Does the Doctrine of Contra Proferentem Have Limited Applicability?

2700 words (11 pages) Essay in Commercial Law

10/04/19 Commercial Law Reference this

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“The doctrine of contra proferentem has limited applicability in commercial cases.” Critically examine this statement with reference to case law, legislation and academic commentary.

Introduction.

The present paper is tasked with examining and critically evaluating the limited applicability of “contra proferentem” doctrine in commercial cases. Further on, the aim is to explore the “modern” interpretation methods that Judges adopted in respect to the “freedom of contract” principle.

At the beginning of the paper a definition of “contra proferentem” doctrine will be given. Thereafter, exclusion and limitation clauses in commercial contracts will be analyzed and a reference will be made to Canada steamship rule. Also, contract interpretation methods will be examined. Therefore, the significance of “Business common sense” term and the limited applicability of contra proferentem doctrine in cases will be explored. Moreover, the restriction to particular contract contents under the Unfair Contract Terms Act 1977 and the “reasonableness test” which has raised, will be evaluated.

Definition of “contra proferentem” doctrine.

Contra proferentem means “against the offeror” and is also known as the ambiguity doctrine.[1] Contract composition requires long negotiations, in which each party looks to achieve its own interest. This can lead a party to use intentionally vague language in order to interpret the contract in a different way from the other party but ostensibly looking as being each party’s favor and this is where contra proferentem applies.

If a contract includes a term which can considered as ambiguous, generally when there is doubt about the meaning of a contract, contra proferentem interprets that term against the party’s interests who insisted on including the particular clause[2]. The doctrine is often applied to standardized contracts, when parties have unequal power. However, when both parties have included the ambiguous clause and are implicated with the wording of the contract, the doctrine has no application. Contra proferentem does not apply in cases when ambiguity is not genuine.

Exclusion – limitation clauses in commercial contracts.

In order to allocate risks, parties in contracts may wish to exclude or limit their liability or negligence in the event of default, as law has entitled them to do so. However, parties should have great reasons to cut down or limit the remedies which are provided by the law for breach of important contractual obligations[3] . Using clear an unambiguous wording in order to properly reflect their intentions is of utmost importance, as well the content must be balanced under the Unfair Contract Terms Act 1977[4].

In case of limiting liability for negligence, Canada Steamship rule arise, even though currently meets limited applicability. According to that principle, exclusion of negligence must be expressed clearly. Otherwise if the language leads to a doubt because is not wide enough to cover negligence, it will be construed against the party which relying on the clause. If the above statement is satisfied, the clause is examined if is capable to cover other liability and if so, clause will not cover negligence[5].

Interpretation of exclusion clauses in commercial contracts and the significance of “Business common sense”.

Contra proferentem doctrine is no longer the first option when it comes to commercial contracts, courts seem to find less ambiguity in such cases and as a result effect was given to different approaches in contractual interpretation.

In Rainy Sky SA v Kookmin Bank [2011], the Supreme court developed a new approach in commercial contracts by suggesting “Business common sense”[6]. In this case two different interpretations of key provisions were possible.

The court in order to interpret the provision, approached Lord’s Hoffmann definition of “reasonable person” in Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] [7]. Ground was given to what the parties wording could made a person with all the background knowledge understand at the time of contract[8]. The court stated that between two possible interpretations, the most consistent with business common sense should apply otherwise, the result will be uncommercial [9].

This case had a paragraph capable of two meanings. Court looked beyond the words used and preferred the construction which was more consistent with the commercial purpose of the bonds. Contra proferentem doctrine did not applied in this case, as court based its decision on the “commerciality” of the competing construction. Nevertheless, courts tend to adopt more business-friendly approaches in commercial cases in respect of “Freedom of contract” and parties’ intentions rather than applying the “punitive” doctrine.

