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CHAPTER 2

THE WEAPONS OF LAW

2.2.4Other Limitations at Common Law to the Operation of Exemption Clauses
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(a)

Express Undertakings

If an oral undertaking is given by the proferens the courts will regard the oral undertaking as taking priority over the printed terms in a standard form agreement.32

In J. Evans & Son (Portsmouth), Ltd. v Andrea Merzario, Ltd. (1976, England), Evans & Son, an importer of machines, arranged the carriage of the machines to England under contract with A. Merzario, a forwarding agent. A. Merzario orally assured Evans & Son that machines shipped in containers would be carried under deck. Nevertheless, eight containers carrying Evans & Son’s machines were subsequently loaded on deck. One container fell overboard and was a total loss. A. Merzario denied liability, relying on an exemption clause in the contract of carriage. It was held that the A. Merzario’s oral assurance overrode the exemption clause, and that it was liable for breach of the warranty given.33


(b)


Fraud or Misrepresentation

A party who misrepresents (albeit innocently) the contents or effect of a clause inserted by it into a contract cannot rely on the clause in the face of the misrepresentation.34

Denning L.J., dealing with the question of exemption clauses generally, said:

Any behaviour, by words or conduct, is sufficient to be a misrepresentation if it is such as to mislead the other party about the existence or extent of the exemption. If it conveys a false impression, that is enough.35

Note! Misrepresentation is so intrinsic to the sale of Endowment Mortgages and similarly constructed Investment Products that it will be dealt with in much greater detail later in this Chapter.


(c)


Reasonableness

The theory of freedom of contract presupposed that any party to a contract is free to choose whether or not to enter into it, and regarded a party who chose to enter into a contract which is onerous as only having itself to blame.36

However, it is now seen (as already outlined in Section 2.2.3, with respect to standard form contracts) that the bargaining powers of the parties may be so unequal that one can virtually dictate terms to the other. As long ago as 1877, in Parker v South Eastern Railway Co., Bramwell L.J. asked what the position would be if some unreasonable condition were inserted. He thought that ‘there is an implied understanding that there is no condition unreasonable to the knowledge of the party tendering the document and not insisting on its being read...'.

Lord Denning M.R. on numerous occasions maintained that an exemption clause would not be given effect if it was unreasonable, or if it was unreasonable to apply it in the circumstances of the case
, for ‘there is the vigilance of the common law which, while allowing freedom of contract, watches to see that it is not abused’.37


While this approach has not been accepted as part of the common law,38 the views as expressed above by Lord Bramwell and Lord Denning are again clear manifestations of the fact that ‘the virtue of the general law, despite all inexpertness of the judges and sometimes of their formalism, has lain and does lie in a drive toward fairness, toward sane balance’.39


The decision as to whether or not an exemption clause can be classified as reasonable is therefore a matter for the Court to decide having regard to the particular circumstances of the case.


In certain circumstances the power to strike down contractual terms limiting liability that are found not to be fair and reasonable has been conferred by statute, most notably, in the U.K., under the Misrepresentation Act 1967, the Unfair Contract Terms Act 1977, and the Unfair Terms in Consumer Contracts Regulations 1995 (these were replaced in 1999),40 and in Ireland, under the Sale of Goods and Supply of Services Act 1980 and the Unfair Terms in Consumer Contracts Regulations 1995 (amended in 2000). (See Note! below regarding the Unfair Terms in Consumer Contracts Regulations.)

Where, within the ambit of these Acts, a question arises as to whether a term, agreement or provision is fair and reasonable, test criteria are set out, in The Reasonableness Test, that give definition as to what would strike down an exemption clause, and (non-exhaustive) Guidelines are also set out for the matters to be taken into account for application of this Test.



The Reasonableness Test

In determining if a contractual term satisfies the requirement of reasonableness, the test is that it shall be a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in contemplation of the parties when the contract was made.


‘Guidelines’ for Application of the Reasonableness Test

Regard is to be had in particular to any of the following which appear to be relevant:

(a)

The strength of the bargaining positions of the parties relative to each other, taking into account (among other things) alternative means by which the customer’s requirements could have been met;

(b)

whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of entering into a similar contract with other persons, but without having to accept a similar term;

(c)

whether the customer knew or ought reasonably to have known of the existence and extent of the term ( having regard, among other things, to any custom of the trade and any previous course of dealing between the parties);

(d)

where the term excludes or restricts any relevant liability if some condition is not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable;

(e)

whether any goods involved were manufactured, processed or adapted to the special order of the customer.


It is clear from the above that the crucial time is the time of the making of the contract, and not the time at which liability arises.41

The burden of proving that a contract term satisfies the requirement of reasonableness rests upon the person who claims that it is reasonable.42


Note! The Unfair Terms in Consumer Contracts Regulations, which implemented European Council Directive 93/13/EEC and came into force in both the U.K. and Ireland in 1995, are discussed under Statutory Intervention, Section 2.4.3: Supply of Services. Most significantly, the Unfair Terms in Consumer Contracts Regulations apply, with certain exceptions, to any term in a contract concluded between a ‘seller of goods or supplier of services’ and a consumer which has not been individually negotiated and which may be regarded as unfair. The Regulations set out the criteria by which it will be determined that a particular term of such a contract is to be regarded as unfair and, as a consequence, struck down.



32 Clark, Contract Law in Ireland, (6th ed.), p. 212.

33, 34, 35 Beatson, Burrows and Cartwright, Anson’s Law of Contract, (29th ed.), p. 191.

36, 37, 38 Beatson, Burrows and Cartwright, Anson’s Law of Contract, (29th ed.), p. 192.

39 Clark and Clarke, Contract Cases and Materials, (4th ed.), p. 383; wording taken from Review by Professor Karl Llewellyn of Prausnitz ‘The Standardisation of Commercial Contracts in English and Continental Law’ (1937).

40 Beatson, Burrows and Cartwright, Anson’s Law of Contract, (29th ed.), p. 192.

41 Beatson, Burrows and Cartwright, Anson’s Law of Contract, (29th ed.), p. 201.

42 Beatson, Burrows and Cartwright, Anson’s Law of Contract, (29th ed.), p. 202.

 

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