The Controversial Role of Penalty Clauses and Exemption Clauses in Contract Law, Study notes of English

Download The Controversial Role of Penalty Clauses and Exemption Clauses in Contract Law and more Study notes English in PDF only on Docsity! "REMEDY-STIPULATION"9 IN THE ENGLISH LAW OF CONTRACT- FREEDOM OR PATERNALISM? Roger Brownsword* I. INTRODUCTION The early volumes of this journal contain two important articles on the English law of contract, Fridman's "Freedom of Contract"' and Atiyah's "Judicial Techniques and the English Law of Contract". : At the end of his conspectus of the operation in English law of the time-honoured principle of freedom of contract, Fridman concludes: "The tendency of modern law, therefore, is away from the principle of freedom of contract. It may be that there is a long way to go before utter regulation of contractual relation- ships is the rule, rather than the exception. But the signs to be found in the cases, it is suggested, point to a movement towards such a situation." , Atiyah examines the role of the so-called "construction technique"' in judicial decision-making, and, in light of its ubiquity, suggests that more attention should be paid to the consequences of its use. The exploratory nature of the article is acknowledged by Atiyah himself when he says that if the article stimulates "further thought and writing about this technique, its purpose will have been achieved". ' The present article can be regarded as a sequel to the two earlier articles, for it investigates both freedom of contract and judicial techniques in the law of contract. The relationship, however, is no more direct than this. No attempt is made to verify Fridman's prognostication about the general trend away from freedom of contract, and no evaluation of the "construction technique" is offered. In contrast with the two earlier papers, this paper deals with just one type of contractual situation, that in which the parties expressly stipulate the remedies available to the innocent party on a breach of contract. This may be termed a "remedy-stipulation" situation, and within its context the present article attempts to describe judicial techni- ques and judicial policy. It will be appreciated that under the head of remedy-stipulation situa- tions we are able to see as cognate phenomena such devices as penalty clauses, liquidated damages clauses, limitation clauses and exclusion clauses. * Lecturer in Law, University of Sheffield. 12 OTTAWA L. REv. 1 (1967). 22 OTTAwA L. REv. 337 (1968). ' Supra note 1, at 22. 4 Supra note 2, at 339. 5 Id. at 362. Ottawa Law Review Section II of this article focusses on stipulations that purport to extend the remedies available to the innocent party on a breach of contract; sec- tion III deals with stipulations that purport to restrict the remedies avail- able to the innocent party. To decide whether a particular stipulation ex- tends or restricts the available remedies, it is necessary to determine the remedy that would be awarded by a court in the absence of such an express contractual provision. The choice of remedy-stipulation situations as the area for enquiry is not arbitrary; nor is it camouflage for another academic excursion into thc area of exemption clauses. Remedy-stipulation situations contain all the ingredients for producing not only difficult cases but also those notorious "hard" cases. The former are brought about by the. problems inherent in establishing contractual intention, while the latter are generated by the ten- sion between the principles of freedom of contract and plain justice. Thus remedy-stipulation situations provide the perfect climate for evaluating both the strength of judicial techniques and the merits of judicial policy. A. Freedom of Contract as the Starting Point The complex network of rules that comprises the law of contract is, according to the traditional theory, .underpinned by a single master principle, the principle of freedom of contract. In its most extreme form this theory would assert that every rule of the law of contract finds its rationale in the principle of freedom of contract and that apparent contradictions within the law can be resolved by reference to the principle. 6 In a more moderate form the theory holds that the principle has great explanatory power, espe- cially as regards reconciliation of the apparent contradictions in the reported cases. Thus it would assert that although judicial decisions might, in the fashion of a kaleidoscope, present an ever-shifting pattern to the observer, such variation is for the most part merely superficial and has underlying it the principle of freedom of contract. " The attraction of the traditional theory, in either of its forms, hardly needs to be stated; it transforms an apparently disjointed and conflicting collection of rules into a neat and symmetrical package. The traditional theory effects this remarkable transformation from chaos to order by means of the concept of freedom of contract. The suspicion that this and kindred exercises entail more than their share of sophistry was voiced many years ago by Jerome Frank. He said: "Lawyers use what the layman describes as 'weasel words', so-called 'safety-valve concepts', such as 'prudent', 'negligence', 'freedom of contract', 'good faith', 'ought to know', 6 It is unlikely that anybody actually adheres to this form of the theory, for quite plainly it claims far too much. For example, how does freedom of contract explain the conflicting decisions which revolved around "mistake of identity" prior to Lewis v. Averay, [1972] 1 Q.B. 198, [1971] 3 All E.R. 906 (C.A.). "The adherent of this version of the theory has less of the look of an "Aunt Sally" about him. Nevertheless, the chances of anyone espousing this version would depend on the flexibility of the reservation, "for the most part". [Vol. 9:95 "Remedy Stipulation" telescope these two phases by deciding questions of formulation and enforce- ment at the same time. '" Despite this, the principle of freedom of contract emphasizes the creation of as wide an area of enforcement as possible, whereas the principle of sanctity of contract emphasizes enforcement within that given area. With this difference of emphasis in mind, "freedom of contract" may be used in the narrow sense to refer simply to that phase where the rules are formulated, or it may be used in a wider sense encompas- sing both freedom of contract proper as well as sanctity of contract. Unless otherwise indicated, "freedom of contract" will here be used in the wide sense. C. Judicial Technique and the Enforcement of Remedy Stipulations The basic idea of enforcing a bargain has the appearance of simplicity, but the appearance is deceptive. Protecting the sanctity of contract assumes that there exists a bargain capable of enforcement and that justice will be served by such enforcement. But suppose the bargain is incomplete or enforcement would be unjust in the particular case. The doctrine of frus- tration has its origins in these difficulties: it is the classic example of the in- complete bargain which if enforced would lead to great oppression. No doubt it is arid in the extreme to enquire into the "true" or "real" basis of frustration, but the avowed bases provide a valuable insight into rudimentary judicial technique. The technique of finding an "implied term" is an attempt to implement an allegedly complete bargain and thus to satisfy the demand for freedom of contract. 1" The rationale of the "just solution" is less sophisticated; it is an openly paternalistic intervention. " This article is not concerned with frustration as such, but it is concerned with judicial techniques and policy in an equally difficult situation-remedy- stipulation. It is hoped that a study of this phenomenon will illuminate the techniques employed by judges, especially in interpreting the traditional theory of freedom of contract. Remedy stipulations fall into two groups: (i) those where the remedy stipulated is more extensive than that which a court would order; and (ii) those where the remedy stipulated is more restricted than that which a court would order. Penalty clauses are typical of stipulations that fall within the first category; exemption clauses are typical of stipulations that fall within the second category. In this framework we shall explore the operation of freedom of contract and the paternalistic response to that principle. The paradigm of contractual freedom is bargaining about the price of goods. If a man makes a bad bargain and pays above the market price, the 1-The distinction would be much clearer if the formulation of the rules were handled by the legislature. leaving the courts to deal with enforcement. 16 See, e.g., the judgment of Earl Loreburn in F.A. Tamplin S.S. Co. v. Anglo- Mexican Petroleum Products Co.. [1916] 2 A.C. 397. at 402, [1916-171 All E.R. Rep. 104, at 107. " See, e.g., the judgment of Lord Wright in Joseph Constantine S.S. Line, Ltd. v. Imperial Smelting Corp.. [1942] A.C. 154. at 179, [19411 2 All E.R. 165, at 182. 1977] Ottawa Law Review law of contract offers him no solace; equally, if a man pays less than the market price, he has nothing to fear from the law. In neither case will the court interfere with the bargain; that is the policy of freedom of contract. It allows and indeed encourages people to haggle, and having haggled, makes them stand by the result. So much for the paradigm; what happens when we move beyond that clear case? We soon encounter restrictions imposed on the freedom of the parties either because they wish to enter into socially harmful contracts or because one of them suffers from an incapacity that impairs his freedom. Neither type of restriction is of immediate interest to us though the latter type is clearly "paternalistic". Our interest here is with the type of paternalism which occurs when the restriction is imposed, not because of incapacity, but because the agreement struck is considered to be harmful not to society at large, but to one of the contracting parties in particular. When the parties have stipulated the remedy for a breach, freedom of contract may come into conflict with paternalism. If the contracting parties agree that the remedy for breach is to be X, prima facie there is no reason a court should not award X. But if X would be unjust as a remedy, being either too great or too small, what does a court do? Does it award X and mutter about freedom of contract, or, in the name of justice, does it refuse X? If it does the latter, it takes the paternalistic path, the path this article intends to investigate. II. REMEDY EXTENSION The English law of contract provides the innocent party with two principal remedies for a breach-damages and the election between repudia- tion and affirmation of the contract. ," The former remedy is always avail- able, the latter only for a serious breach of contract. A serious breach of contract is usually described as a breach of "condition"; whereas a lesser breach is usually described as a breach of "warranty". 9 Bearing in mind that damages and the election to repudiate or affirm the contract are two quite separate remedies, we can consider now the various forms of remedy-stipula- tion found in contracts. A. Damages The archetypal clause providing for damages beyond the amount that would otherwise be awarded is the so-called "penalty" clause. Lord Hals- 18 This article is limited to a discussion of these two remedies, although it is, of course, recognized that other remedies are available to the innocent party, notably the action for an agreed sum, and the equitable remedies. Since the equitable remedies lie at the courts' discretion, it is difficult to see remedy-stipulation having any impact here. 19 This terminology has strong roots in sale of goods cases; see, e.g., Wallis, Son & Wells v. Pratt & Haynes, [1911] A.C. 394, [1911-13] All E.R. Rep. 989, and the judgment of Fletcher Moulton L.J. at the Court of Appeal stage, [1910] 2 K.B. 1003, at 1011, 79 L.J.K.B. 1013, at 1020. [Vol. 9:95 1977] "Renzedy Stipulation" 101 bury gives a good illustration of such a clause (as distinct from one providing for liquidated damages) in the Clydebank Engineering case: ° "For instance, if you agreed to build a house in a year, and agreed that if you did not build the house forZ50, you were to pay a million of money as a penalty, the extravagance of that would be at once apparent." " Penalty clauses are disregarded by the courts, and damages are assessed on the usual compensa- tory basis. The rule against penalty clauses is so firmly entrenched that we no longer even enquire as to its rationale. We are content to describe such clauses as "extravagant", "exorbitant", "extortionate", and "unconscionable". Notwithstanding this powerful stock of epithets, why do we actually dislike penalty clauses? The equitable basis of the objection to penalty clauses is put most suc- cintly by Story: "In reason, in conscience, in natural equity, there is no ground to say, because a man has stipulated for a penalty in case of his omission to do a particular act (the real object of the parties being the per- formance of the act), that, if he omits to do the act, he shall suffer an enormous loss, wholly disproportionate to the injury to the other party."" Although, Story continues, the stipulation has been agreed upon by the parties, the law "would be unworthy of the name, if it did not to some extent provide the means of preventing the mischiefs of improvidence, rashness, blind confidence, and credulity on one side; and of skill, avarice, cunning, and a gross violation of the principles of morals and conscience, on the other". 