In contrast with the commercial purpose approach which was adopted in the previous case, is Arnold v Britton [2015], which was considered as a shift to a more literal contractual interpretation[10]. The case was examined because tenants found variable wordings to leasing. “Business common sense” had not a significant role in this case. Therefore, greater weight to the original and ordinary meaning of the words as at the overall purpose of the clause was given by lord Neuberger. However, subjective evidence of each parties’ intensions cannot be taken into consideration. He also observed that court in order to identify parties’ intentions, has to make the «reasonable person” approach, i.e. What a reasonable person could understand them to mean by the language used[11].

In the above case, tenants had made a very bad bargain. Thus, contra proferentem did not applied as the agreement which they made was clear, unambiguous and they were bound of it. Moreover, If the wording was uncertain, courts could apply more logic interpretation. However, as lord Neuberger stated, reliance can be placed in business common sense but this cannot cover the clear wording[12].

In Persimmon Hommes Ltd v Ove Arup [2017], defendant’s negligence was excluded in the commercial contract[13]. Claimants, relying on “contra proferentem” and “Canada steamship” asserted that the exclusion clauses were not wide enough to exclude liability.

However, court stated that between equal parties in commercial contracts contra proferentem has a limited role, also by common law the factual content as the commercial sense are enough to define the meaning[14].Thus, in relation to Canada Steamship rule, courts tend to use it as a guidance in commercial cases, mainly in indemnity clauses as courts have soften their approach in both exclusion and indemnity clauses[15].Moreover, the wording was clear and contra proferentem did not applied as courts have adopted a different interpretation approach.

Exclusion clauses and enforceability under “Unfair Contract Terms Act 1977”

Unfair Contract Terms Act, is a statutory control which applies to commercial contracts and regulates the exclusion and restriction of liability for breach of contractual obligations in order to provide protection to parties[16].

When it comes to contract composition in standard terms, parties should have in mind the Act’s restrictions and their contract must meet the requirements that “reasonable” test sets.

 In order for a term to be reasonable under UCTA, great importance is given to the circumstances that the contract was made as term’s own fairness[17]. According to Schedule 11 (2) which provides guidelines that determine whether a term satisfy the reasonableness test, in commercial contracts parties bargaining power positions are included, as well as whether the customer reasonably ought to know or knew the term extent[18]. However, subject to reasonableness cannot be under s.2 the limitation or exclusion of liability for death or injury related to negligence. Exclude liability for fraud is forbidden as also the misrepresentation of the terms.

In Regus Ltd v Epcot Solution, the issue was If a clause that excluded liability was unreasonable under UCTA[19]. First judge held that the clause was unreasonable. However, Court of appeal, examined the case under Schedule (2) and barraging power was equal as Epcot was aware for the terms at the time they composited the contract, the exclusion clause also suggested to protect themselves by insurance as it would be easier for them to insurance their own business[20].

In this case, Court of Appeal overturned the High Court’s decision by giving effect in the contractual terms that parties have agreed and freely negotiated.

Goodlife Foods Ltd v Hall Fire, is an interesting case as an unlawful exclusion was made under section 2(1)[21]. The main point that court had to determine was if all the clause should consider ineffective also because of its wide meaning. Thus, court found that the rest of the clause met reasonableness as parties had equal power, similar content is found to other contracts of the industry and a following clause offered insurance[22]. However, the offending part did not affect the rest validity of the clause and considered as partly invalid.

When exclusion clauses are broadly expressed caution should be taken in order to be harmonized under UCTA’s requirements. In contrast, contracts which intend to protect against common insured risks such as fire, such clauses may consider reasonable.

Conclusion

In commercial contracts, when both negotiated parties are sophisticated, courts tend to give effect to their agreement by consider the natural meaning or the contractual commerciality rather than applying “contra proferentem” and other traditional rules. Exclusion clauses are now considered as a way of allocating risks and the doctrine may apply only in extreme ambiguous cases.

However, “UCTA” does not apply to negotiated clauses but limits the applicability of unreasonable terms, with no need to consider “contra proferentem” doctrine. Summarizing, courts tend to support freedom of the contract and parties’ intentions.

