Prior to the second world war there was what Denning, in his judgement of Mitchell (George) (Chesterhall) Ltd. v. Finney Lock Seeds Ltd. [1983], called 'a bleak winter for our law of contract'. During this period exclusion clauses were inforced with little regard to notions of justice and fairness. For example in L'Estrange v. F. Graucob Ltd. [1934] 2 K.B., an exemption clause, in a standard-form contract, successfully protected a manufacturer of a machine that was not suitable for the purposes for which it was sold, even though the plaintiff had not read it.
Contrast this case with Canada Steam Ship v. The King [1952] AC 192. In this case the defendent had leased a dock and shed to the plaintiff. The defendent had agreed to maintain the shed, and during some maintainance work the defendents agents negligently set fire to it, destroying it and its contents. The defendent attempted to rely on an exclusion clause denying liability for damage to the shed, and an indemnity clause that appeared to ensure the leasee indemnified the leasor against all third party claims. The Privy Council, using a technique called the true construction of contract, was able to find that the defendents had not proven that the clauses unequivocaly covered the situation, and due to the contra proferentem rule, found for the plaintiff. The true construction of contract is the term given to the reading of a clause in a very limited way. In this case it was ruled that because the exclusion clause did not mention negligence it did not cover it.
There are two main reasons why this decision has been criticised. Firstly the contract was made between two parties of comparable bargaining power and experience in the negotiation of contracts, as such it is exactly the type of situation that Coote's theorum identifies. Secondly the exemption clauses in this case were a valid and sensible way of distributing the cost of insurance; surely the leasee is in a better position to insure the contents of the shed, as they would know what it contained. In this case it would appear that the Privy Council immediately linked the exclusion and indemnity clauses with contractual abuse, when a more sober analysis would seem to show they were valid attempts to distribute risk. The huge gulf in attitudes between these two cases inevitably led to confusion amongst the draughtsmen of contracts, and this was reflected in the number of cases that went to court.
The true construction of contract was the main technique used by the judiciary to strike out exclusion clauses, and as Atiyah (1992) says, "much justice was done by this means". However the situation led to a battle of wits between those who draughted contracts and the judges, and considerable uncertainty. Inevitably contract terms were occasionally draughted so as to be water-tight, no matter how narrowly they were interpretted, and a number of other legal tools were developed to allow the judiciary to reach the decision they considered just. One such technique, that was pioneered by Lord Denning, was 'fundamental breach'. Denning argued that an exclusion clause could not apply to a breach of contract that was fundamental, or went to the heart of the contract. This reasoning was partially accepted, causing yet more confusion, until it was laid to rest by the Houe of Lords in Photo Production v. Securicor [1980] AC 827. Fundamental breach still remains a part of contract law, but only in conjunction with the construction of contract; unless explicitly stated to the contrary the courts will assume that a clause does not seek to exempt liability from a breach of a fundamental aspect of the contract. Another technique is the 'red-hand rule', this stems back to another Denning judgement, which stated that all onerous terms should be drawn to the attention of the other party by being printed in red ink and highlighted with a pointing hand. In practice the rule is more simply that the attention of the party must be drawn to any onerous clauses, and was applied, to considerable criticism, in Interfoto Picture Library v. Stilletto Visual Programmes [1988] 1 All ER 348.
In 1977, perhaps somewhat belatedly, the legislature stepped in to go some way to clarifying the situation, with the Unfair Contract Terms Act (UCTA). The title of this act appears to show that the intention of the legislators was to tackle unfair contract terms generally. However an examination of the contents of the act shows that it is dedicated to the control of various types of exemption clauses. Evidence perhaps that the in the minds of the legislators unfair contract terms and exemption clauses were indivisible. UCTA has made certain exemption clauses illegal, such as those applying to negligence, or causing death or injury, but many types of clauses are now subject to a reasonableness test. The reasonableness test is flexible, and allows the courts to take into account whether the defendent was offered a choice concerning the exclusion clause, or received some inducement to accept. This may satisfy some of the arguments put forwards by Coote, depending how the judges use their greater power, but UCTA is essentially opposed to Coote's thesis. Adams and Brownsword (1988) supported this, saying, "its [Coote's thesis] implicit rejection by the draughtsmen of UCTA was both realistic and right."
