Standard Form Contracts & Exclusion Clauses

Sarah Chaster – Law 108A Contracts Outline (Final)

Law 108A: Contracts Outline (Final)

Standard Form Contracts & Exclusion Clauses

Contractual Interpretation

Scott v. Wawanesa Mutual Insurance Co (1989, SCC)

Standard Form Contracts & Exclusion Clauses

Unsigned Documents

Parker v South Eastern Railway (1877, Eng. CA)

Thornton v. Shoe Lane Parking (1971, UK CA)

Interfoto Picture Library v Stiletto Visual (1989, Eng. CA)

Promech v Bronco Rentals (1995, Man. CA)

Signed Documents

Tilden Rent-A-Car v. Clendenning (1978, Eng. CA)

Delaney v Cascade River Holidays (1983, BCCA)

Ochoa v Canadian Mountain Holidays (1996, BCSC)

Karroll v. Silver Star Mountain (1988, BCSC)

Doctrine of Fundamental Breach

Karsales v Wallis (1956, Eng. CA)

Suisse Atlantique v Rotterdamsche (1967, Eng. HL)

Photo Production v Securicor (1980, Eng. HL)

Hunter Engineering Co v Syncrude Canada (1989, SCC)

Plas-Tex Canada v Dow Chemical (2004, ABCA)

Tercon Contractors v BC (2010, SCC)

Mistake

Mistake: Introduction

Staiman Steel v Commercial & Home Builders (1976, Ont. HC)

Smith v Hughes (1871, Eng.)

“Snapping up” a Mistaken Offer

Mistaken Assumptions

Bell v Lever Bros (1932, Eng. HL)

McRae v Commonwealth Disposals Commission (1951, Aust. HC)

Equitable Mistake

Solle v Butcher (1950, Eng. CA)

Great Peace Shipping v Tsavliris Salvage (2002, Eng. CA)

Miller Paving v Gottardo Construction (2007, Ont. CA)

Mistaken Identity

Cundy v Lindsay (1878, Eng. HL)

Phillips v Brooks (1919, Eng. KB)

Lewis v Averay (1972, Eng. QB)

Shogun Finance v Hudson (2003, Eng. HL)

Non Est Factum

Saunders v Anglia Building Society (1971, Eng. HL)

Rectification

Performance Industries v Sylvan Lake Golf & Tennis Club (2002, SCC)

Morley Shafron v KRG Insurance Brokers (2009, SCC)

Frustration

Introduction

Historical Development

Paradine v Jane (1647, Eng. KB)

Taylor v Caldwell (1863, Eng. QB)

Krell v Henry (1903, Eng. KB)

Land Cases

KBK No. 138 Ventures v Canada Safeway (2000, BCCA)

Frustration: Summary

Frustration: Remedial Consequences

Control of Contractual Power

Duress

Universe Tankships of Monrovia v Int’l Transport Workers Federation (1982, JCPC)

Nav Canada v. GFAA (2008, NBCA)

Undue Influence

Geffen v Goodman Estate (1991, SCC)

Royal Bank of Scotland v. Etridge (2001, Eng. HL)

Unconscionability

Morrison v Coast Finance (1965, BCCA)

Lloyds Bank v. Bundy (1975, Eng. CA)

Harry v Kreutziger (1978, BCCA)

Illegality and Good Faith

Common law illegality

KRG Insurance v Shafron (2009, SCC)

Statutory Illegality

Still v Minister of National Revenue (1988, FCA)

Good Faith

Bhasin v Hrynew (2014, SCC)

Consumer Protection

Rushak v Henneken (1991, BCCA)

Loychuck v Cougar Mountain (2012, BCCA)

Commercial Practice & Contract Drafting

Remedies

Principles of Remedies and Damages

Reliance Damages

McRae v. Commonwealth Disposals (1951, Australia H.C.)

