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CILTHK TWO-‐DAY COURSE LAW OF CONTRACTS
A. Formation of a contract 1. What is a contract? 2. One determines whether the parties entered into a contract by an objective test. Cf. Smith v.Hughes (1871) LR 6 QB 597 (CA) (Seller sells new oats to Buyer. Buyer accepts, believing seller to be selling old oats): "If, whatever a man's real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that other party upon that belief enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party's terms." (Blackburn J). But whose objective viewpoint? Promisee? What constitutes admissible evidence of a party's intention? What evidence of what happened in pre-‐contractual negotiations? What about early drafts of a written contract? 3. What does the law of contract protect? Expectation interest, reliance interest, restitution interest. 4. Offer -‐-‐ an objective manifestation of the willingness (intention) of a person X (the offeror) to be bound upon acceptance by another person Y (the offeree) of certain terms (an offer). An offer may be by words, writing or conduct. It may be express or implied. It may be addressed to a specific person or persons or to the world at large. Question: what if Y realises that, despite appearances, X subjectively does not mean to be bound? 5. Invitation to treat -‐-‐ X does not make an offer, but merely manifests a willingness (intention) to deal with Y, if Y were to make an offer. Whether there is an offer or an invitation to treat depends on the factual circumstances of a given case. Consider: Auction; goods on display in a supermarket (cf. Pharmaceutical Society of Great Britain v. Boots Cash Chemists Ltd [1952] 2 QB 795 (Act requires certain non-‐prescription medicines to be sold in presence of registered pharmacist. Did Boots
contravene the Act by only stationing a pharmacist at cash register, as opposed to the shelf from which a customer picks ups the medicine?); Partridge v. Crittenden [1968] 1 WLR 1204 (Act prohibits offers to sell wild birds. Did defendant breach Act by advertising wild bird for sale?); timetables; tenders. 5. When does an offer become effective? Presumably, not until received by offeree. 6. Acceptance -‐-‐ an objective manifestation by the offeree of a clear (unambiguous) willingness (intention) to be bound by the terms (offer) put forward by the offeror. The acceptance must be unqualified. An acceptance may be by words, writing, or conduct. It may be express or implied. 7. Rejections and counter-‐offers. Battle of forms. Butler Machine Tools Co. Ltd. v. Ex-‐Cell-‐O Corp [1979] 1 WLR 401 (CA). (Whether price variation clause part of contract. Seller offer stipulated that seller's "terms and conditions shall prevail over any terms and conditions in the buyer's order".) Lord Denning MR: "[O]ur traditional analysis of offer, counter-‐offer, rejection, acceptance and so forth is out of date.... The better way is to look at all the documents passing between the parties -‐-‐ and glean from them, or from the conduct of the parties, whether they have reached agreement on all material points -‐-‐ even though there may be differences between the forms and conditions printed on the back of them." Lawton LJ: "In my judgment, the battle has to be conducted in accordance with set rules. It is a battle more on classical 18th century lines when convention decided who had the right to open fire first rather than in accordance with the modern concept of attrition. The rules relating to a battle of this kind have been known for the past 130-‐odd years.... [I]f anyone should have thought they were obsolescent, Megaw J in Trollope & Colls Ltd. v. Atomic Power Constructions Ltd. [1963] 1 WLR 333, 337 called attention to the fact those rules are still in force". Bridge LJ: "[T]his is a case which on the facts is plainly governed by what I may call the classical doctrine that a counter-‐offer amounts to a rejection of an offer and puts an end to the effect of the offer". 8. Acceptance "subject to contract". Cf. AG v. Humphreys Estate (Queen's Gardens) Ltd. [1987] AC 114 (PC, HK). 9. Acceptance not normally effective unless communicated to offeror. But offeror may stipulate that communication of acceptance not necessary. Further, suppose non-‐acceptance due to offeror's fault?
