted language has an autonomous meaning. It is I think time to reassert the primacy of language in the interpretation of contracts – the flexibility of language is not a proper basis for treating the surrounding circumstances as an independent source of intention, because while they may enable us to discover what the objective was, they cannot help us determine how far it has been achieved. In negotiations, parties’ objectives are likely different, and only the language (not circumstnaces) can tell us how far each party succeeded in their conflicting and opposite endeavour.
- It is difficult to fairly apply the principles in a legal system that excludes the use of preontractual negotiations as evidence of intention. Indeed Lord Hoffmann said the exclusion was founded on “practical policy”, but IAO it is more fundamental – it follows from the objective character of all contractual construction (negotiations can’t tell us what a contract objectively meant). An apparently harsh or unreasonable term may have been agreed by way of compromise or in exchange for concessions in other areas or because the deal was concluded at 3 a.m. and one of the parties was more interested in going to bed than in the finer points of drafting. Once the courts resort to sources other than the language in order to identify the object of the transaction, it is difficult to justify the current law about extrinsic evidence. Yet that rule is fundamental to the principle of objective construction.
- Judges are not well-placed to determine what commercial common sense requires, because they necessarily focus on what has gone wrong, and their idea is likely to be moulded by ideas of fairness, whereas commercial contracts have nothing to do with fairness and everything to do with the spirit of competitive cooperation, with a view to serving their own interests. Applying the principles, the question is no longer what the parties agreed. It is: what would they have agreed if they were the objective, just and fair-minded people that in practice they are not.
- Principles are difficult to reconcile with implied terms and rectification as hard to see the need for either.
I - Interpretation
|Lord Sumption, “A Question of Taste: The Supreme Court and the Interpretation of Contracts”
Thus, UKSC recently retreated:
- Arnold v Britton (Lord Neuberger) – cited some orthodox principles (primacy of language, danger of retrospectively applying a notion of commercial common sense…)
I - Interpretation
|Lord Sumption, “A Question of Taste: The Supreme Court and the Interpretation of Contracts”
But it didn’t admit that any of the previous decisions went too far
But it didn’t admit that any of the previous decisions went too far, and not clear how the UKSC will resolve these differences in the future, but an indication in Wood v Capita (Lord Hodge):
- “Business common sense is useful to ascertain the purpose of a provision, but in the tug of war of commercial negotiations, business common sense can rarely assist the court in ascertaining on which side of the line the centre line marking on the rope lay, when the negotiation ended”.
II - Implied Terms
A/ Terms implied by Statute in Sale of Goods Contracts
Common law = caveat emptor (the onus is on the buyer to seek specific undertakings from sellers in relation to the quality of goods), but this was significantly reduced by statute.
II - Implied Terms
A/ Terms implied by Statute in Sale of Goods Contracts
1/ Non-Consumer Contracts
The Sale of Goods Act no longer applies to contracts between a trader and consumer!
|*Sale of Goods Act 1979, ss 12-15A;
- Section 12(1): implied condition that the seller does have title to sell the goods
- Section 12(2): two implied warranties (freedom from undisclosed encumbrances + quiet possession free from interferences by the buyer and third parties)
- Section 13: if sale by description, implied term that the goods corresponds to the description
- Section 14: two implied conditions where the seller sells in the course of business:
o S14(2): That the goods be of satisfactory quality, defined in s14(2A) and a check-list of factors in s14(2B) and excluding certain factors in s14(2C)
o S14(3): That the goods be reasonably fit for their purpose (if the buyer wants to use it for an unusual purpose he must declare)
- Section 15: two implied conditions in case of sale by sample
o The bulk will correspond with the sample in quality
o The goods will be free from any defect making their quality unsatisfactory, which would not be apparent on reasonable examination of the sample
- Section 15A: if a buyer has the right to reject goods because of s13/14/15 but the breach is so slight that it would be unreasonable for him to reject them (burden of proof on seller), the breach may be treated as a breach of warranty rather than condition, unless a contrary intention appears in or is implied from the contract.
Can exclude liability if reasonable (except s12 which cannot be excluded) (≠ CRA 2015, where liability cannot be excluded).
II - Implied Terms
B/Terms Implied by Custom
|Hutton v Warren (1836)
- Parke B:
o In commercial transactions, extrinsic evidence of custom and usage is admissible to annex incidents to written contracts. In such cases, there is a presumption that the parties did not mean to express in writing the whole of the contract, but a contract with reference to those known usages.
o Whether it is wise to relax the strictness of the common law where parties have agreed to a written contract is doubted, but the principle is well-established and it is too late to pursue a contrary course.
1º The usage must be known (“notorious, certain and reasonable”) but the parties didn’t have to know it.
2º The usage must be observed from a sense of legally binding obligation, not mere courtesy, convenience or expediency.
3º The custom must not have been altered by contract (no implication if contrary to express terms of contract).
II - Implied Terms
C/ Terms implied by the court
1/ Terms implied in Fact
*The Moorcock (1889) 14 PD 64
Test of necessity not reasonableness:
- Facts: whether there was an implied undertaking to take reasonable care to ascertain that the bottom of the river was in such a condition as not to endanger the vessel during using their premises in the ordinary way.
- Bowen LJ:
- An implied warranty as distinguished from an express warranty, really is in all cases founded on the presumed intention of the parties, and upon reason, with the object of giving such business efficacy to the transaction as must have been intended at all events by both parties who are business men; not to impose on one side all the perils of the transaction, but to make each party promise in law as much as it must have been in the contemplation of both parties.
- In this case:
o Both parties knew that this jetty was let out for hire.
o They must have known that it was by grounding that she used the jetty, and that unless the ground was safe the ship would be simply buying an opportunity of danger
o Both parties knew that with regard to the safety of the ground outside the jetty the shipowner could know nothing at all, and the jetty owner might with reasonable care know everything. - The question is how much of the peril is it necessary to assume that the shipowner and the jetty owner intended respectively to bear in order that such a minimum of efficacy should be secured for the transaction, as both parties must have intended it to bear?
1º Source of the implied term is the presumed intention of the parties (so that the court isn’t really making a contract for the parties), but Bowen LJ says that it is also based on “reason”, suggesting a wider basis of implication.
