Commercial Law Is Essential to the Operation of the Business World

Commercial law is essential to the operation of the business world. To facilitate commercial activity, the business community needs a legal system which is certain and predictable, which will give effect to its transaction, which will give legal recognition to trade customs and market prices, which is flexible in order to accommodate new practices and development in business and offers an efficient dispute resolution to deal with its problems. Some of this however needs overlap, for example the recognition of the custom and practices of the commercial community could be seen as an aspect for party autonomy. Thus, other needs appear to conflict as well, like the flexibility in the law tends to be achieved only at the expenses of certainty. In other words, if rules are strict and clear then it produces certainty but it may produce unfair results in individual cases, whereas flexibility and discretionary principles may produce justice in individual cases but tend to be less predictable. In this essay, the incorporation and interpretation of exclusion clause in commercial transaction will be focused in depth and it will be seen how Unfair Contract Terms Act 1977 (UCTA 1977) [1] made major changes to the law relating to exclusion clauses and how it produces certainty in the attempt to meet the needs of commercial community. However, other aspects of commercial law will be discussed in general to see if it facilitates commercial transaction.

2. General discussion

Certainty in Commercial Law

Many transactions are undertaken on the basis that courts will continue to follow the rules laid down in previous contract case laws. The commercial community values legal certainty because it allows for planning and anticipating of liability. Businesses need to know that courts will reliably and consistently interpret commercial transactions. The English courts have consistently promoted considerations of certainty of outcome over those of fairness and justice and offer commercial community a reasonable degree of predictability. In Vallejo v Wheeler, [2] Lord Mansfield said, ‘in all mercantile transactions the great object should be certainty, and therefore, it is of more consequence that a rule should be certain, than whether the rule is established one way or the other. Because speculators in trade then know what ground to go upon.’ [3] Therefore, in order for there to be certainty, the law should be clear and be capable of being applied in a predictable way. For example, if a rule gives the court discretion to find a contract unreasonable, this may be unpredictable. Business people are free to make their contract and to insist on its strict performance. The goal is to enforce the true intention of the parties. Lord Devlin in Kum v Wat Tat Bank Ltd, [4] stated, ‘the function of the commercial law is to allow, so far as it can, commercial men to do business in the way they want to do it and not to require them to stick to forms that they may think to be outmoded. The common law is not bureaucratic.’ [5] This non-intervention is justified on the basis that it promotes certainty. Courts should only intervene if the contract terms are so restrictive or oppressive that it offends against public interest. Of course, freedom of contract cannot be absolute. The courts have tended to adopt a non-interventionist approach on the assumption that there is equality of bargaining power between the contracting parties. It is questionable whether this assumption is as valid today, particularly in the light of the increased use of standard terms of business and the rise of monopolies in which dominated by certain groups. Nevertheless, to the extent that the law is not concerned with the fairness of outcome, commercial law reflects the principles of freedom of contract. Factors suggest that assumption may be less than reliable today, at least as far as the consumer buyer is concerned. However, ‘pure’ commercial contracts are often excluded from such legislation, for example the Consumer Credit Act 2006 [6] has no application to contracts with companies or where business lending to an individual exceeds £25,000 and the UCTA 1977 [7] does not apply to, for example, international supply of goods nor insurance contracts.

In addition, courts have always recognised and given legal effect to the customs and practices of the commercial community, sometimes at the expenses of stretching legal concepts. Courts do this by implying a term into the contract. For example, if the contracting parties are in particular trade where there is settled custom in usage, a term giving effect to that custom or usage may be implied into their contract. In order for the custom or usage to be judicially recognised, it needs to be certain, that is, be well established so the assumption is that parties contracted on the basis of it and reasonable, so that reasonable, honest people would accept it. Business people want flexibility as well as predictability in order to accommodate new practices and development in business. The need for flexibility to accommodate new commercial practices has been met historically by judges recognising mercantile custom and incorporating it within the common law. As commercial people find new ways of doing business, the law needs to adapt to and accommodate these changing commercial practices. For example, with the new technology being used in business, the special problems of e-commerce are factors influencing the development of Commercial law. The law therefore needs to be flexible, although flexibility is often at the expenses of certainty. Legislature also seeks to respond to and accommodate the needs of the commercial community. For example, whenever the reform is proposed extensive consultation with the commercial community will take place before production of the Law Commission report. For example, the Sale of Goods Act 1995. [8]