Anglia Television v. Reed (1972, Eng. CA)

Bowlay Logging v. Domtar (1978, BCSC)

Sunshine Vacations v. Hudson’s Bay (BCCA, 1984)

Loss of a Chance

Chaplin v. Hicks (1911, Eng. CA)

Folland v. Reardon (2005, Ont. CA)

Cost of Completion v. Difference in Value

Groves v. John Wunder (1939, US)

Peevyhouse v. Garland (1963, US)

Radford v. De Froberville (1977, UK)

Ruxley Electronics (1996, House of Lords)

Remoteness

Hadley v. Baxendale (1854, UK)

Victoria Laundry v Newman Industry (1949, Eng. CA)

Scyrup v. Economy Tractor Parts (1963, Man. CA)

Cornwall Gravel v Purolator Courier (1980, SCC)

Koufos v. Czarnikow (The Heron II) (1969, Eng. HL)

Mitigation

Punitive Damages

Whiten v Pilot (2002, SCC)

Loss of Enjoyment

Jarvis v Swans Tours (1973, Eng. CA)

Fidler v Sun Life Assurance (2006, SCC)

Standard Form Contracts & Exclusion Clauses

Contractual Interpretation

Guiding principles:

The process of contractual interpretation is aimed at ascertaining the true intention of parties at the time the K was signed.

-A contract is an agreement. Written piece of paper is evidence of that agreement.

-Courts will look at: the whole K, the context, its commercial purpose

-Courts will look at literal meaning of words (courts only depart from this if an unreasonable result, or if clearly goes against purpose of K/parties’ intentions) – Consolidated-Bathurst

-If there is no ambiguity, then must give it plain meaning (cannot interpret for a more “fair result” or a “sensible commercial result”). Must presume that parties intended the legal consequences of their words – Eli Lilly v. Novopharm Ltd

Courts use an objective approach to determine parties’ intentions.

-Inquiry into subjective intentions is usually not allowed

-Policy: K law is to protect reasonable expectations. The test is thus how the promisor’s conduct would strike a reasonable person in the position of the promise.

Surrounding circumstances are almost always relevant.

-Ks not made in a vacuum. The factual matrix, commercial context, genesis of the K, market etc will be considered

If there is no ambiguity in the written document, there is no need for extrinsic evidence.

-If intention is clear, courts cannot stray beyond the “four corners” of the agreement.

-Majority in Scott v. Wawanesa – when the wording is unambiguous, courts cannot take a different meaning

Evidence of prior negotiations is inadmissible.

-However, might be included to show the general aim or genesis of the transaction

No redundancy. Interpretation must give effect to all parts/provisions of the agreement.

-Doctrine of effectiveness – must give effect to every word of the agreement

-General terms are often seen as qualified by specific terms

Subsequent conduct is not relevant

-Canadian courts have been flexible here – to resolve ambiguity, courts may look to see if a party behaved as if they were in a K

Related agreements may be considered if components of one larger transaction.
Words given their natural or ordinary meaning.

-Evidence may be admitted to prove the word has a special/technical meaning.

Contra Proferentem

-Ambiguities construed in favour of the non-drafting party.

Ambiguity / No Ambiguity
-Contra proferentum (authority: minority in Wawanesa)
-Subsequent conduct can be relevant if two reasonable interpretations (Re Canadian National Railways)
- / -Objective approach
-No need for extrinsic evidence if no ambiguity (majority in Wawanesa)
-Give words their natural/ordinary meaning
-Per majority in Wawansa: judiciary can only give effect to a different meaning if it is a) unreasonable or b) clearly contrary to the intention of the parties

Sattava Capital Corp v. Creston Moly Corp (2014, SCC)

-Most recent word from the SCC on interpretation of contracts

-Interpretation is generally a practical, common-sense approach – not dominated by technical rules of construction – focus on finding the true intention of the parties

-Most evidence of surrounding circumstances can be admitted (however, the parol evidence rule precludes evidence re: subjective intention of parties)

-However, evidence of surrounding circumstances cannot overwhelm the words of the K

-Focus on the words of the written document, in light of its entire context and the commercial purpose of the agreement