II - Implied Terms
C/ Terms implied by the court
1/ Terms implied in Fact
*The Moorcock (1889) 14 PD 64
EXAM POINT
EXAM POINT
Here Bowen LJ was concerned about ensuring the minimum of efficacy to prevent total failure of consideration in order to imply a term by drawing an inference as to the parties’ intentions (in particular, the intention that there not be a total failure of consideration because they were both acting as businessmen). If we abolish consideration this would be impossible.
II - Implied Terms
C/ Terms implied by the court
1/ Terms implied in Fact
|*Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10 [16]-[27]
Facts
- Facts: whether a term should be implied into the articles of association of a company making provision for the removal of directors in certain circumstances. In this case the articles of association stipulated the election of directors according to particular types of shareholding, and provided for their removal in certain circumstances. The PC held that there was an implied term that a director could also be removed when the shareholder with the required shareholding to support his appointment ceased to exist, because it was necessary to avoid defeating the overriding purpose of the machinery for appointing directors, i.e. to ensure that the board of directors reflected the type and degree of shareholder interests.
II - Implied Terms
C/ Terms implied by the court
1/ Terms implied in Fact
|*Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10 [16]-[27]
- Lord Hoffmann:
o The court has no power to improve upon the instrument which it is called upon to construe. It cannot introduce terms to make it fairer or more reasonable. It is concerned only to discover what the instrument means. However, that meaning is not necessarily or always what the authors or parties to the document would have intended. It is the meaning which the instrument would convey to a reasonable person having all the background knowledge which would reasonably be available to the audience to whom the instrument is addressed.
o The question of implication arises when the instrument does not expressly provide for what is to happen when some event occurs. The most usual inference in such a case is that nothing is to happen.
o In some cases, however, the reasonable addressee would understand that the only meaning consistent with the other provisions of the instrument, read against the relevant background, is that something is to happen. In such a case, it is said that the court implies a term. This is not an addition to the instrument. It only spells out what the instrument means.
o In every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean.
o This test can be formulated differently (the implied term must “go without saying”, it must be “necessary to give business efficacy to the contract”) but these are not to be treated as different or additional tests. There is only one question, but in answering that question:
♣ Consider whether a different construction would frustrate the apparent business purpose of the parties (in case of a commercial contract).
♣ It is not enough for a court to consider that the implied term expresses what it would have been reasonable for the parties to agree to. It must be satisfied that it is what the contract actually means.
♣ How the actual parties would have reacted to the proposed amendment is irrelevant.
♣ Not necessary that the need for the implied term should be obvious in the sense of being immediately apparent (the fact that the actual parties might have said to the officious bystander “Could you please explain that again?” does not matter)
II - Implied Terms
C/ Terms implied by the court
1/ Terms implied in Fact
|*Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10 [16]-[27]
Lord Simon
o said (in some case) that a series of conditions must be satisfied:
♣ “(1) reasonable and equitable; (2) necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) so obvious that ‘it goes without saying’ (4) capable of clear expression; (5) must not contradict any express term of the contract.”
o But this list is best regarded, not as series of independent tests which must each be surmounted, but rather as a collection of different ways in which judges have tried to express the central idea that the proposed implied term must spell out what the contract actually means. The above formulations are all good reasons for saying that a reasonable man would not have understood that to be what the instrument meant.
II - Implied Terms
C/ Terms implied by the court
1/ Terms implied in Fact
|*Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10 [16]-[27]
1º Three sources of controversy:
- Confusion between principles of interpretation and implication
- Break with tests used in the past
- Attempt to liberalize the rules relating to implication (though this is unlikely his intention as he makes clear that usually the inference is that nothing is to be done at all)
The test was reconsidered in:
II - Implied Terms
C/ Terms implied by the court
1/ Terms implied in Fact
Marks and Spencer v BNP Parisbas [2015] UKSC 72, [2015] 3 WLR 1843
- Facts: whether a term should implied into a lease, which would entitled the lessee to recover parts of an advance payment relating to a period after the exercise of a break period.
- Held (UKSC): no term is implied because:
o The lease is very detailed and was entered into between two experienced parties and was drafted by expert solicitors
o The lease made provision for a number of contingencies but not this
o The implication was not supported by the general attitude of the law to the apportionability of rent payable in advance (indeed the law assumes rent to be not apportionable in time). - UKSC confirmed that:
o The test for implication was not diluted by Lord Hoffmann’s judgment in Belize
o The test remained one of necessity (≠fairness, reasonableness) though not “absolute necessity” – the question is whether, without the term, the contract would lack commercial or practical coherence or whether it was necessary to make the contract work.
o It is not enough that:
♣ The term appears to be fair
♣ The parties might have agreed to it had it been suggested to them
♣ The term is reasonable to be implied into the contract - UKSC cast doubt on Lord Hoffmann’s proposition that the process of implying is part of the exercise of interpretation (Lord Neuberger: when one is implying a term, he is not construing words as the words to be implied are ex hypothesi not there to be construed)
- Lord Neuberger said that Lord Hoffmann in Belize was a “characteristically inspired discussion rather than authoritative guidance on the law of implied terms” (Lord Carnwath disagreed, Lord Clarke was equivocal, Lord Sumption and Lord Hodge agreed)
II - Implied Terms
C/ Terms implied by the court
1/ Terms implied in Fact
Marks and Spencer v BNP Parisbas [2015] UKSC 72, [2015] 3 WLR 1843
Commentary
Thus the majority of the UKSC seemed to regard Belize as not authoritative guidance, and indeed subsequently the courts appear to move away from Belize back towards old tests like:
- The Moorcock (emphasis on necessity to make the contract work, to give business efficacy to the contract)
- Shirlaw v Southern Foundries (so obvious that if an officious bystander asked the parties whether there was to be such a term, both would have answered “yes”)
II - Implied Terms
C/ Terms implied by the court
2/ Terms implied in Law
|*Liverpool CC v Irwin [1977] AC 239
- Facts: whether a term is to be implied into the tenancy agreement relating to the obligation of the landlord to keep the common parts in repair and properly lit (and if so, what was its scope)
- Held (HL): a term was to be implied to take reasonable care (though there was no breach).