Can silence constitute acceptance? Felthouse v. Bindley (1862) 11 CBNS 869. Uncle offers to buy horse from his nephew for 30+ pounds. Uncle writes: "If I hear no more about [the horse], I consider the horse mine at [the offered price]." No answer from nephew. But nephew told auctioneer that horse sold. Despite this, auctioneer mistakenly sells horse to X. Question: Who owns the horse: uncle or X? But an offer may be accepted by conduct. 10. Unilateral contracts. Carlill v. Carbolic Smoke Ball Co. [1893] 1 QB 256. Advertisement. "100 pounds reward will be paid by the Carbolic Smoke Ball Company to any person who contracts the increasing epidemic influenza, colds, or any disease caused by taking cold, after having used the ball three times daily for two weeks according to the printed directions supplied with each ball. 1,000 pounds is deposited with Alliance Bank, Regent Street, showing our sincerity in the matter. During the last epidemic of influenza many thousand carbolic smoke balls were sold as preventives against this disease, and in no ascertained case was the disease contracted by those using the carbolic smoke ball. One carbolic smoke ball will last a family several months, making it the cheapest remedy in the world ate the price, 10 shillings, post free. The ball can be refilled at a cost of 5 shillings. Address, Carbolic Smoke Ball Company, 27, Prince Street, Hanover Square, London." C contracted flu despite using the ball as per advertisement. She sued for 100 pounds. Argued that advert too vague to be an offer, mere puff, how long is advert effective, no intention to create legal relations, extravagant promise, not possible to have a contract with all the world, no notification of acceptance. 11. Postal rule. Adams v. Lindsell (1818) 1 B & Ald 681. "It is the law in the first place that, prima facie, acceptance of an offer must be communicated to the offeror. Upon this principle the law has engrafted a doctrine that, if in any given case the true view is that the parties contemplated that the postal service might be sued for the purpose of forward an acceptance of the offer, committal of the acceptance in a regular manner to the postal service will be acceptance of the offer so as to constitute a contract, even if the letter goes astray and is lost." Holwell Securities Ltd. v. Hughes [1974] 1 WLR 155 (Russell LJ). Note that in Holwell the postal rule was displaced. Contract provided that option could be
exercised "by notice in writing to [X] at any time within six months from the date hereof". Option exercised by post, but letter never arrived at X address. Justification? "The rule is in truth an arbitrary one, little better or worse than its competitors." (Treitel, para. 2-‐031 (p.26)). Instantaneous communication. Fax, email, SMS. Entores v. Miles Far East Corp. [1955] 2 QB 327 (CA) (Agent in Amsterdam telexes acceptance to London offeror; where was contract made); Brinkibon Ltd. v. Stahag Stahl und Stahlwarenhandelsgesellschaft mbH [1983] 2 AC 34 (HL). But when exactly is the moment of receipt? Suppose, for instance, I do not check my email regularly? Stipulation in offer that offer must be accepted in certain way. What if equally effective other means is used to accept. 12. Revocation of acceptance once posted? Revocation of a unilateral offer before X has completed performance? What if A promises to pay 100 pounds to anyone who walks from London to York. X starts walking from London. Can A withdraw the offer at any point before X reaches York. Errington v. Errington [1952] 1 KB 290. Father buys home subject to mortgage. He tells his son that can live in home with family provided son pays the mortgage instalments and home would become son's once all instalments paid. Question: On the father's death, can the father's personal representatives withdraw the father's offer, even where the son has been paying the mortgage instalments regularly? Note: father left the home by his will to his wife. Denning LJ: "It is to be noted that the couple never bound themselves to pay the instalments ... and I see no reason why any such obligation should be implied.... Ample content is given to the whole arrangement by holding that the father promised that the house should belong to the couple as soon as they had paid off the mortgage. The parties did not discuss what was to be done if the couple failed to pay the instalments ... but I should have thought it clear that, if they did fail to pay the instalments, the father would not be bound to transfer the house to them. The father's promise was a unilateral contract -‐-‐ a promise of the house in return for their act of paying the instalments. It could not be revoked by him once the couple entered on performance of the act, but it would cease to bind him if they left it incomplete and unperformed, which they have not done...." 13. Termination of offer. Offer may be withdrawn before accepted. Notice of termination must reach offeree. Byrne v. Tienhoven (1880) 5 CPD 344. Offer revoked by post before offeree accepts the offer by telegram. But offeree does not receive letter until after offeree has sent off telegram of acceptance. Third party may communicate revocation of offeree.
Dickinson v. Dodds (1876) 2 Ch D 463. Offer to sell real property for 800 pounds. Postscript to offer letter: This offer to be held over until Friday, 9 o'clock am, 12th June 1874." Dickinson's agent informs him that Dodds had offered to sell property to X. Dodds had actually sold property to X on 11 June. Dickinson accepts before 9 am on 12 June. Question: Is Dickinson entitled to specific performance? What about withdrawal of unilateral offer? 14. Rejection of offer. Has to be made known to offeror. Effect of counter-‐offer. 15. Multi-‐lateral offers and acceptances. The "SATANITA" [1895] P 248. Entrants to sailing race agree to abide by rules. 16. Contractual terms must be certain. Ambiguities may be clarified, however, by reference to trade customs, reasonableness. Contract cannot be incomplete in the sense of lacking important terms. Agreements to agree. Cf. May & Butcher v. R [1934] 2 KB 17n (HL) ("The price or prices to be paid, and the date or dates on which payment is to be made by the purchasers to the [Disposals & Liquidation] Commission for such old tentage shall be agreed upon from time to time between the Commission and the purchasers and as the quantities of the said old tentage become available for disposal, and are offered to the purchasers by the Commission"); Foley v. Classique Coaches Ltd. [1934] 2 KB 1 ("the vendor shall sell to the company annd the company shall purchase from the vendor all petrol which shall be required by the company for the running of their said business at a price to be agreed by the parties in writing and from time to time"); Hillas v. Arcos (1932] 147 LT 503 (HL) (sale of "22,000 standards of softwood goods of fair specification". Clause 9 provided: "Buyers shall also have the option of entering into a contract with sellers for the purchase of 100,000 standards for delivery during 1931. Such contract to stipulate that, whatever the conditions are, buyers shall obtain the goods on conditions and at prices which show to them a reduction of 5% on the FOB value of the official price list at any time during 1931. Such option to be declared before the 1st Jan 1931." Contract may stipulate that if no agreement on certain terms then to be resolved by a certain mechanism, such as arbitration, expert valuation. Walford v. Miles [1992] AC 128 (HL) (Agreement to negotiate (note: no time limit expressed) not an enforceable contract as too uncertain). What of agreement to negotiate "in good faith"?
