Doctrine of Contra Proferentum in Commercial Law

2238 words (9 pages) Essay in Commercial Law

24/04/19 Commercial Law Reference this

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

INTRODUCTION

This assignment introduces some points about the doctrine of contra proferentum, which has limited applicability in commercial cases. In that time, the judges’ behavior has changed completely in relation with the applicability that the doctrine of contra proferentum should have in commercial cases. For this reason, it will be explained how the interpretation of the judges has changed and what processes have been done, concerning the common and the statute law. Furthermore, it is essential to make a reference to the interpretation of the exclusion clauses, which has become a substantial conflict between the business parties in commercial cases. Another important elements of this assignment are the applicability of some principles, like “Gilbert Ash”, “Business Common Sense” and  “Canada Steamship”, on the ambiguities that arise in commercial cases. Finally, it would be careless if there was no reference to “The Unfair Contract Terms Act 1977” (UCTA) which has a substantial connection with some remarkable cases. So, particularly at this assignment, it will be evaluated what general measures have been taken in order to increase the freedom of the contracts.

THE DOCTRINE OF “CONTRA PROFERENTUM” AND SOME OTHER PRINCIPLES

If we wanted to give a definition of contra proferentum, we would say that this principle, in a commercial case, interprets a clause strictly against the party, which prefers the structure of the contract, has drafted it and relies upon it. Also, in order this principle to have applicability, it is essential to be enforced in contracts between parties with unequal bargaining power. Generally, when there are ambiguities in a contract and one of the parties does not use clear wording, the court uses the above doctrine in order to protect the less power party and solve the ambiguities that arise from the misrepresentation of the contract’ terms. Nowadays, the courts, although they used to interpret the exclusion and limitation clauses strictly against the business common sense, have changed their behavior and recognized that the parties should set the terms of a contract respecting the freedom of contract and the parties’ autonomy[1]. Another principle that protects the clearance of a contract is the “Gilbert Ash” principle. According to that, the parties should have decided clearly what are their intentions before they draft a contract and give up their rights[2]. Furthermore, another “rule” that has limited applicability, like the contra proferentum, is the Canada Steamship. Shortly, if some of the parties intend to exclude or to restrict liabilities, they have to be clear otherwise the courts will try to protect the party, which has been injured by interpreting the clauses narrowly[3]. Nowadays, these habits have changed and the above principles have not big applicability in courts.

Taking for example the Persimmon Homes Ltd v Ove Arup and Partners 2017, it is obvious that in this case the Canada Steamship and Contra Proferentum rule are now more relevant to indemnity clauses than to exclusion clauses. In this case the judge found that the parties have given effect to the exemption clause, which had been created by the allocation of risks between them. So the liability, respecting the asbestos was not excluded by cl. 4.3[4].

EXCLUSION CLAUSES: TERMINOLOGY AND INTERPRETATION IN COURTS IN RELATION TO “BUSINESS COMMON SENSE” AND “REASONABLE PERSON”

Exclusion clauses are introduced to a contract in order to restrict or exclude liability between the parties. Although, the courts have started to interpret the contracts by shortening the limitations and narrowing the definitions of loss under the umbrella which is called “exclusion clauses”. Furthermore, have become more business-friendly place to litigate and express the parties’ autonomy. Also they give effect to the parties’ agreement and enforce the contractors to charge for accepting large risks[5]. Recently the Court of Appeal has described the appropriate approach about commercial cases. The parties with equal bargaining power should judge the fairness of their contracts, including the fairest terms in their agreement. Yet, they should consider whether the terms contain reasonableness. Although, the court should not interfere because the negotiation of the parties have been made from reasonable businessmen and this interference would be in contrast with the freedom of the contract[6]. The above statements are explained by the summary of the Transocean Drilling UK Ltd v Providence Resources Plc. [2016]. In this case the judgment stated that the court would have been wrong if she had imposed a restricted construction on the clause, where the parties had agreed liabilities for consequential loss[7]. Generally, a party, which relies upon on exclusion or limitation clauses should make clear that the requirements of reasonableness and fairness can be proved by evidences, otherwise the court will not interfere and will respect the parties’ agreement. Furthermore, the lack of judicial interpretation is essential when parties express their intentions clearly and take their risks as they see fit. The most remarkable case that represents business common sense is Rainy Sky v Kookmin Bank. In this case, the court asked what a reasonable person would have decided. So they thought what the intention of the parties were when they were constructing their contract. The court stated that when there are two possible interpretations, they have to apply that, which is more consistent with the business common sense. For this reason they agreed with the Buyer’s opinion. The lesson that we take from this case is that the first intention of the parties is to construe a contract without ambiguities. But when some ambiguities remain because of an unexpected fact the court should apply a commercial and not a literal explanation. So in this case particularly, the conclusion was as Longmore LJ have said in Barclays Bank plc. v HHY Luxembourg SARL [2010]: When there are two possible meanings it is better to apply the more than the less business common sense approach[8].