II - Implied Terms
C/ Terms implied by the court
2/ Terms implied in Law
|*Liverpool CC v Irwin [1977] AC 239
- Lord Denning (CoA):
o The statements in The Moorcock and Shirlaw do not truly represent the way in which courts act. In many cases, the court never looked at the intentions of the parties and if they did they either didn’t intend anything or each intended something different. Those cases show that courts do imply terms when it is reasonable, but not necessary, to do so.
II - Implied Terms
C/ Terms implied by the court
2/ Terms implied in Law
|*Liverpool CC v Irwin [1977] AC 239
- Lord Wilberforce:
o There are different varieties of implication:
♣ Where there is an apparently bilateral contract:
• Court might add obvious terms or
• Court might add terms necessary to make the contract work (The Moorcock)
♣ Lord Denning suggests a third head of implication of reasonable terms, but IJO this extends a long and undesirable way beyond sound authority (though he agrees with the examples Lord Denning cites but thinks that they all belong to the preceding two heads)
♣ This case is a fourth category.
o In this case, there must be implied a letting (with exclusive possession) and with it, a covenant for quiet enjoyment (a necessary incident of the letting). The demise would be useless unless access is obtained by the staircase, and given the height of the building, the lift service. Since there is no other means of disposing of rubbish, there must be a right to use the garbage chutes. Thus, there is an easement for each of these common parts.
o The question is what obligations must be implied; such obligation should be read into the contract as the nature of the contract itself implicitly requires, no more, no less: a test of necessity. The relationship in this case is between landlord and tenant, and not implying any obligation would be inconsistent with this relationship.
o There is a distinction between implication to give business efficacy to a particular contract, and implication, based on wider considerations, of a term as the nature of the contract might call for, or as a legal incident of this kind of contract.
II - Implied Terms
C/ Terms implied by the court
2/ Terms implied in Law
|*Liverpool CC v Irwin [1977] AC 239
- Lord Salmon:
o Rejects Lord Denning’s “reasonableness” test – it is true that unless a term is in all the circumstances reasonable, it will not be implied. But reasonableness itself is not sufficient for it to be implied.
II - Implied Terms
C/ Terms implied by the court
2/ Terms implied in Law
|*Liverpool CC v Irwin [1977] AC 239
Commentary
1º Lord Denning’s reasonableness test was rejected by the HL, but on the facts was it really “necessary”? Atiyah noted that it was obviously not “strictly necessary” to have a usable lift in a block of flats ten stories high, but it would be “exceedingly inconvenient” not to have one. Thus, “necessity” really means “reasonable necessity”, which must mean “reasonably necessary having regard to the context and price”.
2º D sought to rely on the “officious bystander” test, and Lord Cross said that it did not satisfy the test, but still implied a term as a general incident of all contracts of this type. If this is right, then there is a difference between the tests for implication in law and fact.
3º But otherwise the judges aren’t so clear on the distinction between terms implied in fact and law: Lord Denning relies on several cases for the proposition that the “reasonableness” test was used, but these were almost exclusively cases of implication in law.
II - Implied Terms
C/ Terms implied by the court
2/ Terms implied in Law
|Scally v Southern Health & Social Services Bd [1991] 4 All ER 563
Facts/held
- Facts: C sued their employers for damages based on an implied duty of care in the employment contract, that the employer take reasonable steps to inform the employees of the existence of their right to take steps to enhance their pension entitlement (under the employment contract) at more advantageous terms [and breach of duty of care, and breach of statutory duty].
- Held: there was an implied term.
II - Implied Terms
C/ Terms implied by the court
2/ Terms implied in Law
|Scally v Southern Health & Social Services Bd [1991] 4 All ER 563
- Lord Bridge:
o Analyzing the case in terms of tort is misleading because there has been an increasing trend to narrow the range of circumstances that tort law will recognize as sufficient to impose a duty of care to avoid economic loss.
o In contract it is different – the present contract confers on the employee a valuable right but that requires him to take certain action – if this situation is known to the employer but not the employee, the law may imply a duty to take reasonable steps to bring the existence of the continent right to the notice of the employee.
o This is a novel problem because in classical contractual situations where contract terms, having been agreed by the parties, must ex hypothesi be known by them. Here they are negotiated by representative bodies and the employee couldn’t be expected to know.
o In this case the implication cannot be justified as necessary to give business efficacy to the contract of employment as a whole, but can be necessary to render efficacious the very benefit that the contractual right to purchase added years was intended to confer.
o This might stretch the doctrine of implication for sake of business efficacy too far, but here we draw the distinction between implication to a particular contract and type of contract (Liverpool). This is the latter category, and any objection that the implied term would be too wide to be of general application can be surmounted by defining with sufficient precision the category of contractual relationship.
II - Implied Terms
C/ Terms implied by the court
2/ Terms implied in Law
|Scally v Southern Health & Social Services Bd [1991] 4 All ER 563
Commentary
This shows that there is a difference between terms implied in fact and terms implied in law. Though Lord Bridge affirms that the test is still necessity, it appears to be a different sort of necessity
II - Implied Terms
C/ Terms implied by the court
2/ Terms implied in Law
|Peden, Policy Concerns Behind Implication of Terms in Law (2001) 117 LQR 459
- The policy factors influencing courts in implied terms in law reveal a desire to ensure the parties co-operate with each other and with society’s standards.
- This article suggests that the essence of the test for implication in law is a consideration of the nature of the contract and of how to maximise the social utility of the relationship. It might be said that the test is whether the term is necessary for the reasonable operation of the type of contract concerned.
- The technique of implying terms in law provides courts with potential to regulate to some extent the behaviour of parties contracting within a particular type of relationship, in situations where parties do not specify requisite performance details. To use this potential courts need to be convinced that these “default rules” will only apply to appropriate relationships and will advance desirable behaviour with regard to certain policy considerations (relative bargaining position, fairness, extent of the obligation imposed, insurance…)
- Flexibility must be maintained by not dictating an exhaustive list of considerations and the weight to be given each of them.107However, it would be appropriate for courts to be more open about the policy issues with which they are wrestling.