2' As for the sanctity of the bargain: "There is no more intrinsic sanctity in stipulations by contract, than in other solemn acts of parties, which are constantly interfered with by courts of equity upon the broad ground of public policy, or the pure principles of natural justice." " We can see from these statements by Story that the rationale for the rule against penalty clauses rests upon one or both of two possible bases. Either penalty clauses are socially harmful in that they run counter to the compensatory spirit of the civil law. or they encourage sharp dealing and, in any particular case, work a hardship on the party in breach. Nothing is to be gained by speculating as to whether the former or the latter rationale first generated the judicial dislike of penalty clauses, but it should be noted that the latter rationale has in it the seeds of paternalism. For our purposes the most significant feature of penalty clauses is the open way in which they have been dealt with by the courts. In the leading case of Bridge v. Campbell Discount Co., ' Lord Radcliffe says: "The re- fusal to sanction legal proceedings for penalties is in fact a rule of the court's 20 Clydebank Eng'r & Shipbldg. Co. v. Don Jose Ramos Yzguierdo y Castaneda, [1905] A.C. 6, [1904-07] All E.R. Rep. 251. 21 Id. at 10. 22 J. STORY, COMMENTARIES ON EQUITY JURISPRUDENCE para. 1316 (3d English ed. 1920). 23 Id. 24 Id. 25 [1962] A.C. 600, [1962] All E.R. 385. Ottawa Law Review ticular facts of the case. The decision in Schuler v. Wickman would seem to rest on its facts, for the majority made no attempt to set up a general principle debarring contracting parties from expressly classifying the various obligations of an agreement. Indeed, they took quite the opposite line, saying that it was perfectly proper for contracting parties to designate a particular term as a condition. " Moreover, they appeared to hold the view that the appropriate way of designating a term a condition was by expressly labelling it as such. Lord Morris put this most clearly when he said: "I do not take the view that before the word 'condition' can be construed in the technical sense of denoting something fundamental to the continued operation of an agreement there must in every case be found words expressly spelling out the consequences of a breach . . . ." Thus it seems that there is no general policy objection against designating an otherwise unimportant obliga- tion a condition. So we must ask: what was the peculiarity of the facts in Schuler v. Wickman? The peculiar facts which swung the argument against Schuler are to be found in the consequences that would have flowed from treating clause 7(b) as a condition-namely that any failure by Wickman to perform the visiting obligation, though entirely blameless, would have entitled Schuler at once to determine the agreement. Since some 1400 visits were scheduled to be made under the agreement, the majority felt that such an interpretation of clause 7(b) would be "unreasonable"; 36 it would lead to "absurd results" " and "grotesque consequences". 38 This looks very much like a paternalistic encroachment upon the freedom of the parties, and Lord Wilberforce, dis- senting, did not care for the approach: [T]o call the clause arbitrary, capricious or fantastic, or to introduce as a test of its validity the ubiquitous reasonable man . . . is to assume, contrary to the evidence, that both parties to this contract adopted a standard of easygoing tolerance rather than one of aggressive, insistent punctuality and efficiency. This is not an assumption I am prepared to make, nor do I think myself entitled to impose the former standard upon the parties if their words indicate, as they plainly do, the latter. "D Thus we find the majority apparently rejecting the notion of freedom of contract in favour of the touchstone of reasonableness. What technique, then, did the majority use to reach their decision and, apparently, to reject freedom of contract? The word "apparently" is used advisedly, for we can scarcely accuse the majority of abandoning the principle of freedom of contract when the intention of the contracting parties has yet to be established. The concept of freedom of contract, it is submitted, flows from the intention of the parties. We have been 34 In particular, see Lord Kilbrandon's statement to this effect, supra note 30. 3Supra note 29, at 258, [19731 2 All E.R. at 51. 36 Id. at 265, [1973] 2 All E.R. at 56 (Lord Reid). 31 Id. at 265, [1973] 2 All E.R. at 56 (Lord Simon). 38 1d. at 263, [1973] 2 All E.R. at 63 (Lord Kilbrandon). 31Id. at 263, [1973] 2 All E.R. at 55. [Vol. 9:95 "Renedy Stipulation" talking so far about the enforcement of "agreements" and "bargains", but these notions assume a common intention; fundamentally, we are talking about the enforcement of the common intention of contracting parties. So before we can evaluate the judicial techniques used in Scluler v. Wickman we must first establish the intention of the contracting parties in using the word "condition" in clause 7(b). This is not easily done, for the range of logically possible combinations of intention is broad. It is logically possible for neither party to apply his mind to the meaning of a word, for one party only to do so, or for both parties to do so. Where neither party considers the meaning of a word, no one has any intention as to its meaning. Where one party considers the meaning of a word, there is at least some intention, but it can hardly be described as a common intention. Where both parties consider the mean- ing of a word, there is intention on both sides, but not necessarily a common intention, for the parties may ascribe different meanings to the word. Such are the logically possible combinations of intention at the time of the agree- ment. However, by the time the dispute reaches court, neither side will be likely to admit that it had no intention; both parties normally claim to have had some intention or other. It is therefore vital to distinguish between the two phases of intention: first, the real intention. (or non-intention) of the parties at the moment of agreement; second, the alleged intention that the parties advance in court. In Schuler v. Wickman the problems arising from the two phases of intention were typical. There the parties alleged certain clear intentions. Schuler argued that the word "condition" in clause 7(b) was intended in its technical sense; Wickman argued that it merely emphasized the importance of the clause, and said that they would not have been prepared to sign the agreement had they supposed that the word was intended in the sense urged by Schuler. " But, contrary to these after-the-fact assertions, the real inten- tions of the parties were and still are totally unclear. It is no exaggeration to say that what the parties intended at the time of the agreement is any- body's guess. That being so, a judge faces a number of options. Basically, there are four types of techniques for dealing with this problem." 4'0 For more details of Wickman's contention, see Brownsword, supra note 31. In brief, Wickman alleged that "condition" in clause 7(b) indicated that the "visiting" obligation was an important one when viewed in the light of clause 11(a)(1). Clause 11(a)(1) provided for either party to have the right to determine the agreement in the event of a "material" breach being committed and remaining unremedied within 60 days of a written notice to remedy the breach. Thus, "condition" in clause 7(b) was seen as an indication of the relatively light burden of proving that a breach of the clause counted as a "material" breach. "' Some further reflections on the four techniques: (1) So far as finding intention is concerned, there are both clear and difficult cases. Our four techniques are essentially ways of handling difficult cases, but Type D introduces the added complication of the hard case, i.e., the conflict between per- ceived intention and a reasonable result. (2) Where the difficult case is met by a reasonable results approach (Types A and B). then the hard case cannot arise. But where the difficult case is met from 1977] Ottawa Law Review (i) Type A (the "Reasonable Settlement" technique). The judge makes an attempt to determine the real intention of the parties, aban- dons the task as hopeless, and simply imposes a reasonable settlement of the dispute. Lord Denning's judgment in Schuler v. Wickman at the Court of Appeal stage comes near to this type of approach, especially in the following statement: "Where a word like this word 'condition' is capable of two meanings, one of which gives a reasonable result, and the other a most un- reasonable one, the court should adopt the reasonable one." ' (ii) Type B (the "Reasonable Settlement Rationalized" technique). As in the Type A approach, the judge seeks in vain for the real intention of the parties, but when he abandons the task, he does not announce that the search is over. Instead, after imposing his idea of a reasonable settlement, he rationalizes the result by inventing an appropriate real intention. (iii) Type C (the "Resolute Search" technique). The judge seeks the real intention of the parties, determined to find it regardless of the diffi- culties. Having found what he (rightly or wrongly) perceives to be the real intention, the judge pushes it through to its logical conclusion. This type of approach is, of course, the one that effectuates the principle of free- dom of contract. " (iv) Type D (the "Keeping-Your-Options-Open" technique). As in Type C, the judge sets out to discover the real intention of the parties, and, again as in Type C, having rightly or wrongly done so, he pushes that inten- tion through to its logical conclusion. The result so obtained is the judge's first option, and if it appeals to his sense of reasonableness, he will adopt it. If he does so, the ensuing judgment will be virtually indistinguishable from a judgment employing Type C. " However, if the result does not appeal to the judge's sense of reasonableness, he can reject it, replace it with his own idea of a reasonable result, and rationalize that result by inventing an ap- propriate real intention. If the judge elects this second option, the ensuing judgment will be virtually indistinguishable from a judgment employing Type B. " the intention baseline (Types C and D), then of course the hard case may be en- countered. Type C is committed to following intention, whereas Type D goes for the reasonable result (although see infra note 87). (3) How would the techniques deal with the clear but hard case? Types A and B seem to be committed neither to intention nor to reasonable results; Types C and D seem to be committed respectively to intention and to reasonable results. - [1972] 2 All E.R. 1173, at 1181, [1972] 1 W.L.R. 840, at 851 (C.A.). Lord Denning also says: "So the evidence was not helpful, save to show that we must go by the reasonable interpretation of the words and not by any supposed common in- tent .... ." Id. at 1179, [1972] 1 W.L.R. at 849. "For amplification of this point, see text infra between notes 57 and 59. ""Virtually indistinguishable" because in Type D (first option) there might bo some loose statements made about reasonable results (anticipating the second option). 