Cf. Hyundai Engineering and Construction Co Ltd. v. Vigour Ltd. HCCT 100/2003 (16.10.2004) (Reyes J); [2005] 3 HKLRD 723 (CA). II. Consideration 1. A word on formalities of a contract. Deeds. 2. A contract must be supported by consideration moving from each contractual party to the other. There must be some sort of benefit (or detriment) moving from party A to the other party B and vice versa. Thus, a contract is essentially a "bargain" or "exchange" between A and B whereby:-‐
(1) A promises to B that A will do "X" for B "in consideration of" (in return for) B conferring a benefit (or incurring a detriment) as requested by A; and, (2) B promises to A that B will do "Y" for A "in consideration of" (in return for) A conferring a benefit (or incurring a detriment) as requested by B.
Typically, X will be the consideration moving from A to B (that is, the benefit or detriment which A confers or incurs at B's request) and Y will be the consideration moving from B to A (that is, the benefit or detriment which B confers or incurs at A's request). 3. Some examples: sale of goods, contract for services, executory promises, forbearance to sue, compromises or settlement agreements. Contrast: gifts, deeds, moral obligations, "natural affection". 4. Courts will not look into the adequacy of consideration. Nominal consideration. 5. "Past consideration is no consideration." But: Lampleigh v. Brathwait (1615) Hob 105. Pao On v. Lau Yiu Long [1980] AC 614 (PC HK). Quantum meruit. 6. Promising the impossible. Promising that which one would have done anyway. Promising to perform something which one is already duty-‐bound to do:-‐
(1) by the law; (2) by a previous contract with the same party; (3) by a previous contract with a third party. Stilk v. Myrick (1809) 2 Camp 317; cf. 6 Esp 129. Williams v. Roffey Bros. [1991] 1 QB 1 (CA). 7. Agreements to treat a contract as discharged (rescinded). Agreements to vary a contract. 8. Estoppel and waiver. Hughes v. Metropolitan Railway (1877) 2 App Cas 439. Equity and the common law. Requirements:-‐
(1) An unambiguous representation by A to B that A will not enforce A's strict legal rights as against B. (Can silence amount to a representation?) (2) Reliance by B on A's representation. (3) B suffers detriment as a result of reliance on B's representation. Cf. change of position.
Suspensory in effect. Tool Metal Manufacturing Co. Ltd. v. Tungsten Electric Co. Ltd. [1955] 1 WLR 761. Does not found a cause of action? Combe v. Combe [1951] 2 KB 215. "A shield but not a sword." Walton Stores (Interstate) Ltd. v. Maher (19880 164 CLR 387 (H Ct Australia). Amalgamated Investment & Property Co. Ltd. v. Texas Commerce International Bank Ltd. [1982] QB 84.
9. Part payment of a debt. Foakes v. Beer (1884) 9 App Cas 605 (HL). Cf. D & C Builders Ltd. v. Rees [1966] 2 QB 617 (CA). Promissory estoppel. Central London Property Trust Ltd. v. High Trees House Ltd. [1947] KB 130 (Denning J). 10. Relationship between doctrines of consideration and privity. Tweddle v. Atkinson (18610 1 B & S 393. Final Report on Privity of Contract (September 2005) published by the Law Reform Commission of Hong Kong. III. Terms of a contract 1. Express terms. 2. Collateral contract and misrepresentation. Heilbut Symons & Co. v. Buckleton [1913] AC 30 (HL). (P: Are you bringing out a rubber company? D: Yes. P: Is it good? D: We are bringing it out. P bought shares of company. Rubber and produce company. Collapsed. Fraudulent misrepresentation alleged. Whether term that “rubber” company true? (Note: why not sue in negligent misrepresentation?) Routledge v. McKay [1954] 1 WLR 615. Registration book for motorcycle says 1940s model, when in fact 1930s model. A sells to B who sells to C who sells to D who sells to E. Contract between D and E: Motorcycle of 600 cc to be exchanged for sidecar at £30. No fraudulent misrep, no collateral contract. Oscar Chess v. Williams [1957] 1 WLR 370. Trade old for new car. £290 allowed on basis that 1948 Morris. But actually 1939 Morris worth only £175. Mistake induced by false information in registration book. Cf. Dick Bentley Productions Ltd. v. Harold Smith (Motors) Ltd. [1965] 1 WLR 623. German baron's car had actually done 100,000 miles. B buys car after H says only done 20,000 miles since fitted with mile speedometer. H under impression that had been in storage for long time in Germany. Speedometer read 20,000 miles at time of sale. Found to be term of contract.