Nevertheless, in my view, in order for there to be certainty, the law should be clear and be capable of being applied in a predictable way. Another aspect of legal certainty is that settled legal rules should not be changed at times. This is because, once a rule is established parties will contract on that basis, so if the rule is then changed, settled contracts may be disturbed and commercial parties expectations are not fulfilled. However, this is not sometimes necessary especially when there is changing commercial practices as was mentioned above. It is also recognised that commercial people need speedy, inexpensive and efficient dispute resolution to deal with their problems. This need has been met in several ways. First, the commercial court is a separate court of the Queen’s Bench Division staffed by judges who are experienced arbiters of commercial disputes, the rules of the Commercial Court are flexible and operate with relatively little formality and the judges of the Commercial Court have been willing to develop new remedies for example, the freezing order to prevent defendants from disposing of assets and search and seize order allowing seizure of evidence which might otherwise be destroyed. It my view, the law should also promote values of fairness and good faith especially if commercial law is interpreted widely to include consumer transaction. One of the principal objections to general standards of good faith and fair dealing is that they threaten the values of certainty, predictability and consistency to which English contract law is classically committed. Currently, for example, a party can exercise his rights to terminate his contract for breach even though it causes him no loss and even if his sole motive is to escape the consequences of a bad bargain (Mihalis Angelos) [9] or a party can being able to perform against other party’s wishes can claim the full value of the invoice (White and Carter v Macgregor 1962). [10] There are valid arguments for keeping good faith out of commercial transactions, for example, the uncertain scope of the concept would make it difficult to predict outcome of legal disputes, something valued by the commercial community but it seems that standards of fair dealing are increasingly being introduced into English Law, partly because of the harmonisation of commercial law in the European Union. For example, the Unfair Contracts Terms in Consumer Contracts Regulations 1999 (UCTCCR 1999) [11] and the House of Lords in Director General of Fair Trading v First National Bank [12] , where a term in a regulated credit agreement which permitted the lender to charge interest on the sum outstanding until payment and after the entry of any judgment was not rendered unfair by the Unfair Terms in Consumer Contracts Regulations 1994. [13] This can also be seen in the recent Consumer Credit Act 2006 [14] where extortionate credit bargain is replaced entirely by an ‘unfair relationship test’.