45 "Virtually indistinguishable" because in Type D (second option) there might be evidence of the first option having been rejected. In both Type B and D (second option) the rationalization might, of course, be rather crude; in particular, statements about reasonable results tend to devalue statements about the parties' intentions. In Schuler v. Wickman, for instance, we find Lord Kilbrandon purporting to find the [Vol. 9:95 "Remedy Stipulation" the Type D, but Type C is not free from its own difficulties. In particular, the critical determination of the parties' real intention may be wrong, yet, notwithstanding, the judgment moves inexorably towards its determined con- clusion on that false basis. Since Types C and D appear to be the principal techniques employed in Schuler v. Wickman, and since both techniques suffer from imperfections, a closer analysis of these imperfections is re- quired. While it may be meaningless to assert the superiority of one ap- proach over another, we ought nevertheless to understand precisely what is at stake in using either of these two techniques. Type D, apparently adopted by the majority in Schuler v. Wickman, embodies a covert form of paternalism. The objections to the covert method are self-evident; equally obvious are the objections to ex post facto law- making. But the paternalistic rationale for this technique requires further examination. If contractual freedom is regarded as an absolute value, then any encroachment on that freedom, whether paternalistic or otherwise, will be resisted. If freedom is regarded as a value to be weighed against other values, then some encroachment will be allowable, though that encroachment, if based upon paternalism, will generally be viewed with the utmost suspicion. However, paternalism may be more acceptable when it rests upon principle and not simply upon the conduct in question._ To put the matter bluntly, supporters of contractual freedom might argue that the majority decision is nothing more than arbitrary interference with one of our most highly respect- ed values. Can the paternalism found in Schuler v. Wickman possibly be divested of this arbitrariness and so made more acceptable? Surely not; Wickman were labouring under no incapacity, and Schuler did not use sharp practice or treachery. Nor did their mutual exercise in freedom of contract carry harmful social effects (the other acceptable ground for judicial intervention). Finally, the court had no objection in principle to the right of the contracting parties to stipulate that a particular term should be treated as a condition. " The decision to intervene was made simply because the result that would otherwise have ensued was inimical to the court's sense of reason and justice; Schuler's argument simply did not lead to a reasonable result. No doubt the majority had a very sharp sense of justice, but one recalls the comment by Lord Wilberforce that it was a funny sort of justice to leave the innocent party without a remedy "in respect of admitted and by no means minimal breaches". " The important point is that the majority, by using a Type D approach, introduced a decisive element of arbitrary paternalism into the case. The principle of freedom of contract was jettisoned simply because, '2 Another possible element of social harm is the encouragement of sharp dealing, but this possibility can be ruled out for two reasons: (i) on the facts, there was no suggestion of sharp dealing, and (ii) there was no evidence of this construction in the judgments. "3Supra note 29. at 263. [1973] 2 All E.R. at 55. 1977] Ottawa Law Review in Lord Radcliffe's words, the contract showed "a rough edge to one side or the other". " The Type C approach, apparently adopted by Lord Wilberforce in Schuler v. Wickman, has a lot to be said for it. It makes no inroads into contractual freedom and indeed does everything to respect that freedom. Unfortunately, there is no guarantee that the judge who adopts Type C will arrive at and effectuate the common intention of the parties. The real intention of the parties is an elusive object, and the practitioner of Type C, no matter how well-meaning, can easily go wrong. But before we assess the significance of judicial error in ascertaining the real intention of the parties, we must draw some further distinctions with respect to Type C. Within Type C there are in fact three basic sub-types: (i) Type C-1. The judge believes that there is always a common in- tention to be found, and he sets out to find it. (ii) Type C-2. The judge recognizes the difficulty of determining real intention (i.e., given the actual non-intention or the differing intentions of the parties), but he nevertheless prefers to assume that there is a common inten- tion. He determines the common intention by what he thinks the parties would have intended (when they did not actually intend anything) or by what one of them intended (when their intentions were different). In making this finding, the judge pays no attention to the results that follow from it. (iii) Type C-3. The pattern is exactly as in C-2, except that here the judge does pay attention to the results that follow from his finding. However, he does not apply his own standards of reasonableness to these results but the standards of the parties as he perceives them. If the parties do not appear to have common standards of reasonableness, the judge must presumably inject his own standards of reasonableness, and here lies the boundary with Type D. " Lord Wilberforce was probably using the ap- proach of this third sub-type. Having delineated these three sub-types of Type C, we can now return to the matter of judicial error in determining the common intention of the parties. This can best be discussed by assuming first that there is a real common intention and then that there is not. (i) Where the parties actually possess a common intention there is no material difference between the sub-types of Type C. Each sub-type gives the judge the same opportunity to ascertain correctly the common intention, but, equally, each has the same potential for error, which it is foolish to underestimate. The judge can, after the best of efforts to discover the true intention of the parties, end up effectuating a bargain that was never intended. When the parties actually possessed no real common intention capable of being found or effectuated, one can sympathize with the judge " Supra note 27. " And also with Types A and B; for the boundary lies at the point where the judge acts upon his own idea of a reasonable result. See supra note 41. [Vol. 9:95 "Remedy Stipulation" who makes a bad job of an impossible task. But where there is a common intention, the task is possible, and the judge who performs incompetently is less forgivable. (ii) Where the parties possess no common intention the task of finding and effectuating any such intention is ex hypothesi impossible. The judge who adopts the approach of sub-type C-1 may be able to fool himself that he has found the common intention of the parties, but he will fool no one else. To ask of the judge's determination, "How close was it?" will be as bizarre as asking how close an archer came to hitting the "bull's eye" when there wasn't even a target to hit. Our approval of the end result will be entirely fortuitous. Like sub-type C-l, sub-types C-2 and C-3 must inevitably result in a false statement of the intention of the parties. However, the practitioner of sub-type C-2 is a sceptic, unlike the practitioner of C-I. As before, we can do little more than expose the technique for what it is; if the use of C-2 throws up a result which we approve of. that is purely fortuitous. Sub-type C-3 is a different matter altogether; under it the statement of the parties' common intention is not treated as an end in itself, but as a means of achieving a reasonable result according to the standards of the parties. Assuming, then, that the parties have such common standards, these can be either correctly or incorrectly perceived by the judge. As in determining the common intention of the parties, here too the judge may, after the best of efforts, go astray, and in analogous ways. Thus, of the three sub-types. it is only sub-type C-3 that, regardless of the actual existence of a common intention, endeavours to do something which is possible. " Even when no such intention exists, and false statements must necessarily be made re- garding it, the approach of sub-type C-3 means pushing towards a true statement of the parties' common standards of reasonableness. '" Before leaving Type C, a final point must be made. It will be re- membered that Type C was said to effectuate the principle of freedom of contract. Exactly what is the relationship between this principle and Type C? It can now be seen that all three variants of Type C attempt, where there is a real common intention, to effectuate that intention, and this is what freedom of contract requires. Where there is no real common intention, sub- types C-1 and C-2 produce nothing very constructive. C-3, however, has nothing to do with this conceptual symmetry: recognizing the absurdity of casting around for a non-existent common intention, it goes for the next best thing, common standards. After all, freedom of contract, while an attrac- tive idea, can only be validly realized where the parties possess a real com- -6 Unless, of course, there are no common standards. 17 Although we might not criticize the falsity of any statements about intention, it can be argued that the statements are still harmful, in that they tend to perpetuatc the myth of real common intention. Of course, there is no reason why the judge who adopts sub-type C-3 should not state frankly in the difficult cases that he is basing his judgment on perceived common standards. 1977] Ottawa Law Review tionale the principle of freedom of contract tells us nothing about. That principle entreats the courts to impose as few restrictions as possible, but it does not explain the basis of any particular restriction. It is equally unhelp- ful in explaining those cases in which there is no real common intention. Indeed, in such cases the traditional theory obfuscates rather than illuminates. There is, however, one facet of judicial activity which might be explained by freedom of contract. The influence of that principle on judicial thinking would account for (i) judicial reluctance to admit that freedom is being restricted and (ii) judicial reluctance to recognize that the parties' bargain is not being enforced. In short, freedom of contract as a shibboleth would account for the covertness of the majority judgments in Schuler v. Wickman. As for the overtness of the rule against penalty clauses, one can only assume that that rule is so well-established that the judges need not resort to sub- terfuge. III. REMEDY RESTRICTION A. Damages The courts, as we have seen, refuse to enforce penalty clauses; and in Schuler v. Wickman ' the court refused to enforce an attempt to extend the right of repudiation. But, whereas the courts' approach to penalty clauses is overt and explicit, in the latter case it was covert and enveloped in the misleading language of freedom of contract. As we now begin to examine remedy-stipulations which restrict the rights of the innocent party, the lines of our enquiry are already fixed. In particular, we shall be alert to the twin possibilities of judicial covertness and the camouflage provided by the language of freedom of contract. Whereas a penalty clause, if enforced, would operate in favour of the victim of the breach, a clause prescribing a lesser remedy than the courts would allow operates to his detriment. The innocent party would be denied damages that he would otherwise be able to recover from the offending party. Such a clause might either set damages at an unnaturally low figure or might nullify them altogether, but for our immediate purposes the distinction is unimportant. 66 What matters is that the clause is restrictive. Despite the severity with which these limitation and exemption clauses operate, the courts have not felt able to openly challenge their legitimacy. Considering the uninhibited attack on penalty clauses, this judicial restraint is strange, a fact which has not escaped judicial notice. In Robophone Facilities, Ltd. v. Blank " Diplock L.J. (as he then was) said: "[The rule against penalty clauses] seems to be sui generis. The court has no general jurisdiction to re- form terms of a contract because it thinks them unduly onerous on one of 65 [1974] A.C. 235, [19731 2 All E.R. 39. 66 The distinction between nullification and limitation assumes importance once we distinguish between promises sanctioned by no remedy whatsoever, and promises sanctioned by some remedy, albeit limited in extent. 67 [1966] 3 All E.R. 128, [1966] 1 W.L.R. 1428 (C.A.). [Vol. 9:95 "Reinedy Stipulation" the parties--otherwise we should not be so hard put to find tortuous con- structions for exemption clauses, which are penalty clauses in reverse; we could simply refuse to enforce them." " Exemption clauses have in recent years virtually monopolized the atten- tion of those academics interested in contract law. This is perfectly under- standable in a turbulent period when judicial ingenuity has been stretched to the limit. It is beyond the scope of this article to relate the full history of the courts' struggle against exemption clauses, an event which, in any case, is excellently documented elsewhere. " However, when time has performed its winnowing tasks we shall be able to see in the fight against exemption clauses two central judicial strategies: first, the strategy of "tortuous con- structions", referred to by Diplock L.J., and second, a more bruising strategy by which exemption clauses are treated with as little respect as penalty clauses. Before turning to the case law, I must note that selecting cases for analysis is itself a serious preliminary problem. In this area of law, unlike the ones previously dealt with, there is a plethora of case material; this is a field of dynamic judicial activity. Upon what principles, then, are the cases to be selected? Our principal concern here is to describe the situation at present, not the events of the past or the developments of the future. The cases themselves assist this focus; the decision of the House of Lords in Suisse Atlantique o has taken the sting out of many of the earlier prece- dents. 