Bannerman v. White (1861) 10 CB (NS) 844. Buyer asks if sulphur used in hops. Answer: “No.” But that was false. Not fraudulent misrep. But, if knew sulphur used, Buyer would not have entered into contract. Jury found that Seller knew of importance of sulphur content to Buyer as a result of a conversation with the Buyer. Non-‐use of sulphur was thus a term of the contract. Esso Petroleum v. Mardon 1976 QB 801. Throughput estimated at 200,000 gallons per year. But petrol station refused permission to front street, so entrance could not front street and there would be fewer customers. So false estimate. Esso expert’s assessment relied upon by Mardon who wished to be tenant of petrol station. Never made that throughput. Breach of “collateral warranty”. Hedley Byrne v. Heller [1964] AC 465 (HL). Credit extended by to Easipower on strength of Bank reference (made “without responsibility”). Is Bank liable? Tort of negligent mis-‐statement where special relationship. 3. Parol evidence rule. Oral evidence may not be adduced to vary or contradict written contract. Henderson v. Arthur [1907] 1 KB 10. Lease for payment of rent in advance. Leasee says that prior oral agreement for 3 months credit. But that would contradict clear term of lease. But first need to determine where contract is to be found. J. Evans & Sons (Portsmouth) Ltd. v. Andrea Merzario Ltd. [1976] 1 WLR 1078. Oral agreement that goods (liable to rust) would be in containers to be carried under deck. 4. Entire agreement clauses. Are they effective? Inntrepreneur Pub Co. v. East Crown Ltd. [2000] 2 Lloyds Rep 611. Crown required to purchase beer for 30 years from I. Beer tie found in lease. Entire agreement. Said to be collateral oral warranty that tie would not be enforced. Lightman J: “The purpose of an entire agreement clause is to preclude a party to a written agreement from threshing through the undergrowth and finding in the course of negotiations some (chance) remark or statement (often long forgotten or difficult to recall or explain) on which to found a claim such as the present to the existence of a collateral warranty. The entire agreement clause obviates the occasion for any such search and the peril to the contracting parties posed by the need which may arise in its absence to conduct such a search. For such a clause constitutes a binding agreement between the parties that the full contractual terms are to be found in the document containing the clause and not elsewhere, and that accordingly any promises or assurances made in the course of the negotiations (which in the absence of such a clause might have effect as a collateral warranty) shall have no contractual force, save insofar as they are reflected and given effect in
that document. The operation of the clause is not to render evidence of the collateral warranty inadmissible in evidence as is suggested in Chitty on Contract 28th ed. Vol 1 para 12–102: it is to denude what would otherwise constitute a collateral warranty of legal effect. Entire agreement clauses come in different forms. In the leading case of Deepak v. ICI [1998] 2 Lloyds Rep 140, 138, affirmed [1999] 1 Lloyds Rep 387, the clause read as follows:-‐
10.16 Entirety of Agreement This contract comprises the entire agreement between the PARTIES … and there are not any agreements, understandings, promises or conditions, oral or written, express or implied, concerning the subject matter which are not merged into this CONTRACT and superseded thereby …
14.1 Any variations of this Agreement which are agreed in correspondence shall be incorporated in this Agreement where that correspondence makes express reference to this Clause and the parties acknowledge that this Agreement (with the incorporation of any such variations) constitutes the entire Agreement between the parties 14.2 Before executing this Agreement the Tenant and Guarantor have:—
14.2.1 received independent professional advice about its terms or 14.2.2 been advised of the wisdom of taking independent professional advice but have chosen not to do so and accordingly they have not relied upon any advice or statement of the Company or its solicitors.