Whilst the reasonableness test gives the courts the flexibility necessary to adapt to the huge variety of excemption clauses, it means that the uncertainty faced by contractors prior to 1977 still remains. The inherent subjectivity of a reasonableness test was recognised by the House of Lords in Mitchell v. Finney [1983] 2 All ER 737, in which they said that there will be, "room for a legitimate difference of judicial opinion as to what the answer will be, where it will be impossible to say that one view is demonstrably wrong and the other demonstrably right." The inevitable result of this is that uncertainty will continue to persist, and the sentiments of the judiciary will continue to come through in judgements.
As all the decisions up until 1977 pointed to a judiciary that indeed regarded exemption clauses as a by-word for contractual abuse, one might expect the courts to use their new power to strike out exemption clauses with even greater ferocity. This however does not appear to be the case. Palmer (1982) identifies a retreat from the excesses of cases such as Canada Steamship, his main evidence for this comes in the judgements of Alisa Fishing Co. v. Malvern Fishing Co. [1983] 1 All ER 101. In this case the defendents, Securicor, were negligent, which resulted in the loss of two yachts. Securicor attmepted to rely on a clause that limited their liability to œ1000. The clause did not mention negligence specifically, which Canada Steamship would seem to require, and Securicor were guilty of a fundamental breech, as they didn't provide any security service at all. The House of Lords diffrentiated between this case and Canada Steamship on the grounds that Canada Steamship concerned exempton clauses, and this was only a limitation clause; in the words of Lord Fraser, "there is no reason why they [limitation clauses] should be judged by the specially exacting standards which are applied to exclusion clauses." Lord Wilberforce also seems hesitant to be as ruthless as his predecessors, saying, "one must not strive to create ambiguity by strained construction". This dicta would seem to signal the end of the 'true construction of contract'. Palmer welcomed what he saw as this greater tolerance of exemption clauses, saying "the prospect of a more relaxed and realsitic approach to the construction of such terms is most welcome".
In conclusion, I would broadly agree with Adams and Brownsword's sentiments. Exclusion clauses have been commonly regarded as a bad thing, with the exception of a small number of academics. I would also agree that exemption clauses did become a by-word for contractual abuse, up until the early eighties. The distste with which exclusion clauses were regarded, and the failure of the legislature to tackle the problem until 1977, is relfected in a number of judgements. This area of contract law in the post-war period has been one of the most realist in legal history. I would agree with Palmer's argument that in the 1980's there has been a greater recognition that exemption clauses are worthy of enforcement where they are part of a negotiated contract, or are between commercial parties of comparable bargaining power. Why this increased tolerance has occured is a matter of speculation, but I feel that it is probably is due to the resurgence of the freedom of contract over interventionism that occured in the eighties. This reflects an inevitable problem with any general legislation that is based on notions of fairness. Even where there is legislative guidance as to the meaning of fairness there will still be room for legitimate differences of opinion. This freedom will reflect any contemporary notions of fairness in contracts, and uncertainty will continue. As such it is impossible to be certain whether the slight mellowing in attitudes is a temporary aberration or part of a long-term trend.
References
Adams and Brownsword (1988) 'The Unfair Contract Terms Act: A Decade of Discretion', 104 Law Quarterly Review, 94.
Atiyah, P.S. (1992) An Introduction to the Law of Contract, Oxford UP.
Landon, P.A. (1935) 51 Quarterly Law Review, 272.
McKendrick, E. (1988) Contract Law, MacMillan.
Palmer, N.E. (1982) 'Limiting Liability for Negligence', 45 Modern Law Review, 322.
Wheeler, S. and Shaw, J. (1994) Contract Law. Cases, Material, and Commentary, Oxford UP.