71 We shall therefore concentrate on the post-Suisse Atlantique cases. 681d. at 142, [1966] 1 W.L.R. at 1446. 69 See, e.g., B. COOTE, EXCEPTION CLAUSES (1964). For succinct account of the doctrine of fundamental breach, see LAw COMMISSION, WORKING PAPER 39, Appendix D (1971). 70Suisse Atlantique Soci&6 d'Armement Maritime S.A. v. N.V. Rottcrdamschc Kolen Centrale, [1967] 1 A.C. 361, [1966] 2 All E.R. 61. 7 1 The central target here was Karsales (Harrow), Ltd. v. Wallis, [19561 2 All E.R. 866, [1956] 1 W.L.R. 936 (C.A.), where it was suggested that there was a rule of law, rather than a rule of construction, against wide exemption clauses. In Karsales. Lord Denning said: "[Exemption clauses] do not avail [the contracting party] when he is guilty of a breach which goes to the root of the contract." Id. at 868-69, [19561 1 W.L.R. at 940. Similarly, Parker L.J. said: "in my judgment, however extensive the exception clause may be, it has no application if there has been a breach of a funda- mental term." Id. at 871, [1956] 1 W.L.R. at 943. This idea was relied upon in a number of subsequent cases, spectacularly so in Charterhouse Credit Co. v. Tolly, [1963] 2 Q.B. 683, [1963] 2 All E.R. 432, [1963] 2 W.L.R. 1168 (C.A.), where Lord Donovan declared that he did "not find it necessary to determine the true construction of [the] clause" since "a fundamental breach of contract, that is, one which goes to its very root, disentitles the party in breach from relying on the provisions of an exempting clause . . .". Id. at 703-04, [1963] 2 All E.R. at 438. In Suisse Atlantique, their Lordships were at pains to repudiate the suggestion that any such rule of law existed. For instance, Viscount Dilhorne said: "In my view, it is not right to say that the law prohibits and nullfies a clause exempting or limiting liability for a fundamental breach or breach of a fundamental term. Such a rule of law would involve a restriction on freedom of contract .... ." Supra note 70 at 392. [1966] 2 All E.R. at 67. Similarly, Lord Reid felt that "no such rule of law ought to be adopted". Id. at 405, [1966] 2 All E.R. at 76. Although this effectively killed off the Karsales line of authority, the spirit of Karsales was not so easily buried. Thus, 1977] Ottawa Law Review It might be objected that such a narrow range of material cannot possibly do justice to the diversity of judicial ingenuity. But present in the post- Suisse A tlantique period, as in any other, are both the controlling strategies allowed to the judiciary by the logic of contract. For the courts must say about exemption clauses the same things they say about all other undesirable clauses-either "You cannot do this" or "You did not intend this". In the post-Suisse Atlantique period, Harbutt's "Plasticine" Ltd. v. Wayne Tank and Pump Co. " is most important. Accordingly, we shall start by examining this controversial decision of the Court of Appeal. The plaintiffs in Harbutt's manufactured plasticine at an old mill in Somerset. A waxy substance called stearine was used in the manufacturing process. Although the stearine was delivered to the factory in a liquid state, it was stored in large drums where it solidified. When the stearine was required for use it had to be melted, and then was carried in buckets to the mixing machines. The plaintiffs decided to streamline this father inefficient pro- cedure by keeping the stearine in a liquid form throughout. The defendants, specialists in this type of work, submitted to the plaintiffs the design for a system suitable for conveying the liquid stearine from the storage tanks to the mixing machines. In due course the plaintiffs engaged the defendants to install the system. Between the storage tanks and the mixing machines the stearine was to run along a heated pipeline. The defendants specified that this pipeline was to be made of a plastic material called durapipe; this was the defendants' first serious blunder. Durapipe distorts at 1870 F, and the liquid stearine running through the pipeline was to be maintained at 120 to 1600 F, leaving very little margin for safety. The defendants' second mistake was also linked to their specification of durapipe. The pipeline was to be heated by an electric heating tape wrapped around it, the temperature being controlled by a thermostat fitted on to the pipe. However, another feature of durapipe is its low thermal conductivity; thus the thermostat was useless. As Lord in Harbutt's "Plasticine" Ltd. v. Wayne Tank & Pump Co., [1970] 1 Q.B. 447, [1970] 1 All E.R. 225 (C.A. 1969), Lord Denning claimed that in his view the effect of Suisse Atlantique was to affirm "the long line of cases in [the Court of Appeal] that when one party has been guilty of a fundamental breach ... so that the contract comes to an end . . . then the guilty party cannot rely on an exception or limitation clause to escape from his liability for the breach". Id. at 467, [1970] 1 All E.R. at 235. Moreover, the proscriptive spirit of Karsales is evident in the Supply of Goods (Implied Terms) Act 1973, c. 13, for this Act renders void some attempts by sellers to contract out of implied statutory conditions: s. 4. To sum up, although the Karsales version of proscription is no longer in fashion, proscription itself is still very much alive. What, then of Suisse Atlantique? First, as we have indicated, its influence has not been decisive, for proscription is still clearly in evidence. Second, although Suisse Atlantique marks an important stand against proscription, and although it speaks the language of freedom of contract, it does not surrender all judicial control over ex- emption clauses. Granted, the construction approach advocated in Suisse Atlantique is a more subtle form of control than blunt proscription, but it is control none the less. In short, Suisse Atlantique is not as "liberal" as it seems. For further discussions, see infra note 88. r [19701 1 Q.B. 447, [1970] 1 All E.R. 225 (C.A. 1969). [Vol. 9:95 "Remedy Stipulation" mental. Applying the famous Hongkong Fir test, " the court found a breach with catastrophic consequences, an innocent party deprived of substantially the whole benefit of the contract, and an event which would have frustrated the contract had it occurred without the fault of either party. At the third stage, Lord Denning drew the distinction between "a fundamental breach which still leaves the contract open to be performed, and a fundamental breach which itself brings the contract to an end". " In the former case the innocent party can elect between repudiation (disaffirmation) and affirma- tion, but not in the latter-the contract is automatically at an end. In Harbutt's the mill was burnt to the ground. Clearly it was a case of the latter variety and thus the contract was at an end. Finally, the court held that in this situation, as indeed in the case of repudiation by election, the party in breach is disentitled from relying on an exemption clause. The core of the doctrine of fundamental breach was summarized by Lord Den- ning: "[Where the contract is at an end, either by election or automatically, the] innocent party is entitled to sue for damages for the breach, and the guilty party cannot rely on the exclusion or limitation clause: for the simple reason that he, by his own breach, has brought the contract to an end; with the result that he cannot rely on the clause to exempt or limit his liability for that breach." " Thus the defendants could not rely upon clause 15, and their appeal was unsuccessful. If we stand back from the "technicalities" of Harbutt's, we shall see the pattern of the courts' approach to exemption clauses. First there is the question of intention, and then there is the question of policy; the former relates to the construction of clause 15, the latter to its strength. Indeed, in Harbutt's we see in operation the two central controlling strategies to which we have already referred ("tortuous constructions" and open disre- gard). To be sure, policy towers over intention, but both are sufficiently dealt with in this case to warrant further attention. First the question of intention. We have already examined the judicial techniques available for dealing with the problems of intention. Broadly speaking, in both the difficult and the "hard" cases the judge has a choice: he can secure a reasonable result or he can attempt to honour the intentions of the parties. This choice will not necessarily be made overtly. Within this framework, what was the court's approach in Harbutt's? Unfortunately, it is not possible to answer this question directly. Either our framework is inadequate or the judgments in Harbutt's are elusive, probably both. Two factors contribute to make the judgments elusive. First, in none of them is the question of intention critical. Even Lord Denning, who found against the defendants on the construction of the clause, was "by no means confi- dent" of his interpretation and was "not prepared to base [his] judgment on 81 L.e., the test enunciated by Lord Diplock in Hongkong Fir Shipping Co. v. Kawasaki Kisen Kaisha Ltd., [1962) 2 Q.B. 26 at 66, [19621 2 All E.R. 476 at 485 (C.A. 1961). I" Supra note 72, at 464, 11970] 1 All E.R. at 233. 8Id. at 466, [1970] 1 All E.R. at 234. 19771 Ottawa Law Review it". , Secondly, none of the judgments give reasons as to why one inter- pretation is preferred to another. The emphasis tends to be on the linguis- tic possibilities rather than the parties' intentions. Perhaps the most explicit statement is made by Cross L.J.: "No doubt common form clauses of this sort introduced by suppliers to limit their liability ought to be construed strictly, but to my mind there is not any real doubt that what happened in this case fell within the clause." ' It is tempting to interpret this as a com- mitment to enforcing the parties' intention. Cross L.J. looks as though he might be sacrificing policy to intention; but is he really? One must consider that the construction of clause 15 was not critical for the decision actually reached, and, moreover, the result actually reached was as clear a manifesta- tion of policy as one could wish to see. When the crunch came, policy prevailed, and a "reasonable result" was obtained. Despite our lack of success in placing Harbutt's within our framework of judicial techniques, we can nevertheless learn something from the case. For instance, what does Cross L.J. mean when he says that "common form clauses . . . ought to be construed strictly"? Is this a statement about some statutory directive, a statement of personal values, or a statement about judicial practice? It is without doubt the latter. And what is the implica- tion of Lord Denning's statement that if clause 15 is ambiguous it cannot avail the defendants? "[The defendants] cannot, by a printed clause like this, exclude or limit their liability, unless the words are clear and unam- biguous." 86 This is to blur the question of intention with the desire to obtain reasonable results, a confusion which is most often provoked by the standard form contract and the exemption clause. Consider the classic "hard" case in contract. The unscrupulous vendor has sold something utterly defective to the unfortunate purchaser. The purchaser sues, but the vendor seeks refuge behind a wide exemption clause. Perhaps the clause is part of a long standard form contract which the purchaser, quite unwittingly, has signed. The courts' first reaction to such a case might well be favour- able to the vendor, but, after stomaching a heavy dose of similar cases, the judicial mood becomes defiant. The courts begin to seek a reasonable result; the judicial approach moves form Type C to Type D. Enter the strategy of "tortuous constructions". After a while, the proliferation of Type D produces a sinister progeny, the presumptions of intention. " The 84 Id. at 464, [1970] 1 All E.R. at 233. Id. at 474, [1970] 1 All E.R. at 241. 88 Id. at 464, [1970] 1 All E.R. at 233. 