In my judgment that formula is sufficient, for it constitutes an agreement that the full contractual terms to which the parties agree to bind themselves are to be found in the Agreement and nowhere else and that what might otherwise constitute a side agreement or collateral warranty shall be void of legal effect. That can be the only purpose of the provision. This view is entirely in accord with the judgment of John Chadwick QC (as he then was) sitting as a deputy High Court Judge in McGrath v. Shah (1987) 57 P & CR 452. An entire agreement provision does not preclude a claim in misrepresentation, for the denial of contractual force to a statement cannot affect the status of the statement as a misrepresentation. The same clause in an agreement may contain both an entire agreement provision and a further provision designed to exclude liability e.g. for misrepresentation or breach of duty. As an example Clause 14 in this case, after setting out in Clause 14.1 the Entire Agreement
Clause, in Clause 14.2 sets out to exclude liability for misrepresentation and breach of duty.” 5. Party bound by signature on a contract. L'Estrange v. Graucob [1934] 2 KB 394. Contract signed. No evidence of misrep. "Any express or implied condition, statement, or warranty, statutory or otherwise not stated herein is hereby excluded." Scrutton and Maugham LJJ. Lam Tun Ming v. Hu Chun Leung [1991] 2 HKC 285. Bought and sold notes for purchase of shares at $250,000. Alleged that oral agreement that price would be determined from balance sheet and rights and liabilities agreement to be signed by the parties. Draft of latter agreement sought to be adduced. Admissible. Summary judgment set aside. Court of Appeal: “It was therefore always open to a party to adduce extrinsic evidence to prove that the document was not a complete record of the contract.” Curtis v. Chemical Cleaning and Dyeing [1951] 1 KB 805. False impression. Why do I have to sign this document. Exemption clause. Assistant says only relates to damage to beads and sequins. But also covers stains. (Suppose assistant said nothing?) Peekay Intermark Ltd. v. Australia and New Zealand Banking Group [2006] 2 Lloyds Rep 511 (CA). Peekay buys structured product from ANZ linked to performance of a Russian GKO bond. Depreciation of bond hedged by forward US$ contract. But Peekay acquires no interest in bond. In the event of default or moratorium, the product would be worthless. Thought that buying an interest in the GKO. "Rough and ready" explanation conveyed that idea. But could have read document later sent by ANZ which explained true position. Signature binds on risk disclosure. Ming Shiu Chung v. Ming Shiu Sum [2006] 9 HKCFAR 334 (CFA). Ribeiro PJ: "With respect, that approach is contrary to principle. It is in law highly material to ask how or why the father nevertheless signed the documents. Reliance is universally placed on signatures appended to documents by persons of full age and understanding as signifying the signatory's assent or adherence to what that document states. Where such a person has signed a document which purports to have legal effect, the law has never regarded it as enough to show that he signed without knowing its contents for the document to be disavowed. It is an everyday occurrence that people sign documents without reading the small (or even the large) print and therefore sign without actually knowing the terms (or all the terms) of the document signed. But they are held to the documents which they have chosen to sign unless there is shown to be a recognized legal basis for concluding that their apparent consent has been in some way vitiated or that reliance on that document by some other person falls into some category of unconscionable conduct justifying relief in equity.”
6. Incorporation of terms into a contract. Chapelton v. Barry UDC [1940] 1 KB 532. P obtains ticket for deck chairs. Chairs collapses. Exemption clause in ticket. Question of fact. Nothing to indicate that there were exemption terms in ticket. Parker v. South Eastern Railway Co (1876-‐77) LR 2 CPD 416. Whether on the facts P knew or ought to have known that there were terms and conditions on receipt. Thompson v. London, Midland and Scottish Railway [1930] 1 KB 41. Excursion ticket. See conditions on back. Accident. P could not read. Olley v. Marlborough Court Ltd. [1949 1 KB 532. Negligent hotel. Allowed entry to hotel room. Exemption clause in hotel room. Thornton v. Shoe Lane Parking Ltd. [1971] 2 QB 163. Automatic car park ticket. At owner's risk. Exemption in ticket. Personal injury in car park. J Spurling v. Bradshaw [1956] 1 WLR 461. Barrels stored in warehouse. Exemption for loss or damage caused by negligence. Denning LJ. “This brings me to the question whether this clause was part of the contract. Mr. Sofer urged us to hold that the warehousemen did not do what was reasonably sufficient to give notice of the conditions within Parker v. South Eastern Railway Co. I quite agree that the more unreasonable a clause is, the greater the notice which must be given of it. Some clauses which I have seen would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient. The clause in this case, however, in my judgment, does not call for such exceptional treatment, especially when it is construed, as it should be, subject to the proviso that it only applies when the warehouseman is carrying out his contract, and not when he is deviating from it or breaking it in a radical respect. So construed, the judge was, I think, entitled to find that sufficient notice was given. It is to be noticed that the landing account on its face told Mr. Bradshaw that the goods would be insured if he gave instructions; otherwise they were not insured. The invoice, on its face, told him they were warehoused ‘at owner's risk.’ The printed conditions, when read subject to the proviso which I have mentioned, added little or nothing to those explicit statements taken together.” Interfoto Picture Library Ltd. v. Stiletto Visual Programmes Ltd. [1989] QB 433. Transparencies borrowed by D. Hefty fee if not returned within 14 days according to written terms. McCutcheon v. David MacBrayne Ltd. [1964] 1 WLR 125. Car carried to Hebrides on ferry. Risk note with exemption clause. Sometimes signed by car owner. Sometimes not. On this occasion not signed. Incorporated?