II - Implied Terms
C/ Terms implied by the court
3/ Implied Duty of Good Faith?
a/ Foundation Case: Yam Seng v International Trade Corp
|Yam Seng Pte Ltd v International Trade Corp Ltd[2013] EWHC 111 (QB) NB [123]-[153] on implied term of good faith, [186]-[192] on reliance damages
Facts/held
- Facts: D granted C the exclusive right to distribute Manchester United fragrances. C terminated the contract alleging misrepresentation and breaches of contract (not shipping orders promptly, refusing to supply products, undercutting agreed prices…).
- Held (Leggatt J): there were repudiatory breaches justifying C’s termination, and damages for misrepresentation.
II - Implied Terms
C/ Terms implied by the court
3/ Implied Duty of Good Faith?
a/ Foundation Case: Yam Seng v International Trade Corp
- Leggatt J (summary):
o There is “nothing novel or foreign to English law in recognizing an implied duty of good faith in the performance of contracts”, which should be implied in this case because:
♣ Comparative law
♣ We already do it (citing Interfoto)
♣ Based on the presumed intention of the parties
o Main reasons against a duty of good faith in performance:
♣ English law’s preference for incremental development in response to particular problems
♣ Emphasis on freedom of contract and individualism
♣ Concern that such a duty would be too vague and uncertain
o There is a spectrum of contracts ranging from:
♣ All contract parties can act solely in their own interest subject to fraud and other vitiating factors
♣ “Relational” contracts (franchise agreements, long-term distributorship agreements…) involving a longer-term relationship to which parties make a substantial commitment that require “a high degree of communication, cooperatin and predictable perforamcne based on mutual trust and confidence”
♣ Situations raising fiduciary duties that require utmost good faith (requiring avoidance of even the appearance of conflicts of interest, and placing the other party’s interest above one’s own)
II - Implied Terms
C/ Terms implied by the court
3/ Implied Duty of Good Faith?
a/ Foundation Case: Yam Seng v International Trade Corp
- Leggatt J (judgment):
- 122 The general view among commentators appears to be that in English contract law there is no legal principle of good faith of general application (and Interfoto and Walford are often cited). Those cases were concerned, however, with the position of negotiating parties and not with the duties of parties who have entered into a contract and thereby undertaken obligations to each other.
- 124 Three main reasons have been given for what Professor McKendrick has called the ‘traditional English hostility’ towards a doctrine of good faith:
o The preferred method of English law is to proceed incrementally by fashioning particular solutions in response to particular problems rather than by enforcing broad overarching principles (Lord Bingham, Walford)
o English law is said to embody an ethos of individualism, whereby the parties are free to pursue their own self-interest not only in negotiating but also in performing contracts provided they do not act in breach of a term of the contract.
o Fear that recognising a general requirement of good faith in the performance of contracts would create too much uncertainty (content of the obligation would be too vague) - However: this jurisdiction would appear to be swimming against the tide (it is in most civil law jurisdictions, it entered English law through UTCCR, and exists in several common law jurisdictions (ex. US, Canada, Australia, Scotland))
- Under English law a duty of good faith is implied by law as an incident of certain categories of contract, for example contracts of employment and contracts between partners or others whose relationship is characterised as a fiduciary one. I doubt that English law is ready to recognise a requirement of good faith as a duty implied by law into all commercial contracts. Nevertheless, there seems to me to be no difficulty in implying such a duty in any ordinary commercial contract based on the presumed intention of the parties (implied term in fact).
o The modern case law on the construction of contracts has emphasised that contracts are made against a background of unstated shared understandings which inform their meaning.
o The relevant background includes not only matters of fact known to the parties but also shared values and norms of behaviour (some general, others specific to particular trades, and arising out of the particular contractual relationship). Many such norms are naturally taken for granted by the parties when making any contract without being spelt out in the document recording their agreement.
o A paradigm example of a general norm which underlies almost all contractual relationships is an expectation of honesty. That expectation is essential to commerce, which depends critically on trust. Yet it is seldom, if ever, made the subject of an express contractual obligation. Indeed writing such an obligation in would undermine trust and weaken the relationship between parties.
EXAM POINT
Here again the tension between the role of contract to enforce intentions of the parties and the broader interests of society and commerce, though here the two coalesce and the latter informs the former.
o As a matter of construction, it is hard to envisage any contract which would not reasonably be understood as requiring honesty in its performance. The same conclusion is reached if the traditional tests for the implication of a term are used. In particular the requirement that parties will behave honestly is so obvious that it goes without saying. Such a requirement is also necessary to give business efficacy to commercial transactions.
EXAM POINT
Blurring the line between interpretation and implied terms.
o There might be other such standards that are intended to be observed but not written in the contract. A key aspect of good faith is the observance of such standards (ex. fidelity to the parties’ bargain, not to act improperly/commercially unacceptable ways/unconscionably)
- What good faith requires is sensitive to context.
o It includes the core value of honesty.
o In some contractual it may extend further to an expectation that the parties will share information relevant to the performance of the contract such that a deliberate omission to disclose such information may amount to bad faith.
♣ English law has traditionally drawn a sharp distinction between certain relationships – such as partnership, trusteeship and other fiduciary relationships – on the one hand, in which the parties owe onerous obligations of disclosure to each other, and other contractual relationships in which no duty of disclosure is supposed to operate.
♣ That dichotomy is too simplistic. While it seems unlikely that any duty to disclose information in performance of the contract would be implied where the contract involves a simple exchange, many contracts do not fit this model and involve a longer term relationship between the parties which they make a substantial commitment.
♣ Such ‘relational’ contracts may require a high degree of communication, cooperation and predictable performance based on mutual trust and confidence and involve expectations of loyalty which are not legislated for in the express terms of the contract but are implicit in the parties’ understanding and necessary to give business efficacy to the arrangements. Examples of such relational contracts might include some joint venture agreements, franchise agreements and long-term distributorship agreements.