Policy considerations: Finality, certainty, reasonable expectations versus unfair surprise

Cases

Scott v. Wawanesa Mutual Insurance Co (1989, SCC)

Facts:Mr/Mrs. Scott had homeowner’s (fire insurance) policy. 15 year old son Charles was covered by the policy. Charles deliberately set fire; insurer denied coverage by relying on exclusion clause which excluded any losses caused by criminal/wilful acts of an insured.
Issue:Does the exclusion policy apply only to the insured responsible for the wrongful act (i.e. Charles) or does it also apply to an innocent insured (i.e. Mr/Mrs. Scott)?
Dissent:Insurance policy = classic standard form contract. Policy language is ambiguous, thus contra proferentum – insurance companies prepare policies for their own benefit, naturally; so any ambiguities should fairly be resolved in favour of the insureds.
-For insurers to succeed here, would have had to clearly bring clause to the insureds’ attention
-Thus, the insurer’s obligation was owed severally to each insured, and the exclusion clause applied only to the insured responsible for the act (and not other innocent insureds)
-Policy: reasonable expectations of parties (parties unfamiliar with complexities of insurance law might assume coverage)
Majority: The terms of the policy are clear and unambiguous. It clearly excludes this type of risk.
-If wording is clear, courts cannot give K a different meaning unless:
a)contract is unreasonable
b)contract has an effect contrary to the intention of parties.
-Restrictive approach taken by courts (“if I could find another meaning, I would gladly use it, but the policy is clear, so I can’t – the insureds’ damages are excluded under the policy.”)
-Policy: Balancing reasonable expectations with unfair surprise

Standard Form Contracts & Exclusion Clauses

Standard form Ks/exclusion clauses: related but distinct issues (standard form Ks may be problematic without having exclusion clauses; exclusion clauses may appear in Ks that are not standard form).

Standard Form Contracts

Three different contexts where standard forms are used:

Ticket cases:Earliest use of standard form. Hundreds of transactions a day – entrepreneurs did business on fixed terms (no time to negotiate the terms of each).
Businesses with numerous, lengthy and complex transactions often rely on standard form Ks (entrepreneur can’t negotiate terms with each customer, and customers don’t have the expertise). E.g.: insurance, finance & lending agreements,car rentals
Transactions (usually of sale) where a vendor uses a standard form for ease, but also to introduce disclaimer clauses meant to limit the vendor’s liability.

Benefits:Convenient/efficient tool for parties in equal positions
Downsides: Can be used as an oppressive tool; party in dominant position can dictate terms
In commercial arenas, standard form Ks are necessary for complex dealings like freight, insurance or commodities
Must distinguish between standard form Ks between commercial equals from those between parties where there is a disparity in bargaining power
Presumption: Standard form Ks assumed to be fair if parties equal. No presumption between parties in unequal positions.
Two main types:

Business to business standard form contract
Commodity markets, charter-party agreements
Reduces transaction costs, increases certainty and predictability
Efficiency in bargaining
Ensures consistent interpretation of these kinds of contracts
Facilitates administration of contract
Business to consumer standard form contract
Signed or unsigned (tickets/oral)
Concerns: terms imposed by stronger party (“take it or leave it”)
Fairness of terms
Exclusion of liability
Knowledge of terms

Trebilcock, The Common Law of Restraint of Trade (1986)
Standard form Ks reduce transaction costs (e.g. dry-cleaning K – you don’t want to negotiate the terms every time)
They are not always the result of concentrated market power; the real measure of market power isn’t whether a supplier presents his terms on a “take it or leave it” basis, but whether the consumer, if he decides to “leave it”, has a competitive range of alternate sources of supply
Standard form Ks aren’t always evidence of abuse of market power

Exclusion Clauses

Clauses which limit/deny liability are not inherently offensive; are often necessary to define the bargain between the parties
When do problems arise?
If exclusion clause is inserted in a standard form K by a dominant party
If exclusion clause appears to relieve contracting party of the very responsibility which the K imposed
If exclusion clause is relied on by one party and challenged by the other, must ask:

Was the clause effectively included as a term of the K (i.e. was there notice given?)
What does the clause mean? (Strict reading may narrow meaning.)
Is there some reason to simply refuse to apply the clause? (E.g. unconscionable result).