87 See text infra, section III B. This progression from Type C, through Type D, to the presumptions of intention turns upon the idea of reasonable results. It will be recalled that the feature of Type C is that it allows the parties to follow their own intentions. Once we move away from this guiding principle and in its place impose upon the contracting parties our own conception of reasonableness, then we are into Type D. Type D as depicted in Part One has two options, but we would suggest that a third option now can be identified. The third option is this: the judge effectuates the perceived real intention not because it accords with his sense of reasonableness, but because he cannot bring himself openly either to opt for a reasonable result or [Vol. 9:95 "Remedy Stipulation" beauty of the presumptions is that they severely limit the operation of exemp- tion clauses and give the judgment the appearance of being firmly grounded on intention. Thus the ostensible search for the real intention of the parties be- comes a charade; the rules of the search are heavily loaded against allow- ing an exemption clause and in favour of reaching a reasonable decision. Harbutt's is a timely reminder of the existence of the presumptions and tells us something vitally important about our framework of intention; namely, that judicial techniques are not static. Our framework rests upon the as- sumption that, at the outset, there is a genuine search for the parties' real intention. As soon as the presumptions of intention take control, this pre- mise is destroyed. To be sure, there is as ever talk of intention, but this is lip-service; the true goal is obtaining reasonable results, not finding inten- to rationalize the result, since in this latter case the rationalization involves doing too much violence to the language of the contract. Thus, the judge is worried here about the credibility of his judgment. As soon as we introduce the presumption that the parties intend their contract to be endowed with results which mirror the courts' ideas of reasonableness, we vitally assist credibility. Even so, notwithstanding the presump- tion, where the contract bears only one credible interpretation, the judge who uses Type D may.still find himself pushed back to the third option. In other words, al- though the presumption assists the credibility of Type D (second option), it may be unable to prevent the judge from digging himself into the hole represented by the third option. The trouble with Type D is that its origins lie in the quest for real intention. Once we change the framework of the dispute, once we put up a different backcloth, we can act out another drama altogether. Thus we scrap any idea of looking for real intention; instead, we emphasize from the beginning that the parties are presumed to intend that the contract shall bear reasonable results. This generates a series of sub-presumptions all aimed at excising anything tending towards an unreasonable result; the particular words used are played down, and the purpose of the type of contract is brought into the foreground. The ubiquity of the reasonable results presumption is highlighted by Lord Denning in Gillespie Bros. v. Roy Bowles Transp. Ltd., [1973] Q.B. 400, [1973] 1 All E.R. 193 (C.A.): "The judges have, then, time after time, sanctioned a departure from the ordinary meaning. They have done it under the guise of 'construing' the clause. They assume that the party cannot have intended anything so unreasonable. So they construe the clause 'strictly'. They cut down the ordinary meaning of the words and reduce them to reasonable proportions. They use all their skill and art to this end." Id. at 415,' [1973] 1 All E.R. at 200. m A final point of clarification: although we are concerned here with the use of the presumption as a means either of countering "hard" cases or of eliminating such cases altogether, the presumption has a further use in the "difficult" case. Here we are thinking of the case where the judge is unable to identify from among a number of possible interpretations of the contract the one representing the real intention of the parties. Therefore, in order to cut the knot, he tests the interpretations against a criterion of reasonable results. In Gillespie, Buckley L.J. talks in these terms: "It is not in my view the function of a court of construction to fashion a contract in such a way as to produce a result which the court considers that it would have been fair or reasonable for the parties to have intended. The court must attempt to discover what they did in fact intend. In choosing between two or more equally available inter- pretations of the language used, it is of course right that the court should consider which will be likely to produce the more reasonable result, for the parties are more likely to have intended this than a less reasonable result." Id. at 421, [1973] 1 All E.R. at 205. So, although Buckley L.J. is willing to countenance the use of the presumption in the difficult case, thereby securing-but only incidentally-a reasonable result, he disapproves of its use in order to eliminate the "hard" case. 1977] Ottawa Law Review the less effective. Where the contract is affirmed, the technique employed is that of "tortuous constructions". This technique can be the judge's escape route from the "hard" case, as in Type D, or it can be a way of turning attention away from the specific language of the contract and towards its typical objects and concomitant undertakings. In the latter case the tech- nique presumes that the parties intend their contract to bear reasonable results; in the former case that assumption may not be so obvious, but it is available to-strengthen the judgment. " We must now test the accuracy of these hypotheses drawn from Har- butt's and examine the rationale of this restriction of freedom of contract. We must ask: (1) is our analysis of Harbutt's generally applicable? and (2) what is it about exemption clauses that prompts the courts to assume con- trolling powers? But before scrutinizing any further cases, we should take note that our intense preoccupation with Harbutt's and with the doctrine of fundamental breach may put us in danger of losing our overall orientation. We are concerned with those remedy-stipulation clauses which purport to remove or to limit the innocent party's claim to damages for breach of con- tract. All breaches of contract sound in damages, but not all breaches are fundamental. Our discussion of exemption clauses has so far concentrated on cases of fundamental breach. This is only part of the picture; it may be the most interesting part and the part that we choose to concentrate upon, but it is not the whole. It will be recalled that in Harbutt's the second stage in the court's reasoning was classification of the breach as fundamental. Suppose they had not done so. What is the courts' attitude to exemption clauses when the breach is not fundamental? A thumbnail sketch must suffice, since our main concern is with fundamental breaches. The simple distinction between breach of warranty and breach of condi- tion is normally made without reference to the concept of fundamental breach. The explanation for this apparent omission is a mixture of conven- tion and convenience. The distinction identifies the remedies available to the innocent party and thus answers the primary question; the concept of fundamental breach comes later and answers the question whether the reme- dies-whatever they might be-could be defeated by an exemption clause. Now within this framework of warranties and conditions, when an exemption clause is set up against a breach the entire range of breaches, from trivial to severe, is liable to provoke, in one form or another, the strategy of "tor- tuous constructions". " Sometimes the defect in the exemption clause will "See supra note 87. "At this point the reader might enquire: "And what exactly do you mean by 'liable'?" We cannot provide a "scientific" answer, for we have chosen the word "liable" advisedly, not in order to gloss over a difficulty, but in order to indicate our uncertainty in the matter. If we conceive of the scale of "liability" as running from "absolutely no chance", through "possible", and then through "likely", until eventually we reach "absolutely certain", then we are thinking in terms of what is "likely". In other words, we could replace our statement in the text by the following: "Within the framework . . . it is suggested that . . . the entire range of breaches . . . is likely to provoke . . . the strategy of 'tortuous constructions'." [Vol. 9:95 "Remedy Stipulation" be obvious; an exemption of liability for breach of warranty will not avail against a breach of condition, and exemption of liability for breach of an implied term will not avail against a breach of an express term. " At other times the defect will be less glaring, but, whatever the level of the breach, the exemption clause will always have to overcome this strategy of "tortuous constructions". But when, in the view of the court, the breach is a breach of warranty only, the exemption clause will not be subjected to the doctrine of fundamental breach. It is, however, vulnerable to a more sophisticated threat, that of being held inoperative as being repugnant to the notion of a contractual promise. Devlin J. (as he then was) once said: "It is illusory to say: 'We promise to do a thing, but we are not liable if we do not do it.' If the matter rested there, there would be nothing in the contract." " A contractual promise is a promise sanctioned by a remedy. Now a court may identify the contractual promises without reference to any saving provi- sion. So, if a contractual promise is classified as a warranty, then any ex- plicit provision exempting a party from liability to pay damages is repugnant and of no effect. The logic of this strategy is strong, but if we construe the contract as a whole, rather than piece-meal, an entirely different conclusion results. An exemption clause can then be seen as a cancellation of the initial promise or as evidence of an intention to be bound in honour only. So, too, of conditions, where we are liable to encounter the concept of fundamental breach. That concept does not operate below the level of breach of condi- tion; but there it stands as a second obstacle-the first being the strategy of "tortuous constructions"-to the successful operation of the exemption clause. ' Let us apply these observations taken from the Harbutt's case to some later cases to see whether they confirm our proposition that where there has been a breach of conditiofi, an exemption clause is likely to be met either by the strategy of "tortuous construction" or the doctrine of fundamental breach. "' Two cases worthy of our attention are Farnworth Finance Facili- ties Ltd. v. Attryde , and Hollier v. Rambler Motors A.M.C. Ltd. " Both decigions, like Harbutt's, come from the Court of Appeal, a fact which may 'See the classic cases of Wallis, Son & Wells v. Pratt, (1911] A.C. 394, [1911] L.J.K.B. 1058, and Andrews Bros. (Bournemouth) v. Singer & Co., [1934] 1 K.B. 17, [1933] All E.R. Rep. 479 (C.A.). "Firestone Tyre & Rubber Co. v. Vokins and Co., [19511 1 LL. Rep. 32, at 39 (K.B. 1950). The notion of repugnancy suffers from considerable ambiguity. Re- pugnancy could refer to: (1) conceptual repugnancy, i.e., a contractual promise un- supported by a remedy; (2) inconsistency between two substantive provisions of a contract; (3) inconsistency between an oral undertaking and a written standard form; (4) the Harbutt's doctrine; and (5) conflict between the construed main purpose of a contract and an exemption clause. On (2) and (3) see J. Evans and Son (Ports- mouth) Ltd. v. Andrea Merzario Ltd., [1976] 2 All E.R. 930 (C.A. 1975). On (1) and (5) see Vokins. "See supra note 92. Here again we are thinking in terms of what is "likely". "See supra notes 92 and 95. 97 [1970] 2 All E.R. 774, [1970] 1 W.L.R. 1053 (C.A.). 98 [1972] 2 Q.B. 71, [1972] 1 All E.R. 399 (C.A. 1971). 19773 Ottawa Law Review narrow their significance somewhat. Farnworth Finance Facilities Ltd. v. Attryde was a case in which the court had "to apply the principles about fundamental breach, which were recently considered.. . in Harbutts ... ". "' The facts in Farnworth were not as dramatic as in Harbutt's-Fenton At- kinson L.J. said that the case came "very near the line [i.e., between funda- mental and non-fundamental breach situations]" "'--and yet they were typical of the sort of facts that give rise to the doctrine of fundamental breach. Mr. Attryde wished to purchase a new motorcycle. He approached some dealers, King's Motors (Oxford) Ltd., who supplied him with a machine on hire-purchase terms. The plaintiffs were the finance company involved in the transaction. After taking delivery of the motorcycle, Mr. Attryde found a number of faults in the machine and so took the motorcycle back to the dealers, who were unable to fix it. Mr. Attryde then twice returned the machine to the manufacturers, who were able to fix some but not all of the faults. All this took three months, after which Mr. Attryde used the motor- cycle for about five weeks, recording some four thousand miles. This period was brought to an end when the rear chain broke and knocked a hole in the crank case. At this juncture, the defendant, having had enough of the af- fair, wrote to the plaintiffs saying that he was not prepared to make further efforts to get the machine repaired, that he would not continue to pay hire charges for a machine which from the outset had been a "troublesome burden", and that the plaintiffs should repossess the motorcycle. The plaintiffs, who were in receipt of Mr. Attryde's deposit plus four instalments, repossessed the machine and sold it, claiming damages for breach of the hire-purchase agreement. Mr. Attryde counterclaimed for the amount of his own loss. The plaintiffs then joined the dealers as second defendants, asserting that if they (the plaintiffs) were in breach to Attryde they could claim an indemnity from the dealers. At first instance, it was held that the plaintiffs, having supplied a motorcycle which was "disgusting for a new machine", had no claim against Mr. Attryde. Moreover, Mr. Attryde had a perfectly good counterclaim against the plaintiffs, although in respect of this counterclaim the court agreed with the plaintiffs that they were entitled to be indemnified by the dealers. Wishing to escape from the burden of the indemnity, the dealers appealed, on the basis that the plaintiffs were wrongly held liable to Mr. Attryde. This central question of the plain- tiffs' liability to Mr. Attryde hinged upon the plaintiffs' attempt to hide be- hind an exemption clause. The trial judge found that the machine was not roadworthy at the time of purchase and that the totality of defects constituted a fundamental breach. With the scent of fundamental breach in the air, the Court of Appeal set off on the trail blazed by Harbutt's. But first, they asked, were the plaintiffs in breach of contract? Lord Denning said that though there were no express terms concerning the condition of the machine, the contract was nevertheless " Supra note 97, at 777, [1970] 1 W.L.R. at 1058. 