THE UNFAIR CONTRACT TERMS ACT 1977 AND SOME REMARKABLE CASES IN RELATION TO THIS ACT

Firstly, the basic purpose of the Unfair Contract Terms Act 1977 (UCTA) is to restrict the liability in a contract, which can be excluded for breach of contract and negligence. This restriction is made by reference to a reasonable test and in some cases by a specific prohibition. Most of the provisions of UCTA apply to business liability. If you have included some exclusion clauses into your contract, they will be judged in relation to the time and the circumstances the contract has been construed. One of the important things while the parties are negotiating their contract is to assess if the terms and conditions they have set apply the reasonable test and justify that the court would think that you have included a limitation clause reasonably. Furthermore, it s important to be certain that the risk and liability that have been excluded could not been covered by an insurance in order the court to be determined for the reasonableness of the exclusion. The UCTA set some rules, which ensure the fairness and reasonableness of the contract. One of the guidelines states that it should be evaluated the bargaining power between the parties and if the one party had given the essential incentives before the other signed the contract. Also, it plays a big role, whether there was an ability to construe a contract with similar or different terms[9].

Taking for example the Photo Production Ltd v Securior Transport Ltd, it is concluded that when the risk of the contract is coming from insurance and the parties have equal bargaining power, the case does not need interpretation and the parties should take risks as they see fit. So, the UCTA did not apply to this case for the above reasons and because the contract had been construed before that. Eventually, in this case the wording was sufficient to exclude liability[10]. In addition, in Granville Oil and Chemicals Ltd v Davis Turner and Co. Ltd through Tuckey LJ stated that: Parties with equal bargaining power should be bound by their own exclusions and terms[11].

In conclusion, in Regus (UK) Ltd v Epcot Solutions Ltd, the exclusions of liability were reasonable under UCTA. Although, Epcot challenged that the exclusion of liability for loss and damage were enforceable and unreasonable under the Act, the Court of Appeal found that the clauses 23(3) met the requirements of reasonableness and the clause 23(4) was independent from the previous[12].

CONCLUSIONS

Summarizing it is obvious that the doctrine of contra proferentum has limited applicability in commercial cases nowadays. As we have evaluated in the above statements, the main reason that the courts most of the times protect the parties, which rely upon the ambiguities in contracts is because they have adopted a more business common sense behavior in relation to the interpretation of the exclusion and limitation clauses. There is the confidence that the parties should take risks as they see fit and they should rely upon to these risks although they seem ambiguous. Furthermore, other principles and Acts rarely apply to commercial cases, so the direction to more reasonable and fairness contracts are more frequent. It is understandable that the courts’ behavior has been changed completely the last years and it is obvious approaching a more business-friendly plan in order to interpret the cases.

BIBLIOGRAPHY

Cases:

  • Photo Production Ltd V Securicor Transport Ltd [1980] AC 827
  • Granville Oil & Chemicals Ltd v Davies Turner & Co Ltd [2003] EWCA Civ 570
  • Regus (UK) Ltd v Epcot Solutions Ltd, [2008] EWCA Civ 36
  • Transocean Drilling UK Limited v Providence Resources PLC [2016] EWCA Civ 372
  • Rainy Sky S.A. & Ors v Kookmin Bank [2011] UKSC 50
  • Persimmon Homes Ltd & Ors v Ove Arup & Partners Ltd & Anr [2017] EWCA Civ 373.