Strict construction: Ambiguities will be construed against the drafting party (contra proferentum)
Exclusion of liability for negligence: Line of cases here (p. 510-511)
Generally, very clear words are needed to protect from liability for negligence – courts usually take a very restrictive approach here
General exclusion clauses will not protect against negligence unless CLEAR words to this effect
Authority: Canada Steamship
Where a defendant’s liability rests ONLY in negligence, then general words of exclusion can cover negligence (since otherwise, the clause wouldn’t have a subject matter) - Alderslade

Unsigned Documents

General rule for signed documents: party signing written K is bound by its terms, regardless of whether they read or are aware of terms (L’Estrange)
For unsigned documents, courts have developed the doctrine of reasonable notice: If there is no knowledge of conditions, a person is bound to conditions if there was reasonable notice that the ticket contained conditions (Thornton)
Mellish rule (reasonable notice):Where written document contains conditions but document not signed and party did not know of conditions, evidence is required to show assent to terms. Evidence may be:

a)actual knowledge that the document contains conditions; or

b)reasonable steps taken to provide notice that the document contains conditions.

Reasonable notice doctrine was developed in many railway cases (see Parker)
Trilogy of cases using the reasonable notice doctrine:
Parker (Mellish rule: reasonable notice of terms)
Thornton (reasonable notice for exemption clauses)
Interfoto (reasonable notice for any stringent/unusual clause)
Ticket cases deal with two levels:

a)Pure contractual analysis (did one party do enough to give the other notice that a term was being incorporated in the K?)

b)Question of fairness/reasonableness (would it be fair in the circumstances, given the natures of the transaction/character of the parties, to hold one party bound by a particularly unusual/stringent condition

Civil law systems have principles of good faith; English common law has instead used piecemeal solutions to issues of unfairness (i.e. playing with contract formation rules, finding no consideration, using reasonable notice doctrine, etc)

Cases

Parker v South Eastern Railway (1877, Eng. CA)

Facts: Parker received ticket for storage of bag at railway; bag lost; ticket limited liability to $10.
Reasons:Creation of theMellish rule
-Parker hadno actual knowledge (thought it was simply a receipt, didn’t read conditions).
-However, Railway company had taken reasonable steps – he had been handed ticket, ticket said “See back” and conditions limiting liability were on the other side, and there were prominent notices at the place where he received the ticket that it was subject to conditions
-As long as railway company has done what would be sufficient to inform people in general that the ticket contains conditions, then that is enough (wouldn’t be fair for a particularly ignorant plaintiff to succeed because of his own stupidity or carelessness!)
Held:Based on this reasonable notice that there were conditions, Parker was held to be bound by those conditions
Ratio:Creation of the Mellish rule. Law treats signature and notice as substitutes.

Thornton v. Shoe Lane Parking (1971, UK CA)

Facts:Car accident hurt Thornton when he was in a multi-storey car park owned by defs. Sign says, “All cars parked at owner’s risk”. Ticket printed from machine.
Issue:Defs. acknowledge fault, but rely on exemption clause (ticket said “subject to conditions” – long list of conditions were printed on panel elsewhere in the car-park).
Held:Exclusion clause does not apply. Df cannot rely on exclusion clause to escape liability.
Reasons: Plays with rules of contract formation. Historically, tickets were offers – customer could accept by buying. Here, ticket from an automated ticket booth is merely a receipt (customer pays and gets a ticket – cannot then refuse terms and get money back – this would be K modification)
-Insufficient notice (per Parker): Terms must be brought to his notice before buying ticket (i.e. placed on or near machine). This ticket was simply a receipt – subsequent terms could not alter K since K was concluded.
-Df didn’t do what was reasonably sufficient to bring notice of exempting condition
-This exemption clause was so destructive of rights that it would need to be specifically brought to plaintiff’s attention – printed in red ink with a red hand pointing to it
-Actual knowledge:No finding that the plf knew of the condition
-Dfs didn’t bring clause to plf’s attention, and no evidence that he knew of exempting condition, thus it does not apply
Ratio: Rather than just requiring knowledge that there are conditions, there must be knowledge of the actual exempting condition