Bibliography

Cases

  • Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2012] 1 All ER 1137 (02 Nov 2011)
  • Investors Compensation Scheme v. West Bromwich Building Society [1997] UKHL 28; [1998] 1 All ER 98; [1998] 1 WLR 896 (19th June, 1997)
  • Arnold v Britton & ors [2015] UKSC 36, (10 June 2015)
  • Persimmon Homes Ltd & Ors v Ove Arup & Partners Ltd & Anr [2017] EWCA Civ 373. (25 May 2017)
  • Regus (UK) Ltd v Epcot Solutions Ltd, [2008] EWCA Civ 36 (15 Apr 2015)
  • Goodlife Foods Ltd v Hall Fire Protection Ltd [2017] EWHC 767 (TCC)

Legislation

  • Unfair Contract Terms Act (1977)
  • S.2
  • S.3
  • S.7
  • S.11

Books

  • McKendrick E, Contract Law Texts Cases And Material (7th edn, 2016)
  • Furmston MJ Chuah, Commercial Law (2nd edn, Pearson Education Limited 2013)
  • McMeel G, The Construction Of Contracts (Oxford University Press 2011)
  • Linderfalk U, On The Interpretation Of Treaties (Springer 2007)
  • Ben-Shahar OL Bebchuk, “Boilerplate” (University of Michigan Law School 2006)
  • Surahyo A, Understanding Construction Contracts (Springer International Publishing AG, zHd Alexander Grossmann 2017)
  • Møllmann A, Delivery Of Goods Under Bills Of Lading (Taylor and Francis 2016)

Journals

  • C. D. D., ‘FAIRNESS AND CONTRACT: Unfair Contract Terms Act 1977’ (1978) 7 Industrial Law Journal
  • Beale H, ‘Unfair Contract Terms Act 1977’ (1978) 5 British Journal of Law and Society
  • Orlando S, ‘The Use Of Unfair Contractual Terms As An Unfair Commercial Practice’ (2011) 7 European Review of Contract Law
  • Gaitskell R, ‘Can You Exclude Liability? The Unfair Contract Terms Act 1977’ (1992) 2 Engineering Management Journal
  • Tillotson J, ‘Exclusion Clauses, Consumer Protection And Business Reasonableness: The Unfair Contract Terms Act 1977’ (1978) 12 The Law Teacher

Websites

  • ‘Rainy Sky Sa And Others V Kookmin Bank: SC 2 Nov 2011 – Swarb.Co.Uk’ (swarb.co.uk, 2018) <http://swarb.co.uk/rainy-sky-sa-and-others-v-kookmin-bank-sc-2-nov-2011/> accessed 18 February 2018
  • ‘George Mitchell V Finney Lock Seeds – 1983’ (Lawteacher.net, 2018) <https://www.lawteacher.net/cases/george-mitchell-v-finney-lock-seeds.php> accessed 14 February 2018

[1] Inc. US Legal, ‘Contra Proferentem Doctrine Law And Legal Definition | Uslegal, Inc.’ (Definitions.uslegal.com, 2018) <https://definitions.uslegal.com/c/contra-proferentem-doctrine/> accessed 14 February 2018.

[2] ‘What Is Contra Proferentem? – Business Law Center’ (Bizlawcenter.com, 2018) <http://www.bizlawcenter.com/2013/07/30/what-is-contra-proferentem/> accessed 14 February 2018.

[3] ‘Interpretation Of Exclusion Clauses – Publications – Allen & Overy’ (Allenovery.com, 2016) <http://www.allenovery.com/publications/en-gb/Pages/Interpretation-of-exclusion-clauses.aspx> accessed 14 February 2018.

[4] ‘Exclusion Clauses: Top Drafting Tips And Recent Developments’ (Shoosmiths, 2013) <http://www.shoosmiths.co.uk/client-resources/legal-updates/Exclusion-clauses-Top-drafting-tips-recent-developments-4903.aspx> accessed 14 February 2018.

[5] Michael Dew, ‘Transferring Liability For Negligence In Commercial Contracts: The Canada Steamship Test | Legaltree.Ca’ (Legaltree.ca, 2007) <https://www.legaltree.ca/node/565> accessed 15 February 2018.

