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Report No. 103

Chapter 4

Experience in other Countries

4.1. How the problem is dealt with in the U.K.-

In the United Kingdom various legal principles based upon the fundamental concept enunciated by Denning, L.J.1 that 'there is the vigilance of the common law which while allowing freedom of contract watches to see that it is not abused', have been utilized. These principles are-(a) that there should be reasonable notice to the other party of the conditions; (b) that the notice should be contemporaneous with the contract; (c) that there should be no fundamental breach of the contract; (d) that the contract would be strictly construed as against the bigger organisation and in favour of the weaker party, and (e) that the terms of a contract should not be unreasonable on the face of it.

Courts have resorted to what are known as contra proferentem rule, the 'four corner', rule, the Gibaud rule, and the important stratagem of the doctrine of fundamental breach. The contra proferentem rule amounts to this; that a person who, relying on an exclusion clause, seeks to avoid a liability, can do so only by reference to words which clearly and unequivocally apply to the circumstances of the case. Under this rule, if one party to the contract is not only under a duty of care, but is also subject to some form of strict liability, a clause excluding liability will cover only the latter, unless the language manifestly covers both types of obligations.

In the Gibaud case2, the plaintiff left his bicycle at the defendants' station and received a ticket containing a clause exempting the defendants from liability. The bicycle was not put in the cloakroom, but was left in the booking hall from where it was stolen. The Court of Appeal held : The defendants were protected. If the contract had been to keep the bicycle necessarily in the cloakroom, the defendants would be outside the 'four corners' of the contract and not be protected by the exemption clause, which would only protect them while performing the contractual obligation, and not the obligation as bailee. As regards the doctrine of fundamental breach, it was propounded by Denning, L.J.3 as follows:

'It is now settled that exempting clauses of this kind, no matter how widely they are expressed, only avail the party when he is carrying out his contract in its essential respects. He is not allowed to use them as a cover for misconduct or indifference or to enable him to turn a blind eye to his obligations. They do not avail him when he is guilty of a breach which goes to the root of the contract. It is necessary to look at the contract apart from the exempting clauses and see what are the terms, express or implied, which impose an obligation on the party. If he has been guilty of a breach of those in a respect which goes to the very root of the contract, he cannot rely on the exempting clauses.'

But this view has received a severe blow in the House of Lords.4 It has been said by Lord Reid that there is no indication, 'that the courts are to consider whether the exemption is fair in all the circumstances or is harsh and unconscionable or whether it was freely agreed by the customer it appears to me that its solution should be left to Parliament' (emphasis supplied); and Lord Wilberforce explained that if fundamental or total breach means a departure from the contract, the question will arise how great a departure, and if it means supply of a different thing, the question will be how different. The Hon'ble Mr. Justice Scarman had stated5:

"for example, in the law of contract it is necessary to consider whether the law should be based upon the principle of freedom of contract or on, some other principle, e.g., that the law will enforce only those bargains that are fair-a principle which would, in the interests of good faith in mutual dealings, impose some restrictions upon contractual freedom. A particular illustration of the need to reach a conclusion on this social question is to be found in the law reform problem that arises over the rights to vendors and hire-purchase-finance companies to contract out of their common law and statutory liabilities. It is well-known that hire-purchase finance companies, warehousemen, and suppliers of goods and services, often make use of standard forms of contract which contain clauses exempting or limiting suppliers liability."

1. John Lee & Son. v. Railway Executive, (1949) 2 All Eng Rep 581.

2. Gibaud v. Great Eastern Railway, (1921) 2 KB 426.

3. Karsales v. Wallis, (1956) 2 All ER 866.

4. Suisse Atlantique Societed' Agreement Maritime SA v. M.V. Rotterdamasche Kalen Centrale, (1966) 2 All ER 61.

5. Law Reform, the Lindsay Memorial Lectures delivered at the University of Keele, Nov. 1967, p. 29.

Unfair Terms in Contract Back

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