Interfoto Picture Library v Stiletto Visual (1989, Eng. CA)

Facts:Interfoto runs a library of photo transparencies; Stiletto is a advertising agency
-Stiletto asked Interfoto for some transparencies; Interfoto sent over 47 pictures
-Stiletto liked them, said one or two may be of interest and they would be in touch
-Stiletto never got in touch and didn’t return photos til almost a month later
-Transparencies had been accompanied by a delivery note with the word “Conditions” in fairly prominent capital letters (Condition 2 stipulated all transparencies must be returned within 14 days, or a holding fee would be charged)
-Stiletto did not send transparencies on time and Interfoto sent a bill for 3800 pounds (evidence was that the reasonable charge, i.e. market rate, would’ve been only 330 pounds)
-No previous dealings between parties
Issue:Was condition 2 sufficiently brought to Stiletto’s attention to be binding on Stiletto?
Held: No. Nothing was done to draw the plf’s attention to condition 2 specifically, thus it is not part of the K. Reduces the amount of the judgment to the reasonable market rate stated above.
Reasons: Rejects argument that condition 2 was not part of the K (the delivery note was supplied with the transparencies)
-Rejects contract formation argument(i.e. that K was already formed over the phone and that delivery note was a contract modification) – this kind of playing around is unrealistic
-Considers the jurisprudence on ticket cases:
-Parker: Concerned with whether the printed conditions as a whole were sufficiently drawn to the customer’s attention (if yes, customer bound, even if hadn’t read them)
-Thornton: Concerned with whether one particularly onerous conditionwas sufficiently drawn to the customer’s attention
-Thus the Mellish rule is not limited to exemption clauses and can generally be applied
-Condition 2 is very onerous/$$ - no way pls could know, unless it was brought to their att’n
-Historically and today, people tend not to read printed conditions (today, printed conditions are very complicated & usually one-sided in favour of the drafting party)
-Plus, plfs never asked for 47 transparencies – this, plus huge cost, leads to inordinate liability
Ratio:If one condition (not necessarily an exemption clause) in a set of printed conditions is particularly onerous or unusual, the party seeking to enforce it must show that the particular condition was fairly brought to the attention of the other party.

Promech v Bronco Rentals (1995, Man. CA)

Facts:Bill of lading between a shipping company and a railway company acknowledge receipt of goods “subject to the classifications and tariffs in effect”, and limited liability to $500.
Principle:Reasonablenessof any notice depends on the particular recipient involved (in this case, the plaintiff shipping company was bound by terms because they weren’t just a layperson – they were a company who regularly worked in this business, knew this kind of language and bills of lading – less was required to give them reasonable notice)
Principle: That which is reasonable for one class of customers may not be reasonable for another. The threshold for what constitutes “reasonable notice” with unsigned contracts may be much lower if parties can be assumed to know certain things based on their commercial capacity.

Signed Documents

L’Estrange: general rule for signed documents (bound, regardless of whether party has read or is aware of terms)
Tilden: departure from strict signature rule in l’Estrange
Tilden was decided in 1970s (height of consumer protection legislation); since then, has not been broadly applied – Courts today tend to uphold standard form contracts and signed waivers of liability (even if waivers haven’t been read)
Karroll: A very narrow view of the rule in Tilden (narrows it considerably). Has been widely cited with approval and implicitly accepted by the SCC.
Therefore: the rule in L’Estrangeapplies, with certain exceptions:

i)Cases of fraud/misrepresentation