[6]  Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2012] 1 All ER 1137 (02 Nov 2011)

[7] Investors Compensation Scheme v. West Bromwich Building Society [1997] UKHL 28; [1998] 1 All ER 98; [1998] 1 WLR 896 (19th June, 1997)

[8] Charles Russell Speechlys, ‘When Will The Courts Apply “Business Common Sense” In Contract Interpretation? | Lexology’ (Lexology.com, 2015) <https://www.lexology.com/library/detail.aspx?g=f4a6c5d7-7dff-4c8b-883b-ff63182df848> accessed 15 February 2018.

[9] Malcolm Sadler, ‘Using Business Common Sense To Interpret Contracts’ (www.freethsoxford.co.uk, 2012) <http://www.freethsoxford.co.uk/using_business_common_sense_to_interpret_contracts> accessed 15 February 2018.

[10] Arnold v Britton & ors [2015] UKSC 36, (10 June 2015)

[11]  ‘Contractual Interpretation Post-Arnold V Britton’ (Nortonrosefulbright.com, 2017) <http://www.nortonrosefulbright.com/knowledge/publications/154562/contractual-interpretation-post-arnold-v-britton> accessed 16 February 2018.

[12] Nick Pryor, ‘Say What You Mean: Supreme Court On Contractual Interpretation In Arnold V Britton | Litigation & Corporate Risk Expert Insights | Expert Insights | Berwin Leighton Paisner’ (Blplaw.com, 2015) <http://www.blplaw.com/expert-legal-insights/articles/say-mean-supreme-court-contractual-interpretation-arnold-v-britton> accessed 16 February 2018.

[13] Persimmon Homes Ltd & Ors v Ove Arup & Partners Ltd & Anr [2017] EWCA Civ 373. (25 May 2017)

[14] ‘Court Of Appeal Decision Casts Doubt On Principles Requiring Narrow Interpretation Of Exclusion Clauses’ (Herbert Smith Freehills – Litigation notes, 2017) <https://hsfnotes.com/litigation/2017/06/02/court-of-appeal-decision-casts-doubt-on-principles-requiring-narrow-interpretation-of-exclusion-clauses/> accessed 16 February 2018.

[15] Peter Stockill, ‘BLM – News – Exemption Clause Spared The Axe’ (Blmlaw.com, 2017) <https://www.blmlaw.com/news/exemption-clause-spared-the-axe> accessed 17 February 2018.

[16] ‘Limitation And Exclusion Of Liability’ (Ashurst.com, 2018) <https://www.ashurst.com/en/news-and-insights/legal-updates/quickguide-limitation-and-exclusion-of-liability/> accessed 17 February 2018.

[17] ‘Be Reasonable…Exclusions Of Liability, UCTA And The &#39;Reasonableness Test&#39; In Avrora V Christie’ (Bristows.com, 2012) <https://www.bristows.com/news-and-publications/articles/be-reasonableexclusions-of-liability-ucta-and-the-reasonableness-test-in-avrora-v-christie/> accessed 17 February 2018.

[18] ‘Unfair Contract Terms Act And Consumer Regulations’ (E-lawresources.co.uk) <http://e-lawresources.co.uk/Unfair-Terms—Regulation-by-statute.php> accessed 17 February 2018.

[19] Regus (UK) Ltd v Epcot Solutions Ltd, [2008] EWCA Civ 36 (15 Apr 2015)

[20] Struan Robertson, ‘Regus V Epcot’ (Out-law.com, 2008) <https://www.out-law.com/page-9779> accessed 17 February 2018.

[21] Goodlife Foods Ltd v Hall Fire Protection Ltd [2017] EWHC 767 (TCC)

[22] ‘Extinguishing Liability: Exclusion Clauses And Enforceability – Talking Construction’ (Talking Construction, 2017) <http://talkingconstruction.gateleyplc.com/2017/08/31/extinguishing-liability-exclusion-clauses-enforceability/> accessed 17 February 2018.

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