7. Implied terms. Terms implied in fact Liverpool City Council v. Irwin [1977] AC 239. Common parts. Access by tenants. Obligation on landlord to keep in reasonable repair? Shirlaw v. Southern Foundries [1939] 2 KB 206. Officious bystander test. Goes without saying. Trade custom, course of dealing. Terms implied by law, such as by the Sale of Goods Ordinance (Cap.26) ss.14-‐17 and supply of Services (Implied Terms) Ordinance (Cap,457) ss.5-‐7. AG of Belize v. Belize Telecom [2009] 1 WLR 1988 (PC). 8. Construction (interpretation) of a term. What parties would reasonably have understood a term to mean in its factual context (matrix). Natural and ordinary meaning. Investors Compensation Scheme Ltd. v. West Bromwich [1998] 1 WLR 896 (HL).
"(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. (2) The background was famously referred to by Lord Wilberforce as the ‘matrix of fact,’ but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man. (3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.
(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. 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: see Mannai Investments Co. Ltd. v. Eagle Star Life Assurance Co. Ltd. [1997] A.C. 749. (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. Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera S.A. v. Salen Rederierna A.B. [1985] A.C. 191, 201:-‐
‘[I]if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.'
If one applies these principles, it seems to me that the judge must be right and, as we are dealing with one badly drafted clause which is happily no longer in use, there is little advantage in my repeating his reasons at greater length. The only remark of his which I would respectfully question is when he said that he was ‘doing violence’ to the natural meaning of the words. This is an over-‐energetic way to describe the process of interpretation. Many people, including politicians, celebrities and Mrs. Malaprop, mangle meanings and syntax but nevertheless communicate tolerably clearly what they are using the words to mean. If anyone is doing violence to natural meanings, it is they rather than their listeners.”
9. Pre-‐contractual negotiations. Chartbrook Ltd. v. Persimmon Homes Ltd. [2009] 1 AC 1011 (HL).
10. Some maxims of construction (with literal translations in brackets). Contra proferentem (“Against the party relying on the clause [that is, the proferens]”). Eiusdem generis (“Of the same type”). Expressio unius, exclusio alterius (“The expression of one [implies the] exclusion of the other”). Ut res magis valeat quam pereat (“So that the thing [that is, the contract or contractual term] might be worth more, rather than perish)”. IV. Performance, discharge, and breach of a contract 1. Performance of a contract. Entire and severable obligations. 2. Terminology. Rescission. Repudiatory breach. Condition. Warranty. Innominate term. Wickman Ltd. v. Schuler AG [1974] AC 235 (HL) (alleged condition that defendant should see certain number of customers (6) per week, 4 year contract). Arcos v. Ronaasen [1933] AC 470 (HL) (timber for barrel supposed to ½” thick, instead timber 9/16” thivk supplied). Reardon Smith v. Hansen Tangen [1976] 1 WLR989 (HL) (Yard No. 354 at Osaka, built elsewhere). Hongkong Fir Shipping Co. Ltd. v. Kawasaki Kisen Kaisha [1962] 2 QB 26 (CA) (obligation to provide a seaworthy ship). Bunge v. Tradax SA [1981] 1 WLR 714 (HL). 3. Termination for repudiatory breach. Acceptance of repudiation. Effect. Not retrospective. Secondary obligation to pay damages. 4. What happens if party does not acceptance repudiation. 5. Breach of warranty. Effect. Damages. 6. Breach of innominate term. 7. Theory of efficient breach. Justified? 8. Anticipatory breach.
The "MIHALIS ANGELOS" [1971] 1 QB 164 (charterer cancels charterparty in advance of time when entitled to do so). The "GOLDEN VICTORY" [2007] 2 AC 153 (charterer repudiates contract before charterparty terminated; owner accepted; Gulf War breaks out before time when charter party would have ended). Bwllfa principle. 9. What if believe (wrongly) that entitled to treat contract as repudiated? 10. What if A first repudiates, then B? 11. Stipulations as to time. Notice making time of the essence. 12. Election, waiver, estoppel. V. The construction of exemption and limitation of liability clauses 1. History. Lord Denning MR's theory of fundamental breach. Photo Production Ltd. v. Securicor Transport Ltd. [1980] AC 827 (HL). 2. Scope of an exemption or limitation of liability clause is essentially a matter of construction. Contra proferentem. Who is the proferens? Standard form contracts. 3. Some judicial pronouncements:-‐ (a) 'The relevant test, as formulated by Lord Morton in Canada Steamship Lines Ltd v R [1952] 1 Lloyds Rep 1; [1952] AC 192 was quoted by Donaldson L.J. in The 'RAPHAEL' [1982] 2 Lloyds Rep 42 at 44:-‐
"Their Lordships think that the duty of a court in approaching the consideration of such clauses may be summarised as follows:-‐ (1) If the clause contains language which expressly exempts the person in whose favour it is made (hereafter called 'the proferens') from the consequence of the negligence of his own servants, effect must be given to that provision. (Any doubts which existed whether this was the law in the Province of Quebec were removed by the decision of the Supreme Court of Canada in The Glengoil Steamship Company v Pilkington.) (2) If there is no express reference to negligence, the court must consider whether the words used are wide enough, in their ordinary meaning, to cover negligence on the part of the servants of the proferens. If a doubt arises at this point, it must be resolved against
the proferens (in accordance with article 1019 of the Civil Code of Lower Canada: 'In cases of doubt, the contract is interpreted against him who has stipulated and in favour of him who has contracted the obligation'). (3) If the words used are wide enough for the above purpose, the court must then consider whether 'the head of damage may be based on some ground other than that of negligence', to quote again Lord Greene in the Alderslade case. The 'other ground' must not be so fanciful or remote that the proferens cannot be supposed to have desired protection against it; but subject to this qualification, which is no doubt to be implied from Lord Greene's words, the existence of a possible head of damage other than that of negligence is fatal to the proferens even if the words used are prima facie wide enough to cover negligence on the part of this servants."'