LEGISLATION:

  • Unfair Contract Terms Act 1977 s.2, s.3, s.7 s,11

BOOKS:

  • McKendrick Ewan, Contract law: text, cases, and materials Seventh edition, 2016

WEBSITES AND BLOGS:

  • Unfair Contract Terms | Mylawyer’ (Mylawyer.co.uk, 2018) <https://www.mylawyer.co.uk/law-a-A76062D32725/?A76062D32725=> accessed 17 February 2018.
  • Exclusion And Limiting Clauses Lecture Notes’ (Lawteacher.net, 2018) <https://www.lawteacher.net/lecture-notes/exclusion-clauses-lecture.php> accessed 17 February 2018.
  • A it, Learning austerity and Ziggurat: bonds, ‘Exclusion Clauses In Commercial Contracts: The Contract Is King | Construction, Engineering & Procurement Expert Insights | Berwin Leighton Paisner’ (Blplaw.com, 2018)
  • <http://www.blplaw.com/expert-legal-insights/articles/exclusion-clauses-in-commercial-contracts-the-contract-is-king> accessed 17 February 2018
  • ‘Transferring Liability For Negligence In Commercial Contracts: The Canada Steamship Test | Legaltree.Ca’ (Legaltree.ca, 2018) <https://www.legaltree.ca/node/565> accessed 17
  • Mason Lee, The role of “business common sense” in the construction of commercial contracts, Business Law Review (UK), 02/2012, Volume 33, Issue 2

[1] Mason Lee, The role of “business common sense” in the construction of commercial contracts, Business Law Review (UK), 02/2012, Volume 33, Issue 2

[2] A it, Learning austerity and Ziggurat: bonds, ‘Exclusion Clauses In Commercial Contracts: The Contract Is King | Construction, Engineering & Procurement Expert Insights | Berwin Leighton Paisner’ (Blplaw.com, 2018) <http://www.blplaw.com/expert-legal-insights/articles/exclusion-clauses-in-commercial-contracts-the-contract-is-king> accessed 17 February 2018.

[3] ‘Transferring Liability For Negligence In Commercial Contracts: The Canada Steamship Test | Legaltree.Ca’ (Legaltree.ca, 2018) <https://www.legaltree.ca/node/565> accessed 17 February 2018.

[4] Persimmon Homes Ltd & Ors v Ove Arup & Partners Ltd & Anr [2017] EWCA Civ 373.

[5] A it, Learning austerity and Ziggurat: bonds, ‘Exclusion Clauses In Commercial Contracts: The Contract Is King | Construction, Engineering & Procurement Expert Insights | Berwin Leighton Paisner’ (Blplaw.com, 2018) <http://www.blplaw.com/expert-legal-insights/articles/exclusion-clauses-in-commercial-contracts-the-contract-is-king> accessed 17 February 2018.

[6] Exclusion And Limiting Clauses Lecture Notes’ (Lawteacher.net, 2018) <https://www.lawteacher.net/lecture-notes/exclusion-clauses-lecture.php> accessed 17 February 2018.

[7] Transocean Drilling UK Limited v Providence Resources PLC [2016] EWCA Civ 372

[8] Rainy Sky S.A. & Ors v Kookmin Bank [2011] UKSC 50

[9] Unfair Contract Terms | Mylawyer’ (Mylawyer.co.uk, 2018) <https://www.mylawyer.co.uk/law-a-A76062D32725/?A76062D32725=> accessed 17 February 2018.

[10] Photo Production Ltd V Securicor Transport Ltd [1980] AC 827

[11] Granville Oil & Chemicals Ltd v Davies Turner & Co Ltd [2003] EWCA Civ 570 

[12] Regus (UK) Ltd v Epcot Solutions Ltd, [2008] EWCA Civ 36

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