'Id. at 779, [1970] 1 W.L.R. at 1060. [Vol. 9:95 "Remedy Stipulation" odd; it makes sense only as part of a campaign against exemption clauses. But any strategy which has the effect of treating an implied term as more important than an express provision turns the contract world on its head and must be viewed with suspicion. The second illustration of this "Alice in Wonderland" approach comes from the judgment of Fenton Atkinson L.J.: "We heard interesting argu- ments on the true construction of cl. 4 and 5 of the exception provisions of the hire-purchase agreement; but in the result those difficulties in my view do not have to be resolved." os The "result" referred to is the finding that there had been a fundamental breach of contract by the plaintiffs. This finding effectively sounds the death-knell for the exemption clause. If we swallow the approach found in Harbutt's, Fenton Atkinson L.J.'s dictum might seem unexceptionable, but, simply to consider it according to the principles of contract law, it is heresy. We could rephrase the dictum thus: "The true construction of the relevant express provisions of the contract is difficult, and we have heard some interesting arguments on these points. However, ignoring these provisions, it is clear that the contract has been broken. That being so, we need no longer ask ourselves what the parties really intended." Farnworth is a straight application of Harbutt's, and, moreover, con- forms to our analysis in Harbutt's of the proscriptive doctrine of funda- mental breach. The exemption clauses are sidelined at the first opportunity and then eliminated altogether. Indeed, so strong is the proscriptive atmos- phere that the strategy of "tortuous constructions" is not even required. It would have made little difference even had the court decided that Mr. Attryde had affirmed the contract, for, though the strategy of "tortuous constructions" would then have been applied, Lord Denning said that "even if the first defendant had affirmed the contract . . . [the] exception clauses would not protect the plaintiffs". '0' The second case for consideration is Hollier v. Rambler Motors (A.M.C.) Ltd. "' Like Harbutt's, Hollier arose out of a catastrophic fire. The plai-itiff's car was in need of repairs. The defendants agreed to effect the repairs, such agreement being formed during the course of a telephone conversation between the parties. While the car was at the defendants' garage, a fire occurred which caused substantial damage to the car. The plaintiff sued the defendants, claiming that the fire and the ensuing damage were caused by the defendants' negligence. The defendants replied by asserting (1) that they had not been negligent, and (2) that even if they had been negligent, they were protected by an exclusion clause. At the trial the judge found clear proof of the defendants' negligence; seemingly the "electric wiring of their premises was faulty in design and was not properly inspected or maintained". ... However, the judge then held that the de- 108 Supra note 97, at 779, [1970] 1 W.L.R. at 1060. 101 Id. at 778, [1970] 1 W.L.R. at 1059. "0 Supra note 98. .. Cited by Salmon L.J., id. at 75, [1972] 1 All E.R. at 401. 1977] Ottawa Law Review fendants were indeed protected by their exclusion clause. This conclusion entailed holding (1) that the clause in question had been incorporated into the contract and (2) that the clause carried the meaning given it in argument by the defendants. The plaintiff's appeal, which turned upon the judge's findings on these points, was successful. The Court of Appeal lost no time in eliminating the exemption clause by holding that it had not been incorporated into the contract. There is no more effective method for controlling exemption clauses, but the facts have to permit such an approach. 11, The contract between the parties was made over the telephone; the exemption clause was contained in an "invoice" form normally signed by the customer; on the occasion in question, the plaintiff did not sign the form, but on at least two of the three or four occasions in the past when the defendants had carried out work for the plaintiff, the form had been signed; these previous dealings between the parties spanned a period of five years. On the strength of these sparse and perhaps inconsistent previous dealings the defendants con- tended that the exemption clause was incorporated into the oral contract. Such a contention flew in the face of a strong line of authority and the court "without any hesitation" rejected it. 113 Despite having this solid ground for their decision, the court went on to consider the true construction of the ex- emption clause, and the bulk of the judgments are given over to this issue. Thus, although it might be objected that this part of the decision is simply obiter, the thoroughness of the judicial treatment requires our attention. We are of course interested in the question of construction. The ques- tion of incorporation may well be an interesting product of the tension be- tween freedom of contract and exemption clauses, but it is beyond the present enquiry, which is concerned with the judicial response to those remedy- stipulations which are in fact accepted as terms. In Hollier the exemption clause read: "The company is not responsible for damage caused by fire to customer's cars on the premises. Customer's cars are driven by staff at owners' risk." What did this terse provision mean? The gist of the court's remarkable answer is conveyed in the statement of Salmon L.J. (as he then was) that "the words of the condition would be understood as being meant to be a warning to the customer that if a fire does occur at the garage which damages the car, and it is not caused by negligence of the garage owner, then the garage owner is not responsible for damage". 114 But what liability would the garage owner have if he was not negligent? None. This is a 112 The Court of Appeal used the "not incorporated" strategy to great effect in Thornton v. Shoe Lane Parking Ltd., [1971] 2 Q.B. 163, [1971] 1 All E.R. 686, (1970). "' Supra note 98, at 78, [1972] 1 All E.R. at 404. The "strong line of au- thority" was McCutcheon v. David MacBrayne, Ltd., [1964] 1 All E.R. 430, [1964] 1 W.L.R. 125, and Hardwick Game Farm v. Suffolk Agricultural Poultry Producers Ass'n, [1969] 2 A.C. 31, [1968] 2 All E.R. 444-a short line, no doubt, but nevertheless a strong one. 114 Strangely enough, although this statement is to be found at [1972] 1 All E.R. at 406 (emphasis added), it does not appear in [1972] 2 Q.B. 71 or [1972] 2 W.L.R. 401. [Vol. 9:95 "Remiedy Stipulation" very benevolent exemption clause. Not only does it nullify liability in a situation where no liability exists; it also serves the purpose of instructing the intelligent lay customer in the nature of a bailee's liability. "' Such a construction defies belief and suggests that the strategy of "tortuous con- structions" is at work. Lord Justice Salmon delivers the most comprehensive judgment on this point. He starts by saying that it is "well settled" that a clause purporting to exclude liability for negligence "should make its meaning plain on its face to any ordinarily literate and sensible person". ... This principle does not require an express exclusion of negligence. "but in order for the clause to be effective the language should be so plain that it clearly bears that meaning". Certainly we are driven towards this meaning where negligence is the only head of liability relevant to the party who pleads the exemption clause, but unless there is an express reference to negligence, we are free to construe the clause in other ways. Thus, while it is easier to give effect to the exemption clause where negligence is the sole head of liability, we have to remember that "in every case it comes down to a question of construing the alleged exemption clause". ... This cautious beginning testifies to the power of the presumptions against exclusion clauses. Instead of asking "What was the common intention or understanding behind this clause?" the court announces that the party pleading the clause is going to have to over- come a number of obstacles to its enforcement. For Salmon L.J. the justifi- cation for so loading the dice against the exemption clause is that "defendants should [not] be allowed to shelter behind language which might lull the customer into a false sense of security by letting him think-unless perhaps he happens to be a lawyer-that he would have redress against the man with whom he was dealing for any damage which he, the customqr, might suffer by the negligence of that person". " Here we see the familiar bias in favour of the consumer which has been so prominent in this area; together with the general presumption against exemption clauses and the willingness to construe such clauses, it makes Salmon L.J.'s remarks ominous to the advocate of freedom of contract. The foreboding grows when Salmon L.J. turns to the leading cases dealing with clauses that purport to exclude liability for negligence. In Rutter v. Palmer, ,2. the exemption clause did not specifically refer to negli- gence; it said that customers' cars were driven "at customers' sole risk". According to Salmon such a provision effectively excludes liability for neg- " 5 In Rutter v. Palmer, [1922] 2 K.B. 87 (C.A.). Bankes L.J. noted such a consequence: "If [the stipulation] is not introduced for the purpose of protecting the garage proprietor from the negligent acts of his driver, it is hard to see what effect it has beyond being a mere statement of the general law." Id. at 91. 116 Supra note 98, at 78, [1972] 1 All E.R. at 404. 217 d., [1972] 1 All E.R. at 404. 118 Id. at 79, [1972] 1 All E.R. at 405. 119 Id. at 78, [1972] 1 All E.R. at 404. 12oSupra note 115. 19773 Ottawa Law Review other will make it applicable where there is negligence by the defendant, it requires special words or special circumstances to make the clause exclude liability in case of negligence". 132 The other is the novel idea that "where the words relied upon by the defendant are susceptible either to a construc- tion under which they become a statement of fact in the nature of a warning or to a construction which will exempt the defendant from liability for negli- gence, the former construction is to be preferred". "' The principles point to only one construction, namely, treatment of the clause as a statement of fact, a warning. This approach is far more straightforward than Salmon L.J.'s; it dispenses with the need to explain the pressing cases since these can be seen as being concerned with clauses excluding liability and therefore as irrelevant in construing a clause that simply issues a warning. Finally, Latey J.'s judgment is simply a miniature of Salmon L.J.'s. Latey J. con- cludes that the clause does not exclude liability for negligence since the intelligent layman would not realize that that was its purport; plainer words would be required to accomplish this. It is submitted, then, that wherever a remedy-stipulation clause purports to restrict the claim for damages, it will at the very least encounter the strategy of "tortuous constructions". This will not usually occur by way of a search for the real intention of the parties, but rather their presumed intention. Freedom of contract is out of the picture, not because it would be difficult to determine the real intention of the parties (though it might be), but simply because the courts' real concern is in arriving at a reasonable result. There are both "difficult" and "hard" cases, and exemption clauses often give rise to the paradigmatic "hard" cases. After leaping through the hoop provided by the strategy of "tortuous constructions", exemption clauses must also, if there has been a breach of condition, face the doctrine of funda- mental breach. ' This doctrine operates in the same way as the ban on 132 Id., [1972] 1 All E.R. at 408 (emphasis added). 