(b) Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd3 [1983] 1 WLR 964 (HL), at 966:-‐
“Whether a clause limiting liability is effective or not is a question of construction of that clause in the context of the contract as a whole. If it is to exclude liability for negligence, it must be most clearly and unambiguously expressed, and in such a contract as this, must be construed contra proferentem. I do not think that there is any doubt so far. But I venture to add one further qualification, or at least clarification: one must not strive to create ambiguities by strained construction, as I think that the appellants have striven to do. The relevant words must be given, if possible, their natural, plain meaning.”
(c) Carewins Development (China) Ltd. v. Bright Fortune Shipping Ltd. FACV Nos. 13 and 14 of 2008 (12 May 2009) (Ribeiro PJ):-‐
"After having navigated through the now discredited doctrine of fundamental breach,1 the English courts have settled on the principle that the effectiveness or otherwise of an exemption clause, especially involving a commercial contract where there is no inequality of bargaining power, is purely a matter of its construction. The correct approach in this context was summarised by Lord Wilberforce in Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd,2 in the following terms:-‐
1 Rejected in particular by the decisions of the House of Lords in Suisse Atlantique Société 2 [1983] 1 WLR 964 at 966.
'Whether a clause limiting liability is effective or not is a question of construction of that clause in the context of the contract as a whole. If it is to exclude liability for negligence, it must be most clearly and unambiguously expressed, and in such a contract as this, must be construed contra proferentem. I do not think that there is any doubt so far. But I venture to add one further qualification, or at least clarification: one must not strive to create ambiguities by strained construction, as I think that the appellants have striven to do. The relevant words must be given, if possible, their natural, plain meaning.'
That position is very similar to that taken in Australia where the courts had spared themselves the fundamental breach diversion. In Darlington Futures Ltd v Delco Australia Pty Ltd,3 in a joint judgment of all its members, the High Court4 described the proper approach as follows:-‐
'These decisions clearly establish that the interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in case of ambiguity.'
Two related aspects of the principle so expressed should be underlined. First is the emphasis it lays on the requirement that the exempting words be devoid of any ambiguity, with the clause being construed against the person relying on the exemption.5 Secondly, the principle stresses the need to construe the clause in the context of the contract as a whole, taking into account its nature and object. As Lord Wilberforce pointed out in the Suisse Atlantique case,6 the principle is 'that the contractual intention is to be ascertained ... not just grammatically from words used, but by consideration of those words in relation to commercial purpose ...'
3 (1986) 161 CLR 500 at 510. 4 Mason, Wilson, Brennan, Deane and Dawson JJ. 5 See also The “Starsin” [2004] 1 AC 715, at 779, §144 per Lord Hobhouse: “If a party, otherwise liable, is to exclude or limit his liability or to rely on an exemption, he must do so in clear words. Unclear words do not suffice ... Any ambiguity or lack of clarity must be resolved against that party…” 6 Suisse Atlantique Société d’Armement Maritime SA v NV Rotterdamsche Kolen Centrale [1967] AC 361 at 434.
It will often be the case that an exemption clause uses very broad words which, viewed simply as a matter of language, may be thought apt to exclude all conceivable liability. But the process of construction does not stop there. Wide words of exemption will often cover a whole range of possibilities, some of which will be consistent with maintaining the contractual obligations which reflect the main purpose of the parties’ agreement, and some of which would negate those obligations and effectively deprive the contract of any compulsory content. In such cases, the clause is construed contra proferentem to ascribe the narrower meaning to it in order to sustain the purpose and legal effect of the parties’ contract. As Lord Diplock pointed out in Photo Production Ltd v Securicor,7 the court’s premise in the construction exercise is that the parties intended their agreement to have contractual force:-‐
'Parties are free to agree to whatever exclusion or modification of all types of obligations as they please within the limits that the agreement must retain the legal characteristics of a contract ...'