Exclusion Clauses

It is clear that there has to be certainty in commercial law and some of the ways in which commercial law can facilitate the commercial transaction has been generally discussed above. Now, the incorporation of exclusion clause in commercial contracts will be discussed and it will be seen how the courts and legislature have responded towards the use of it to facilitate the commercial community in commercial transaction. For the reason of facilitating commercial transaction for the community, the English courts have always been attached to the doctrine of freedom of contract, which holds that sane adults are free to contract on any terms they wish. [15] In Printing and Numerical Registering Co. v Sampson, [16] Sir George Jessel MR said: “If there is one thing more than another which public policy requires it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts when entered into freely and voluntarily shall be held sacred and shall be enforced by Courts of Justice. Therefore, you have this paramount public policy to consider that you are not lightly to interfere with this freedom of contract.” [17] Exclusion clauses have been the subject of keen academic debate for almost half a century. The reason for such argument is that complete freedom of contract would allow a stronger party to use exclusion clauses to force its customers to give up certain rights that they would otherwise have enjoyed. Some academics believe this justifies the legal control of exclusion clauses. Exclusion clause can be portrayed as a social nuisance because they are used by contracting parties to avoid consequences of their failure to perform their contractual obligations. Although exclusion clause provided easy ways for powerful parties to exempt liability, it is however mistake to see the exclusion clause entirely in a negative way. Exclusion clause can play a very important role in the regulation of risk. For example, a customer is able to put a value on the benefits of such a warranty, and decide whether or not they want to pay for it, the market will then dictate a fair price for the warranty. In my opinion, restricting exclusion clauses will harm the poor more than the rich by forcing them to ‘buy’ certain warranties with goods and services, which may then put those goods and services beyond their reach. In the case of British Fermentation Fermentation Products Ltd v compare Reavell, [18] it shows the role played by exclusion clause in the regulation of risk. In this case it can be seen that the consequential losses were almost four times the size of the contract price. Some business contracts afford to bear that type of losses, so they rely on exclusion clause in order to contain their potential liability. [19] Judge Bowsher QC held that this clause was efficient to exclude the vendor’s liability to the purchaser. In the light of the case such as British Fermentation Fermentation Products Ltd v Compare Reavell, [20] it is difficult to defend the view that exclusion clause do not have legitimate role to play in modern contract law but they do play an important role in regulating and containing risk. Thus, in other words, exclusion clauses need to be regulated and not outlawed. Overtime the nature of regulation has changed prior to the enactment of the Unfair Contract Term Act 1977 [21] the courts did not have the power at common law to invalidate exclusion clause on the grounds that it was unreasonable. In the absence of a direct power to regulate unreasonable exclusion clause the courts resorted to indirect means. The principal indirect means were the rules relating to the incorporation and interpretation on exclusion clause. In cases such as J Spurling Ltd v Bradshaw [22] and Thornton v Shoe Lane Parking Ltd [23] the courts were able in effect to regulate an unreasonable exclusion clause by concluding that it had not been incorporated into the contract. The other device which the courts used was to apply to exclusion clauses particularly restrictive rules of interpretation so as to enable them to conclude that the clause did not in fact exempt the defendant from the particular loss that the plaintiff had suffered. [24] Now that the UCTA 1977 has been enacted, the need for these indirect methods of contracts has largely disappeared as the act can do the job now. However there are signs in the case law that this old restrictive rules are on the way out, for example it can be seen in the case of Bank of Credit and Commerce International SA v Ali, [25] where Lord Hoffman in his dissenting judgement speech said that “it was however unusual even in the 19th century, for commercial documents to be interpreted according to rules of construction. The quest for certainty, which still dominated the construction of wills and deeds, was though less important than the need to give effect to the actual commercial purpose of the document. There was however one remarkable example in the 20th century of a rule of construction being evolved by the courts in a commercial context. This was the rule of construing exemption clauses. The purpose was not to promote certainty of construction but to remedy the unfairness which exemption clauses could create”. [26] In my view, the law is currently in a state of transition as the status of some of the old cases, which adopt a restrictive approach to the interpretation of exclusion clauses, is presently uncertain.

Thus, a contracting party which wishes to rely on an exclusion clause in order to exclude or limit liability towards its contracting party must prove two matters and may be subject to challenge in third issue. The first matter which the party relying on the exclusion clause must prove is that the clause has been validly incorporated into the contract. Exclusion clause may be regarded as ‘onerous’ and ‘unusual’ and so attract the more stringent rules relating to the incorporation of terms into the contract. [27] This clause facilitates commercial transaction and helps to meet the needs of commercial community. For example, it can be seen in the case of Inferfoto Picture Library Ltd v Stiletto Visual Programmes Ltd. [28] But this is by no means a necessary inference. For example, a clause which limited the contractor’s liability at a maximum of the contract price was held not to be ‘onerous’ or ‘unusual’. This can be seen in the case of Shepherd Homes Ltd v Encia Remediation Ltd, [29] where a sub-contractor had done what was necessary to give fair notice to an employer that its offer was subject to a limitation on liability. [30] The second matter which a party relying upon an exclusion clause must prove is that the exclusion clause, as a matter of construction is effective to exclude liability for the loss that the claimant has suffered. And the third matter relates to UCTA 1977. [31]