- Although its requirements are sensitive to context, the test of good faith is objective in the sense that it depends not on either party’s perception of whether particular conduct is improper but on whether in the particular context the conduct would be regarded as commercially unacceptable by reasonable and honest people. This follows from the fact that the content of the duty of good faith is established by a process of construction which in English law is based on an objective principle.
- There is in my view nothing novel or foreign to English law in recognising an implied duty of good faith in the performance of contracts.
o It is consonant with the theme identified by Lord Steyn as running through our law of contract that reasonable expectations must be protected.
o It is already reflected in several lines of authority that are well established. - Further observations:
o Because the content of the duty is heavily dependent on context and is established through a process of construction of the contract, its recognition is entirely consistent with the case by case approach favoured by the common law.
o As the basis of the duty of good faith is the presumed intention of the parties and meaning of their contract:
♣ Its recognition is not an illegitimate restriction on the freedom of the parties to pursue their own interests. The essence of contracting is that the parties bind themselves in order to co-operate to their mutual benefit. The obligations which they undertake include those which are implicit in their agreement as well as those which they have made explicit.
♣ It is open to the parties to modify the scope of the duty by the express terms of their contract and, in principle at least, to exclude it altogether. I say ‘in principle at least’ because in practice it is hardly conceivable that contracting parties would attempt expressly to exclude the core requirement to act honestly.
o The fear that recognising a duty of good faith would generate excessive uncertainty is unjustified. There is nothing unduly vague or unworkable about the concept. Its application involves no more uncertainty than is inherent in the process of contractual interpretation.
II - Implied Terms
C/ Terms implied by the court
3/ Implied Duty of Good Faith?
a/ Foundation Case: Yam Seng v International Trade Corp
- Leggatt J (on reliance damages):
o The advantage of claiming damages on the ‘reliance’ basis is not that the claimant can recover expenditure which would have been wasted even if the contract had been performed but that the burden of proof lies on the defendant to show that the expenditure would not have been recouped. o A general theme which runs through the law of damages = on the one hand, the general rule that the burden lies on the claimant to prove its case applies to proof of loss. But on the other hand, courts will do the best they can not to allow difficulty of estimation to deprive the claimant of a remedy, particularly where that difficulty is itself the result of the defendant's wrongdoing. Accordingly the court will attempt so far as it reasonably can to assess the claimant's loss even where precise calculation is impossible. o The court is aided in this task by what may be called the principle of reasonable assumptions – that it is fair to resolve uncertainties by making reasonable assumptions which err if anything on the side of generosity to the claimant where it is the defendant's wrongdoing which has created those uncertainties. o The (rebuttable) presumption that the claimant would have recouped expenditure incurred in reliance on the defendant's performance of the contract is an illustration of this approach. o I therefore conclude that Yam Seng is entitled to recover as damages for ITC's breach of contract its net expenditure incurred in performing the agreement.
II - Implied Terms
C/ Terms implied by the court
3/ Implied Duty of Good Faith?
|NOTE Whittaker (2013)
Argues that if Leggatt J meant no more than that it is open to courts to find an implied term of good faith in particular contracts, then this is uncontroversial. But if he argues for a general requirement of good faith in the performance of contracts, then this invites courts to go well beyond the proper function of judicial law-making.
- Leggatt J said that there was no need for English law to abandon its characteristic “case by case” approach to accommodate the principle of good faith in contractual performance, but IAO he goes very far in arguing for the recognition more generally of an implied term requiring good faith so as to reflect the expectations of the parties, which would not reflect the incremental approach.
- Leggatt J said that such a term would not be an illegitimate restriction on the freedom of parties to pursue their own interests because “the essence of contracting is that the parties bind themselves in order to cooperate to their mutual benefit”. However, IAO many English lawyers would say that the “essence of contracting”, and freedom of contract, includes the right for parties to pursue their own interests and does not require them to cooperate for their mutual benefit. Introducing standards like “improper”, “commercially unacceptable” and “unconscionable” is bound to create uncertainty, so much so that when EU law introduced such an open-textured approach in B2C contracts, it provided three examples (misleading actions, misleading omissions, aggressive commercial practices) and a black-list.
Using implied terms to give effect to good faith would surprise most civil lawyers (who would say that you can’t exclude the application of good faith). But Leggatt J said that parties could modify the scope of the duty or even exclude it (though it is hardly conceivable that they would).
II - Implied Terms
C/ Terms implied by the court
3/ Implied Duty of Good Faith?
b/ What is the scope of Yam Seng?
- The crucial variable as to where on the spectrum of good faith something falls is not duration of contract, but where on the spectrum it falls between market (less good faith) and organization (more good faith):
o Market = contracts between parties with antagonistic interests, each seeking to gain at the other’s expense
o Organization = network of contracts that bind the parties together, where cooperation is required to maximize the joint profits to be distributed according to the contractual formula
The suggestion in Yam Seng that the authority of Walford can be confined to cases of negotiation is not beyond challenge, and subsequent cases haven’t resolved the matter…
II - Implied Terms
C/ Terms implied by the court
3/ Implied Duty of Good Faith?
b/ What is the scope of Yam Seng?
Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (t/a Medirest) [2013] EWCA Civ 200 [77]-[92]
- Jackson LJ (on Yam Seng): there is no general doctrine of good faith in English contract law, but a duty of good faith may be implied by law as an incident of certain categories of contract. However, while an express duty of good faith in performance is enforceable, such a duty will not be implied in fact (thus does not support Leggatt J’s proposition that good faith duty can be implied in fact)
- Jackson LJ (on implied term in discretions):
o InThe “Product Star”the charter-party provided that the vessel should not be required to proceed to any port which the master or owners in their discretion considered dangerous. The owner exercised the discretion, CoA held that this was a breach of contract:
♣ “Where A and B contract with each other to confer a discretion on A, that does not render B subject to A’s uninhibited whim. Not only must the discretion be exercised honestly and in good faith, but it must not be exercised arbitrarily, capriciously or unreasonably.”
o In Horkulak the claimant’s contract of employment entitled him to a discretionary bonus. The Court of Appeal held that the lost bonus should form part of the damages. It was an implied term, based on the common intention of the parties, that there would be a genuine and rational exercise of the discretion by the employer.
o An important feature of the above line of authorities is that in each case the discretion did not involve a simple decision whether or not to exercise an absolute contractual right. The discretion involved making an assessment or choosing from a range of options, taking into account the interests of both parties. In any contract under which one party is permitted to exercise such a discretion, there is an implied term. Such a term is extremely difficult to exclude, although I would not say it is utterly impossible to do so.
o However, in this case, there is no such implied term because the express terms of the contract merely confer on the party a discretion to decide whether or not to exercise an absolute contractual right. There is no need for an implied term to make the clause work.