Such legal characteristics embrace well-‐established implied incidents of commercial (and other) contracts:-‐
'Since the obligations implied by law in a commercial contract are those which, by judicial consensus over the years or by Parliament in passing a statute, have been regarded as obligations which a reasonable businessman would realise that he was accepting when he entered into a contract of a particular kind, the court's view of the reasonableness of any departure from the implied obligations which would be involved in construing the express words of an exclusion clause in one sense that they are capable of bearing rather than another, is a relevant consideration in deciding what meaning the words were intended by the parties to bear.'8
However, emphasising that the matter is ultimately a question of construction, his Lordship added:-‐
'But this does not entitle the court to reject the exclusion clause, however unreasonable the court itself may think it is,
7 Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 at 850. 8 Ibid at 850-‐851.
if the words are clear and fairly susceptible of one meaning only.'9
The last passage just cited contains a reference to the rule that ambiguities will be resolved against the contract breaker. The exemption clause is given effect as excluding liability for the breach only where the words are 'clear and fairly susceptible of one meaning only'. If it is also fairly susceptible of a meaning which does not exclude liability for the breach in question, it is that narrower, contra proferentem meaning which the court will ascribe to the term. The application of this principle may be illustrated in the context of a charterparty exclusion clause by the decision of the House of Lords in Tor Line AB v Alltrans Group of Canada Ltd ('The TFL Prosperity').10 That case involved the charter of a vessel to operators of a roll-‐on roll-‐off liner service. One of the clauses specified certain physical attributes of the vessel including free height on the main deck consistent with her intended use. The vessel delivered did not meet those specifications but the owners sought to rely on a clause exempting liability in very broad terms.11 Lord Roskill pointed out that if a literal meaning were to be given to the clause relied on, it would mean 'that the owners would be under no liability if they never delivered the vessel at all for service under the charter or delivered a vessel of a totally different description from that stipulated in the preamble.' Such a construction was rejected:-‐
'In truth if clause 13 were to be construed so as to allow a breach of the warranties as to description in clause 26 to be committed or a failure to deliver the vessel at all to take place without financial redress to the charterers, the charter virtually ceases to be a contract for the letting of the vessel and the performance of services by the owners, their master, officers and crew in consideration of the payment of time charter hire and becomes no more than a statement of intent by the owners in return for which the charterers are obliged to pay large sums by way of hire, though if the owners fail to carry out their promises as to description or delivery, are entitled to nothing in lieu. I find it difficult to believe that this
9 Ibid, at 851. 10 [1984] 1 WLR 48. 11 “The owners only to be responsible for delay in delivery of the vessel or for delay during the currency of the charter and for loss or damage to goods on board, if such delay or loss has been caused by want of due diligence on the part of the owners or their manager in making the vessel seaworthy and fitted for the voyage or any other personal act or omission or default of the owners or their manager. The owners not to be responsible in any other case nor for damage or delay whatsoever and howsoever caused even if caused by the neglect or default of their servants. ...” (italics supplied)
can accord with the true common intention of the parties and I do not think that this conclusion can accord with the true construction of the charter in which the parties in the present case are supposed to have expressed that true common intention in writing.'12
The principle was applied to a bill of lading in Motis Exports Ltd v Dampskibsselskabet Af 1912 Aktieselskab,13 where Stuart-‐Smith LJ stated:-‐
'I also agree with the Judge that even if the language was apt to cover such a case, it is not a construction which should be adopted, involving as it does excuse from performing an obligation of such fundamental importance. As a matter of construction the Courts lean against such a result if adequate content can be given to the clause.'
Like Lord Diplock, his Lordship accepted that the exemption might be effective if suitably drafted but that it would be construed to be inapplicable if it was possible to ascribe to the term 'adequate content' consistent with maintaining the basic purpose of the contract. It is this approach which I apprehend the Australian authorities to have in mind when they speak of 'reading down' such clauses. Thus, in Kamil Export (Aust) Pty Ltd v NPL (Australia) Pty Ltd,14 Marks J stated:-‐
'The first question then is whether the words of exemption should be interpreted to mean what they seem in clear language to say or whether they should be read down in accordance with the relevant authorities, not to apply to loss due to conduct which would defeat the main object of the contract of carriage, namely delivery to the consignee on his proof of payment, as evidenced by production of the bill of lading.'
4. Control of Exemption Clauses Ordinance (Cap.71). 5. Are limitation clauses construed more generously than exemption clauses?
12 Ibid at 58-‐59. 13 [2000] 1 Lloyd’s Rep 211 at 216. 14 [1996] 1 VR 538 at 544 (Supreme Court of Victoria, Appeal Division).