133 Id., [1972] 1 All E.R. at 408. 134 See supra notes 92 and 95. Although we argue that Suisse Atlantique has failed to stem the proscriptive tide, there is no doubt that one of the reasons we arc reluctant to set up fundamental breach as anything more than a "likely" hurdle is our awareness of Suisse Atantique lurking in the background. Indeed, on some occasions it springs into the foreground. Thus, in Kenyon, Son & Craven Ltd. v. Baxter Hoare & Co., [19711 2 All E.R. 708, [1971] 1 W.L.R. 519, the decision rested upon Suisse At- lantique. Briefly, in Kenyon the plaintiffs were suing the defendant warehousemen for damage caused to their groundnuts during the period of warehousing. Donaldson J. held that the defendants had "failed to use reasonable skill and care in and about the custody and preservation of the nuts" (id. at 716, [1971] 1 W.L.R. at 529) and that the defendants' carelessness "was the carelessness of the fatalist and the defeatist ... but it was not a reckless carelessness" (id. at 717, [1971] 1 W.L.R. at 529). The defence was that the defendants were protected by one of the conditions of the con- tract, such condition excluding liability for loss or damage to goods in the defendants' custody or control "unless such loss or damage [was] due to the wilful neglect or default" of the defendants. The main authority for the defence was Suisse Atlantique. Against this, the plaintiffs, relying on Harbutt's and Farnworth, argued that the de- fendants were in fundamental breach with the result that the exemption clause was of no avail to the defendants. Donaldson J. found for the defendants, by revitalizing Suisse Atlantique. He argued thus: (1) the defendants were not guilty of wilful [Vol. 9:95 "Remedy Stipulation" penalty clauses, though less overtly. Once the court characterizes a clause as belonging to the general category of penalties or exclusions, it no longer matters what the parties intended; the clause will not be enforced. Harbutt's and Farnworth exemplify this proscriptive strategy, Hollier the strategy of "tortuous constructions". What is the rationale for the judicial dislike of exemption clauses? If we abstract the exemption clause from its commercial setting, it appears as a harmless device for allocating the various contractual risks. But once we return to the real world, we see that it is commonly used as a protective device in standard form contracts. The protection it affords, moreover, always serves the interest of the stronger party, the contract being in no real sense the outcome of bilateral negotiation. The courts might originally have refused to enforce exemption clauses on the particular merits of in- dividual cases, but at some stage general rules militating against their en- forcement were developed. Paternalism might well have been the driving force behind this development; the courts may have felt that the unsuspecting consumer simply did not know what was good for him when faced with the guile of sharp dealers. But we cannot eliminate the possibility that the courts saw themselves as doing something more than affording the consumer paternalistic relief from a burdensome transaction. Perhaps the courts felt that suppressing the exemption clause would go some way towards discour- aging the arguably harmful practice of supplying shoddy goods and services, and so protect the public at large. " What really matters is that we should be able to identify the extent of the courts' encroachment on freedom of contract, whatever the rationale behind it. What are the courts' criteria for enforcing or failing to enforce exemption clauses? The court usually asks itself a number of questions. Was a standard form contract being used? Was the innocent party a consumer and the guilty party a dealer? Was there an inequality of bargaining power between the parties? Finally, in deference to Harbutt's, was the effect of the exemption clause to afford protection against a very large claim? Judicial support for this sort of in- ventory can be found in Lord Reid's judgment in Suisse Atlantique: Exemption clauses differ greatly in many respects. Probably the most objectionable are found in the complex standard conditions which are now neglect; (2) the applicability of exemption clauses is a matter of construction unless there is a total deviation from the contemplated contractual performance; (3) the defendants were not guilty of such a total deviation; (4) the applicability of the condition turned therefore on its construction; and (5) the clause on its true construc- tion protected the defendants. The second stage of the argument was built on Lord Wilberforce's judgment in Suisse Atlantique. and against this framework both Harbuttrs and Farniworth were explained as cases of total deviation. Finally, Donaldson J. expressed some doubts about the correctness of Lord Denning's view in Farnworth that "in deciding whether a contract is broken in a fundamental respect one ignores the exception clauses" (id. at 720, [1971] 1 W.L.R. at 532); the judge felt that his statement was obiter and "inconsistent with Suisse Atlantique" (id., 11971] 1 W.L.R. 532). " Arguably" because we are unsure about the economic arguments that sur- round this issue. 19773 Ottawa Law Review so common. In the ordinary way the customer has no time to read them, and if he did read them he would probably not understand them. And if he did understand or object to any of them, he would generally be told he could take it or leave it. And if he then went to another supplier the result would be the same. Freedom to contract must surely imply some choice or room for bargaining. At the other extreme is the case where parties are bargaining on terms of equality and a stringent exemption clause is accepted for a quid pro quo or other good reason. 136 What role does statute law play in this area? In Suisse A tlantique Lord Reid suggested that the problem of exemption clauses was extremely com- plex and that its solution "should be left to Parliament". "" He thought that there was a need "for urgent legislative action", such action not being "beyond reasonable expectation". ' This forecast was well-founded, for in 1973 the Supply of Goods (Implied Terms) Act was enacted. The Act amounts to a vindication of the longstanding judicial campaign against ex- emption clauses. Section 4 of the Act replaces section 55 of the Sale of Goods Act 1893; 140 it limits the power of the seller of goods to contract out of his statutorily implied obligations. Any attempt to contract out of the implied undertakings as to title is void. 141 Of greater interest to us, however, is the restriction placed on the seller's power to contract out of the implied undertakings as to quality and fitness. Here the restriction operates at two levels. In the case of a "consumer sale" any attempt to contract out is void; " in all other cases the exemption will "not be enforceable to the extent that it is shown that it would not be fair or reasonable to allow reliance on the term". ' How is the court to determine whether it is fair and reason- able to allow reliance? The Act provides that "regard shall be had to all the circumstances of the case", '" but the court is referred in particular to the following matters: 14 the relative bargaining strength of the parties, "I Supra note 70, at 406, [1966] 2 All E.R. at 76. Similarly, see Donaldson J. in Kenyon, Son & Craven Ltd. v. Baxter Hoare & Co., supra note 134: "If [the ex- emption clause] occurred in a printed form of contract between parties of unequal bargaining power, it would be socially most undesirable .... ' Id. at 720, [1971] 1 W.L.R. at 533. The idea of relative bargaining strength was explicitly adopted in British Crane Hire Corp. v. Ipswich Plant Hire Ltd., [1974] 1 All E.R. 1059, [1974] 2 W.L.R. 856 (C.A. 1973). Lord Denning said: "The plaintiff [in Holier] was not of equal bargaining power with the garage company which repaired the car. The condi- tions were not incorporated. But here the parties were both in the trade and were of equal bargaining power." Id. at 1061-62, [1974] 2 W.L.R. at 861. "I Supra note 70, at 406, [1966] 2 All E.R. at 76. See also Kenyon, Son & Craven Ltd. v. Baxter Hoare & Co., supra note 134, at 720, [1971] 1 W.L.R. at 533. "I' Supra note 70, at 406, [1966] 2 All E.R. at 76. 139 C. 13. 140 56 & 57 Vict., c. 71. ""See the new s. 55(3) (as set out in the Supply of Goods (Implied Terms) Act 1973, c. 13, s. 4). " See the new s. 55(4). "See the new s. 55(4). 14See the new s. 55(5). 11 See the new s. 55(5). [Vol. 9:95 "Remedy Stipulation" be excluded?" Yet Harbutt's is a case where the point is so obvious that we may miss it altogether, since the entire analysis proceeds upon the assump- tion that the right to repudiate is inviolable. Indeed the right to repudiate, far from being at the mercy of the exemption clause, does itself determine the fate of the exemption clause. For, if the situation falls in Lord Den- ning's first group, the innocent party has the usual election-"either to affirm the contract or to disaffirm it" '"-while if the situation falls in the second group, the contract is automatically repudiated; and repudiation, whether by election or automatically, spells the doom of the exemption clause. So the only option denied to the innocent party is affirmation, and then only if the situation falls in the second group. "' This limitation, moreover, is not the work of the exemption clause. The effect of Harbutt's, then, is to settle the questions of breach and repudiation without the assistance or hindrance of the exemption clause, the relevance of which is reduced to the question of damages, and only there when the innocent party, having the election to affirm or disaffirm, has elected to affirm. The next question is, does every "repudiation situation" attract the approach taken in Harbutt's? Though the Suisse A tlantique decision was treated as being mainly of historical interest, that decision nevertheless colour- ed our discussion of Harbutt's; rather than assert that Harbutt's would always be followed, we more cautiously submitted that it seemed to be the critical trend. "" Harbutt's may be the key decision, but, having assumed the in- violability. of the right to repudiate, it does not squarely face the question of whether the right to repudiate may be excluded. We thus feel justified in resurrecting Lord Wilberforce's judgment in Suisse A tlantique. The judg- ment is extremely sensitive to the problems raised by exemption clauses, and it seems to us to provide an illuminating contrast to the inflexible approach taken in Harbutt's. In Suisse Atlantique Lord Wilberforce says that the expression "funda- mental breach" is used "to denote two quite different things, namely, (i) a performance totally different from that which the contract contemplates, (ii) a breach of contract more serious than one which would entitle the other party merely to damages and which (at least) would entitle him to refuse performance or further performance under the contract". '"' This is poten- tially confusing; the first meaning concerns the applicability of the exemption clause, whereas the second meaning identifies a situation in which the inno- cent party enjoys the right to repudiate. To say that a breach is funda- mental could mean either (1) that the exclusion clause cannot be relied upon, or (2) that the innocent party has the right to repudiate if he so elects. The real danger in the ambiguity, however, is not so much that there might be a 1-5 Id. at 464, [1970] 1 All E.R. at 233. 156So far as the innocent party is concerned, this must seem like a small price to pay for the guaranteed right of repudiation, plus. in the event of repudiation, a guaranteed right to damages. "'5 See supra note 134. 158Supra note 70, at 431, [1966] 2 All E.R. at 91. 1977] Ottawa Law Review problem in communication, but that we might, quite mistakenly, believe that there is a necessary coincidence between the two senses of the term. Lord Wilberforce is at pains to disabuse us of any such view: For, though it may be true generally, if the contract contains a wide excep- tions clause, that a breach sufficiently serious to take the case outside that clause, will also give the other party the right to refuse further performance, it is not the case, necessarily, that a breach of the latter character has the former consequence. An act which, apart from the exceptions clause, might be a breach sufficiently serious to justify refusal of further per- formance, may be reduced in effect, or made not a breach at all, by the terms of the clause. 