II - Implied Terms
C/ Terms implied by the court
3/ Implied Duty of Good Faith?
b/ What is the scope of Yam Seng?
McKendrick suggests to draw a distinction between two situations:
- Express duty of good faith:
o Express term of a contract that requires the parties to act in good faith in performing the contract definitely enforceable (Mid Essex Hospital)
o Express dispute resolution clause in an enforceable contract that requires the parties to seek to resolve a dispute in good faith enforceable (Emirates Trading Agency)
o Express obligation to negotiate in good faith ?
♣ Courts can build upon the previous cases to enforce such obligations
♣ But on the other hand Walford v Miles might stand in the way of this - Implied duty of good faith:
o Yam Seng said that courts should imply a duty in the performance of contracts in the appropriate case, but subsequent cases have been reluctant to do so because:
♣ Of the substantive content of the term, which makes it inconsistent with the arm’s length nature of the relationship between the parties but unlikely that Leggatt J envisaged implying an onerous duty; it is merely to give effect to parties’ intentions so can just be honesty… It seems like his intention was more to promote and protect expectations of honesty and encourage adherence to standards of commercial dealing generally accepted in the market place.
♣ Of any inconsistency with the express terms of the contract, ex. by cutting down the scope of an express obligation or to render redundant other clauses of the contract
II - Implied Terms
C/ Terms implied by the court
3/ Implied Duty of Good Faith?
b/ What is the scope of Yam Seng?
|Hamsard v Boots (2013, Norris J)
- Norris J: Yam Sen is not authority for the proposition that parties in commercial contracts may be presumed to intend a general obligation of good faith; there will generally be an implied term not to frustrate the purpose of the contract, but no routinely implied term to subordinate its own commercial interest to those of the other party.
II - Implied Terms
C/ Terms implied by the court
3/ Implied Duty of Good Faith?
b/ What is the scope of Yam Seng?
|Cohen, “Pre-Contractual Duties: Two Freedoms and the Contract to Negotiate” in Good Faith and Fault in Contract Law, ed. Beatson & Friedman, p.25
Freedom to contract
- The law of contract is predicated upon these two notions of freedom: the positive freedom of contract, which means that the parties are free to create a binding contract reflecting their free will, and the negative freedom of contract, which means that the parties are free from obligations so long as a binding contract has not been concluded.
- As to the positive freedom of contract, this principle means that the formation of a contract and the selection of its terms are the result of the free will of the parties. The crucial question: when is a contract considered as a product of the free will of the parties?2
- The freedom to act in the bargaining process is limited: the contracting party is not allowed to act so as to frustrate the pre-conditions for the existence of freedom of contract.
- It should be stressed, however, that not every difference between the parties calls for the intervention of the law. Violence and fraud are incompatible with freedom of contract, but what about economic or emotional compulsion, non-disclosure of a material fact?
- The determination of the prerequisites guaranteeing the positive freedom of contract ‘already implies a judiciary enforced redistribution of advantages from the strong to the weak’3and raises doubts and controversies as to its scope. A system which recognizes a principle of good faith in the bargaining process is likely to broaden the minimal pre-conditions guaranteeing freedom of contract.
II - Implied Terms
C/ Terms implied by the court
3/ Implied Duty of Good Faith?
b/ What is the scope of Yam Seng?
|Cohen, “Pre-Contractual Duties: Two Freedoms and the Contract to Negotiate” in Good Faith and Fault in Contract Law, ed. Beatson & Friedman, p.25
Freedom from contract
- So long as a contract has not been concluded, the contracting parties are free to withdraw. According to this reasoning, if they are not contractually bound (and have not committed any tort), why should they be bound at all? ‘By permitting liabilities to arise before agreement has been reached, the courts sense a danger that this would amount to the imposition of liability without consent’6
- But strict adherence to freedom from contract might transform it into a freedom to manipulate the rules of the game. Freedom of action which is the underlying idea of freedom of contract may be abused (by inducing reliance and then reneging a (non-contractual) promise)
- The duty of good faith is likely to limit the negative freedom from contract and the possibility of abusing the contractual rules of the game. It means a rejection of the adversarial approach which characterizes the position of the negotiating parties in English law.11
II - Implied Terms
C/ Terms implied by the court
3/ Implied Duty of Good Faith?
b/ What is the scope of Yam Seng?
|Cohen, “Pre-Contractual Duties: Two Freedoms and the Contract to Negotiate” in Good Faith and Fault in Contract Law, ed. Beatson & Friedman, p.25
English and Continental Laws
- The difference between the systems is not as wide as might initially appear; while Continental systems have adopted a broad principle of good faith, English law prefers piecemeal solutions to existing problems, which end up imposing liabilities on contracting parties while a contract has not been concluded:
o Promissory estoppel, which is a hybrid creature, comprising elements of contract (promise) and tort (reliance).
o Restitution to recover benefits transferred in the expectation that a contract would be concluded.
o Collateral contract theory,19which might treat a pre-contractual promise as a contractual one, antecedent to the principal contract and sometimes operating along it.
o Postal acceptance.
o Law of torts (esp. negligence) might be applied as well to impose pre-contractual duties. - The principle of good faithpostulates an a priori limitation of freedom of action in the bargaining process. On the other hand, the position of English law is just the opposite: it is an a priori assumption of freedom in the bargaining process, subject to special rules imposing liability.