Incorporation of an exclusion clause

i.Incorporation by signature

Prior to the Second World War there was what Denning, in his judgement of Mitchell (George) (Chesterhall) Ltd. V Finney Lock Seeds Ltd., [32] called ‘a bleak winter for our law of contract’ [33] . During this period exclusion clauses were enforced with little regard to notions of justice and fairness. Exclusion clauses must be expressed clearly and without ambiguity or they will be ineffective. [34] The clause must be clearly expressed what its intention is. In my view, exclusion clauses must be construed strictly and the degree of strictness appropriate to their construction may properly depend upon the extent to which they involve departure from the implied obligations ordinarily accepted by the parties whom will be entering a particular kind of contract. The incorporation of terms into a contract can be a contentious issue in practice. There are three principle options available on how can a party take adequate steps to ensure that its terms are incorporated into the contract. The first is to ensure that the other party to the contract signs the document that contains all the relevant terms. The second is to take reasonable steps to bring the terms to the notice of the other party. The third option is incorporation by course of dealing. [35] The first issue which is incorporation by signature will be discussed first. The effect of signing a written document was first indicated by Mellish L.J in Parker v South Eastern Railway [36] . In the ordinary case he said: ‘where an action is brought on a written agreement which is signed by the defendant, the agreement provided by proving his signature, and, in the absence of fraud, it is wholly immaterial that he has not read the agreement and does not know its contents’. [37] This was accepted by as correct by the Court of Appeal in L’Estrange v F.Graucob Ltd. [38] The claimant, the owner of the cafe, agreed to buy from the defendants an automatic slot machine for cigarettes. The agreement was to pay by instalments, and it contained an exemption clause excluding liability for breach of warranty or condition. The claimant signed the agreement without reading its terms. The machine proved faulty, and the claimant purported to terminate the contract for breach of condition. It was held that she could not do so since she was bound by the terms of the exclusion clause. [39] The words of Scrutton L.J were unambiguous: “in cases in which the contract is contained in a railway ticket or other unsigned document, it is necessary to prove that an alleged party was aware, or ought to have been aware, of its terms and conditions. These cases have no application when the document has been signed. When a document containing contractual terms is signed, then, in the absence of fraud, or I will add, misrepresentation, the party signing it is bound, and it is wholly immaterial whether he has read the document or not”. [40] Hence, the UCTA 1977 [41] would now regulate the validity of the exclusion clause found in the contract between the parties in L’Estrange. But at that time which L’Estrange was decided the court did not have the power at common law to strike down exclusion clauses on the ground that they were unreasonable or unfair. In so far as the criticism of L’Estrange are based on the unfairness of the result, it can be argued that any such unfairness is best addressed by giving to the courts the power to control unreasonable or unfair terms and not by modifying the rule that a party is bound by his own signature. A signature provides a measure of certainty and it is frequently relied upon by third parties. As Moore- Bick LJ observed in Peekay Intermark Ltd v Australia and New Zealand Banking Group Ltd, [42] the rule in L’Estrange is ‘ an important principle of English Law which underpins the whole of commercial life: any erosion of it would have serious repercussions’ [43] . New forms of technology may, however challenge this perspective of the value of a signature. For an example, an electronic signature may count as a signature for the purpose of the rule in L’Estrange. Thus, the signature rule is thought to promote contractual certainty in commercial transaction.

ii.incorporation by notice

A party who wishes to incorporate terms into a contract by giving his contracting party notice of them must satisfy three requirements. First, notice must have been given at or before the time of contracting. In Olley v Marlborough Court Ltd, [44] the notice was located in a hotel bedroom. It was held that it was ineffective to exclude liability towards a guest of the hotel on the basis that the contract between the hotel and the guest had been concluded before she set foot in the hotel bedroom. It was therefore too late to be effective. Of course, if it could have been shown that if the claimants had visited the hotel regularly, and that they were aware of the terms under which it did business, the clause may have been allowed to stand. [45] In the era of contracts via the internet, great care must be taken in constructing websites so that notice of any exemption clauses is given to a person entering into a contract. With the possibility of a purchaser being able to jump pages by way of links, it is necessary to ensure that the pages including the exclusion clauses is not capable of being bypassed by such links. The consequences of this arising may mean that a contracting party will not be bound by an exclusion clause and this may facilitate commercial transaction for the commercial community as it gives protection to consumers who enter into contracts not wholly appreciating or understanding the full implications of the contract. The second requirement is that the terms must have been contained or referred to in a document that was intended to have contractual effect. In Chapelton v Barry UDC, [46] a ticket was given to someone who hired a deckchair was held not to be a contractual document and so was not effective to give the hirer notice of the terms. [47] The third requirement is that reasonable steps must have been taken to bring the terms to the attention of the other party. This requirement has generated a considerable amount of case law which dates back to the decision of the Court of Appeal in Parker v South Eastern Railway, [48] where the claimant had deposited a bag in the cloakroom of a railway station belonging to the defendants. He was given a ticket with conditions including a clause limiting liability. The claimant had not read the clause but was bound by it. The defendant had done enough to notify the claimants of the clause. [49] In this case, the test applied by the court is not whether the recipient has read the terms or taken reasonable steps to discover their existence. Instead the court focus attention upon the party relying upon the terms and ask themselves whether that party has taken reasonable steps to bring notice of the term or terms to the attention of the party. Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd. [50] was a case which did not focus on exclusion clauses but has implications for them. A clause stating that a charge of £5 per transparency per day was to be levied if they were not returned by a certain date. The defendant forgot about the transparencies and was eventually given a bill of £3,783.50. The Court held that this condition was unreasonable and extortionate, and as such special attention should have been drawn to it. [51] The need to draw attention to unusual clauses is not a recent development in contractual exclusion clauses, in Hood v Anchor Line (Henderson Brothers) [52] Lord Dunedin stated “Accordingly it is in each case a question of circumstance whether the sort of restriction that is expressed in any writing (which, of course, includes printed matter) is a thing that is usual, and whether, being usual, it has been fairly brought before the notice of the accepting party”. [53] In this particular case it was found that the conditions were not unusual and therefore did not require explicit attention to be drawn to them. [54] Lord Dunedin’s inference that unusual conditions could require extraordinary notices draws similarities to Lord Denning’s obiter in J Spurling Ltd v Bradshaw [55] where he famously referred to the need for the ‘red hand’ pointing to the clause. [56] While his comment may have its mark on the judicial memory and on textbook writers, it has not been translated into commercial practice. Little red hands are not to be found in commercial contracts in the UK. A more realistic step to take is to put the clause in bold print. A court may be more likely to conclude that reasonable steps have been taken where there has been ‘an express acknowledgment in the contractual document that the terms and conditions in question were incorporated. (Ocean Chemical Transport Inc v Exnor Craggs Ltd). [57]

iii.incorporation by course of dealing

Finally, a term may be incorporated into the contract as a result of a course of dealing between the parties or as a result of the custom of the trade in which the parties work. The leading case on incorporation by course of dealing is in the following decision of the House of Lords in McCutcheon v David MacBrayne Ltd, [58] the claimant sued a ferry company for damages when a ferry carrying his car from Ishay to the Scottish mainland sank. The contract had been made and no exclusion clause was signed. However, exclusion clauses had been displayed on the walls of the office where the contract was made and on the ferries. Over the previous years the claimant had used the defendants ferries to transport sheep, sometimes signing the exclusion clause and sometimes not. The House of Lords held t