- Limits on freedom of action during negotiations might be well justified:
o Commercial contracts require complicated and lengthy negotiations. The parties should not always bear their own expenses. When, in the course of negotiations, trust is being built and consequently expenses are incurred, the rule of freedom should be substituted by another rule of risk allocation
II - Implied Terms
C/ Terms implied by the court
3/ Implied Duty of Good Faith?
b/ What is the scope of Yam Seng?
|Cohen, “Pre-Contractual Duties: Two Freedoms and the Contract to Negotiate” in Good Faith and Fault in Contract Law, ed. Beatson & Friedman, p.25
Breach of a promise in the course of negotiations
- From the point of view of theinjured party, we can say that the two notions of freedom correspond to two types of defects in the bargaining process that frustrate the party’s expectations:
o defect in the will of the contracting party and occurs when one party makes a contract as a result of a mistake, misrepresentation, duress or undue influence good faith doesn’t really play a role
o breach of a promise given or expectation created in the course of negotiations good faith plays major role - The freedom to enter into a contract also implies the freedom not to do so. The English rule would, in principle, exempt a negotiating party from liability for breaking off negotiations (≠good faith systems)
- But what would be the approach of English law with regard to a contract which attempts to regulate the process of negotiations? Does English law allow for a positive contractual limitation on the negative freedom from contract? What would be the position of such a contract in a system rejecting a general duty of good faith in the negotiation process?
o WalfordvMiles,37
♣ Facts: Owners of a photographic processing company wished to sell their company. They were negotiating with a third party. Shortly afterwards they received an offer from the plaintiffs. They agreed in principle to sell the business to them. In a phone conversationit was also agreed that, if on a certain date the plaintiffs provided a comfort letter from a bank, the vendors ‘would terminate any negotiations with a third party’. The plaintiffs duly provided the comfort letter within the time specified, and the defendants confirmed in letters that, subject to a contract, they agreed on the sale. But several days later the defendants withdrew from the negotiations and decided to sell the business to the third party for the same price.
The plaintiffs claimed damages for misrepresentation in continuing to deal with the third party (and got damages for it representing wasted expenses). The controversy related, however, to the contractual cause of action. The plaintiff claimed that the vendors broke a collateral contract, which imposed on them a positive duty to negotiate with them in good faith, and a negative duty not to negotiate with third parties.
♣ The consideration for that undertaking was the supplying of the comfort letter by the plaintiffs. They determined their loss as a result of the breach to be£1 million, ie the difference between the contract price and the present value of the company.
♣ The trial judge ruled that the vendors broke the collateral contract and ordered that the damages for the loss of opportunity be assessed.
♣ The Court of Appeal, by a majority (Dillon and Stocker LJJ), allowed the appeal, holding that the action relied only on an agreement to negotiate which was unenforceable under English law. Bingham LJ, who dissented, held, however, that the vendors broke the negative agreement not to deal with third parties.
♣ The House of Lords affirmed the Court of Appeal’s position. Lord Ackner, who rendered the judgment, held that the cause of action failed on both grounds: the positive ground failed, because an agreement to negotiate was not binding under English law for lack of certainty; the negative cause, not to deal with others, failed because it did not specify any time limit.
II - Implied Terms
C/ Terms implied by the court
3/ Implied Duty of Good Faith?
b/ What is the scope of Yam Seng?
|Cohen, “Pre-Contractual Duties: Two Freedoms and the Contract to Negotiate” in Good Faith and Fault in Contract Law, ed. Beatson & Friedman, p.25
A contract to negotiate—problem of completion
- Indeed, the apprehension regarding a contract to negotiate may be justified. It seems quite difficult to assess the propriety of the causes of the breakdown of the negotiations49Some may be legitimate.
- A system which has never built the common law notion of good faith into negotiations might feel unable to fill gaps in a contract predicated on the notion of good faith.
- On the basis of the elaboration of an already existing duty of good faith in negotiations (in other jurisidcitons, it is easy to give an effect to an express contract to negotiate in good faith, and possibly also to such an implied contract.
o French law: by virtue oftort law, the parties are subject to a duty to negotiate in good faith,53but once the negotiations have attained a mature stage, the parties are subject to a ‘contractual obligation … to continue to negotiate in good faith. This obligation is sometimes express, but most often implicit in the structure of the preliminary dealings. It prevents parties putting up unacceptable proposals with the aim of … causing a break-off of negotiations, or of merely pretending to negotiate seriously, while in fact hehas decided to deal with a competitor, it compels him to work towards the reaching of a definite decision within a reasonable period’
II - Implied Terms
C/ Terms implied by the court
3/ Implied Duty of Good Faith?
b/ What is the scope of Yam Seng?
|Cohen, “Pre-Contractual Duties: Two Freedoms and the Contract to Negotiate” in Good Faith and Fault in Contract Law, ed. Beatson & Friedman, p.25
A lock-out agreement
- Walford: a lock-out agreement may be valid, but it is ineffective if it does not specify any time limit.
o Bingham LJ (dissenting): the agreement not to deal with others should be construed as binding the vendors for such time as was reasonable.
o Lord Ackner: the construction which Bingham LJ had suggested would again impose indirectly on the vendors a duty to negotiate in good faith, a duty not recognized in English law.73 - In contrast to the contract to negotiate, the content of the duty in the lock-out agreement was clear and so was its breach. There was no need for assistance from the standard of good faith so the objection raised by Lord Ackner against its enforceability is not convincing.
- The reluctance of the court inWalfordcould be explained by reference to the classical will theory: if a contract is supplemented by the court, the contract no longer derives from the parties’ agreement, but from the position adopted by the court.
- However, the concept of freedom of contract is prejudiced in either solution: the total rejection of a contract is more harmful to the free will of the parties than the introduction of supplementing elements to a contract whose main features had already been agreed upon (which is why we have implied terms)
- Indeed in this case there is no problem:
o The trial judge held that there was an intent to conclude the deal as soon as possible after 6 April (because it took the transaction into the next financial year), so could have implied reasonable time after 6 April.
o Even if the parties were to determine for themselves the reasonable time limit,87they could not have exempted themselves from liability, as the breach occurred from the very beginning of the contract and it was certainly within the reasonableness limitation. - Principle of validity applied by the Court of Appeal inPittvPHH Asset Management Ltd:
o Facts: Pitt was competing with a third party for the purchase of a residential property. His final bid of£200,000 was accepted by the vendor, acting through an agent, subject to contract. The third party increased her offer to£210,000. The vendor was informed that the acceptance of his offer was withdrawn. Pitt told the vendor’s agent that he would seek an injunction to prevent the sale to the third party; alternatively, that he would tell that third party that he was withdrawing and that she could lower the price and also that he could exchange as quickly as the agent wished. Consequently an oral agreement was reached between Pitt and the vendors whereby the vendor would stay with Pitt’s offer and that he would not consider any other offer provided Pitt exchanged contracts within two weeks of its receipt. Pitt sued for damages for breach of the oral agreement.
o Held: the agreement was enforceable.The parties had reached a lock-out agreement, whereby the vendor would not negotiate with anyone for the period of two weeks following Pitt’s receipt of the draft contract. The consideration = Pitt did not sue for an injunction; would not cause trouble with the third party; and agreed to exchange contracts within two weeks. - But consideration raises problems: if Pitt did not have any substantive cause of action, how could his promise not to sue be regarded as valid consideration?Is a nuisance value good consideration? And if a promise to contract is not binding on each party, how could the agreement to exchange contracts be regarded as consideration being based on an invalid promise?It seems that the court applied a rather loose concept of consideration in order to give binding force to the lock-out agreement.91
- By relaxing the element of consideration, the court has broadened the ambit of contractual liability, and opened the gate for the recognition of binding promises given during the negotiation.
EXAM POINT
Relaxing the concept of consideration to impose pre-contractual liability – this means that consideration is necessary in order to shield parties from too great extent of liability where they haven’t yet entered into a contract, and thereby to preserve their (negative) freedom to contract.
- Parties to negotiations now have to be more cautious. A promise supported by consideration in its broader sense might give rise to a contractual liability. Consequently, the borderline between negotiations and contract has been blurred to some extent.
II - Implied Terms
C/ Terms implied by the court
3/ Implied Duty of Good Faith?
b/ What is the scope of Yam Seng?
|Cohen, “Pre-Contractual Duties: Two Freedoms and the Contract to Negotiate” in Good Faith and Fault in Contract Law, ed. Beatson & Friedman, p.25
A lock-out agreement
Rules and standards
Rules and standards
- The creation of a contract is governed by fixed rules dictated by the law (certainty, consideration, formalities…).
- A system based on the duty of good faith in negotiations will impose pre-contractual duties which will mitigate the harshness of the formal rules. Good faith is a standard which might override the formal rules. In English law, equity has been used similarly ‘to mitigate the rigours of strict law’.108
o Lacking the tradition of a good faith system, English law has shown a reluctance to be assisted by this standard as a means to subdue the formal rule. By preserving the governance of rules, English law has thus reinforced the values of certainty and security111and undermined those of co-operation and solidarity, regarded as the underlying values of moderncontract law.112
o Indeed, Professor Atiyah is of the opinion that since 1980 there is a post-modern return to the classical principles
♣ Walfordexemplifies such a trend: itmade use of classical contract law by adhering to rules (certainty and definiteness) and the rejection of standards (good faith, reasonableness).
♣ But PittvPHH Asset Management Ltdgoes in another direction. It relaxed the element of consideration so as to give binding force to promises inducing reliance given during negotiations. Such construction might pave the way for the validity of irrevocable offer and other agreements made during negotiations, hitherto considerednudum pactum, provided they are supported by the required meager consideration.
II - Implied Terms
C/ Terms implied by the court
3/ Implied Duty of Good Faith?
b/ What is the scope of Yam Seng?
|Cohen, “Pre-Contractual Duties: Two Freedoms and the Contract to Negotiate” in Good Faith and Fault in Contract Law, ed. Beatson & Friedman, p.25
Conclusion: position in English law
- Breach of a promise which amounts to misrepresentation promisor is bound by promise and must compensate innocent party’s reliance. Good faith and English law reach the same result – parties cannot manipulate the rules
- Without misrepresentation promisor is not bound by promise, even if it induced reliance.
o Promise to negotiate in good faith wholly ineffective
o Non-specified lock-out agreement wholly ineffective
o Mere promise unsupported by consideration wholly ineffective - Although the formal application of consideration is less rigorous than that of certainty in the sphere of negotiations, reliance has not yet become an explicit substitute for consideration, and liability based on promissory estoppel has not yet substituted conventional contractual liability. where no misrepresentation is involved in the negotiations, the barriers to the freedom to manipulate with the rules are lower than those obtaining in a good faith regime.
III - Exemption Clauses
|Atiyah, Introduction to Contract Law pp. 149-154 (2006)
1º The variety of exemption clauses
- Excluding purely contractual obligations (ex. fitness for purpose in Sale of Goods)
- Excluding tort liability (ex. liability for damage to goods in bills of lading)
- May be partial
III - Exemption Clauses
|Atiyah, Introduction to Contract Law pp. 149-154 (2006)
2º Why do we scrutinize exemption clauses?
- It is wrong in principle to take away or reduce a person’s legal rights but (i) legal rights might be designed to serve as “default” terms meant to work well in most cases but users can modify when they don’t work, and (ii) there are substantive reasons that parties may incorporate such clauses (ex. allocation of responsibility for insurance, so that someone doesn’t have to pay twice for insuring the same thing)
- Exemption clauses are often forced on unwilling parties in “take it or leave it” contracts indeed historically, exemption clause are often found in non-competitive markets, but (i) why are exemption clauses in particular subject to judicial hostility (and not, ex., contract price, which surely must be more dangerous because why would you even bother with exemption clauses if you can set whatever price you’d like), and (ii) exemption clauses are also commonly found in perfectly competitive markets.
- Less experienced contracting parties frequently fail to understand the full significance of exemption clauses so are more likely to agree to unreasonable exemption clauses than other unreasonable clauses (ex. price) but (i) commercial parties are usually fully aware of what they are agreeing to, (ii) there are good commercial reasons, (iii) consumers today are often very sophisticated about them too and even unsophisticated consumers know that if they buy something at very cheap prices they are not likely to receive the same guarantees as expensive stuff.