159 Since the exemption clause now participates in the construction of the contract, the doctrine of fundamental breach is prevented from applying to all breaches of condition. According to Lord Wilberforce we must distinguish the operation of two types of exemption clause: the type which renders the supposed breach of condition "not a breach at all" and the type which causes the breach to be "reduced in effect". Since under the former type of exemp- tion clause there is no obligation and thus no breach, that type cannot assist us in answering the question, "Can the right to repudiate be excluded?" If there is no breach, then clearly there can be no question of repudiation. It is the latter type of exemption clause that interests us. Lord Wilberforce's suggestion that the breach may be "reduced in effect" hints at the possibility of totally excluding the right to repudiate. But the hint is a gentle one and must be squared with his Lordship's later statement that contracting parties do not intend the exclusion clause to have so wide an ambit as in effect to deprive one party's stipulations of all contractual force: to do so would be to reduce the contract to a mere declaration of intent. To this extent it may be correct to say that there is a rule of law against the application of an exceptions clause to a particular type of breach. But short of this it must be a question of contractual in- tention whether a particular breach is covered or not . . . . It is suggested with some trepidation that Lord Wilberforce's dicta are reconcilable under the proposition that the right to repudiate may not be excluded by a blanket exemption clause. However, it may be possible for a blanket exemption clause to effectively stop the other party from repudiating (this is not as contradictory as it sounds), ' and for a weaker exclusion clause to leave open the innocent party's claim to damages while removing his right to repudiate. The problem raised by Lord Wilberforce's dicta is that of the relationship between blanket exemption clauses and the concept of the contractual promise. The problem will have to be re-examined, for it leads us to our second type of restrictive remedy-stipulation, the downgrading of a condition to a warranty. :59 Id., [1966] 2 All E.R. at 92 (emphasis added). 6O Id. at 432, [1966] 2 All E.R. at 92. 161 See text infra between notes 170 and 171. [Vol. 9:95 "Remedy Stipulation" Lord Wilberforce's dicta may be paraphrased and extrapolated as follows: (1) An exemption clause may be so specific as to define the obliga- tion(s) of one of the contracting parties. Thus, the exemption clause will assist in determining what sort of performance is contemplated under the contract and in deciding whether or not there has been a breach. For example, a term in a contract for the sale of a "car" might provide that the vendor gives no undertaking as to the roadworthiness of the "car". '" Rather than view this as a wicked exemption, Lord Wilberforce would ask us to view it as part of the process of rendering more explicit the vendor's obliga- tion(s). Of course, such an approach makes a lot of sense where the sale is between a vendor and a scrap dealer who pays a nominal sum for the "car", or where the "car" is sold in the ordinary way but at a fraction of the prevailing market price. But the difficulty arises when normal market price is paid; the approach would then require us, against our better instincts, to hold that the purchaser paid the price of a roadworthy "car" and still took the risk that the "car" was not roadworthy. Naturally there is no difficulty if we treat the purchaser as a fool who merits the raw deal that he has struck. (2) Although a specific exemption clause can identify the sort of performance contemplated under the contract, it cannot afford any protection in respect of conduct that is a deviation from that contemplated performance. This is a truism; the clause could only afford such protection if it were wrongly interpreted in formulating the performance contemplated by the parties. Thus, in our earlier example, the term denying any undertaking as to the roadworthiness of the "car" would be no protection for the vendor should he deliver a sack of potatoes. Suppose the term provided that the vendor should not be liable, if, instead of delivering a "car", he delivered a sack of potatoes? This would take us back to the question of the contem- plated contractual performance. (3) Although a specific exemption clause can assist the determination of what has been promised under the contract, the clause must nevertheless leave intact some sort of legal promise (that is, a promise sanctioned by a remedy), for contracts are concerned with secured promises. A blanket exemption clause would therefore not avail our "car" vendor, for such a clause would reduce a supposedly contractual agreement to a "gentleman's agreement". " (4) If the exemption clause merely narrows the range of remedies available to the innocent party and does not eliminate them altogether, then it does not violate the idea of a contractual promise and can be supported. 16 The term "car" is tendentious, and so we arc assuming that, by giving no undertaking as to roadworthiness, the vendor is not involving himself in a crude self- contradiction. "I We are assuming that the blanket exemption clause denies all liability for any breach of any (or all) of the contractual obligations. 1977] Ottawa Law Review no longer be said to confer no right to repudiate for a breach of it, because the breach may be so fundamental as to give that right." "' This looks like a reference to Harbutt's, which would, of course, be a serious setback for the validity of such a stipulation. Under the approach taken in Harbutt's the stipulation becomes irrelevant. The court would note the label "war- ranty only" or "liability for breach of this term limited to damages only" and would put the stipulation to one side as being an exemption clause. Next it would determine whether there had been a breach, and, if so, whether the breach was fundamental: if there had been a fundamental breach, the right to repudiate would be available, and the exemption would have absolutely no effect. It could have effect only if it purported to limit the quantum of damages, and if the innocent pqrty elected to sue for damages. Finally, even if the innocent party should affirm the contract, the exemption clause would on its own terms be of no comfort to the offending party. In all this, the only hope for the stipulation would be if the court should decide that the breach was not fundamental. However, were this to happen, the stipulation would probably be redundant anyway, because it might well be a situation in which the court felt that the breach was not sufficiently serious to justify repudiation. Given the facts in Har- butt's, that decision would be an obstacle in the path of any stipulation seeking to downgrade a condition to a warranty. I"' On the other hand Lord Wilberforce's judgment in Suisse A tlantique offers support for such downgrading stipulations. The idea that the breach "may be reduced in effect" ,' points strongly to this conclusion but also raises a doubt whether the suggested freedom to downgrade extends to contracts where the provision in question bears on the contract's one and only condi- tion or on all of its several conditions. Suppose a contract contains three conditions, one of which is stipulated to be a mere warranty. In this con- text the stipulation does not so much point to the performance contemplated by the parties as to the relative importance of the obligations. One assumes that Lord Wilberforce would find nothing objectionable in such a stipulation. However, if there was one condition only, could this one and only condition be successfully stipulated to be a warranty? If so, then for no breach of this particular contract would the innocent party be able to repudiate, a circumstance that might lead the court to adopt another version of the re- pugnancy idea and quash the stipulation. Under this idea the court would reject the stipulation as being antithetical to the admittedly main purpose of the contract; once that purpose has been identified, a determination in which exemption clauses can of course assist, then it must be treated as a condition and enforced. But despite this limitation, Lord Wilberforce's tol- erance of such downgrading stipulations stands in sharp contrast to the 174 [1972] 2 All E.R. 1173, at 1189, [1972] 1 W.LR. 840, at 860 (C.A. 1972). 175 Sed quaere: in Harbutt's, how significant within the downgrading context was the fact that there was a ceiling on the damages recoverable? 1 76 Supra note 70, at 431, [1966] 2 All E.R. at 92, [1966] 2 W.L.R. at 987. [Vol. 9:95 "Remedy Stipulation" proscriptive approach. There is no obvious ground upon which to base a rapprochement between the two approaches, and it is difficult to know which will prevail. The present trend is very much against the possibility of down- grading, and in Harbutt's there is a clear precedent for rejecting such a stipulation. But the law moves in cycles, and because this sort of stipulation is not typical of those used against consumers, the courts may yet take a more sophisticated approach towards exemption clauses, one in which Lord Wilberforce's judgment will provide important guidance. In any event, this protective storm may have blown itself out with the advent of Parliamentary intervention. We should now consider the developing shape of this area of remedy- stipulation. Blanket exemption clauses may be. following Harbutt's, quashed before any question about the legitimacy of excluding the right to repudiate can be asked. This technique, as was mentioned, is not completely overt, but it is a very open form of covertness. By contrast, the Suisse Atlantique approach towards blanket exemption clauses produces a maze of possibilities, and it too, no less than the proscriptive approach, threatens freedom of contract. This threat takes two forms. First, there is Lord Wilberforce's statement that exemption clauses are not to be given so wide an ambit as "to reduce the contract to a mere declaration of intent". "" It would be a serious setback to freedom of contract if the courts should mechanically apply the repugnancy formula in cases where the exemption clause does not purport to cover all the contractual obligations. "' This would not only subordinate contractual intention to a rigid conceptual framework, it would bode ill for another supposed sanctuary of contractual freedom, namely, the freedom to agree either as a matter of law or simply as a matter of honour. The second way in which freedom of contract is threatened-under the non-proscriptive approach-is more familiar and more important. It con- cerns once again the presumptions of intention. Unlike the approach taken in Harbutt's, the "liberal" approach of Suisse Atlantique allows the exemp- tion clause a role in identifying the contemplated contractual performance. This is, however, not quite so liberal as it seems, for the presumptions of intention also participate in this process of identification, and they operate so as to minimize the effectiveness of the exemption clauses. '" A neat trap 17 7 Id. at 432, [1966] 2 All E.R. at 92, 119661 2 W.L.R. at 987. ,71 Quaere: which choice would Lord Wilberforce opt for? Possibly not the repugnancy option, for he might take the view that the exceptions clause here entailed that the act was "not a breach at all". Another quaere: what would happen if the obligations left untouched were simply warranties? Would we then run up against the idea that somewhere in the contract there must be a condition? '7' First, they will lean on the exemption clauses so as to ensure that, on their own terms, they are given the minimum application. Secondly, if the court comes to the exemption clauses with a statement of the contemplated contractual performance, that is, with a statement of the "main purpose" or "four corners" of the contract, then the appropriate "main purpose" and/or "four corners" presumptions will push the exemption clauses out to the fringe of the dispute; see infra note 182. Seen in this light, there is little to choose between Harbutt's, which says that the question of breach is determined independently of the exemption clauses, and 1977] Ottawa Law Review is laid here; if the clause is very general, it is unlikely to strike at the ob- viously important contractual obligations; whereas if it is very specific, it risks being quashed under the repugnancy formula. Even Lord Wilber- force's position is open to question in this respect. In Suisse Atlantique he said that if a contract provided for the delivery of X, and instead Y was delivered, ' then it would not be hard to hold the exemption clauses inap- plicable. What did Lord Wilberforce mean when he said that the exemption clauses would be inapplicable to the case of deviation because "the con- tracting parties could hardly have been supposed to contemplate such a mis- performance, or to have provided against it without destroying the whole contractual substratum . . ."? 181 The implication of this statement is that by the time the exemption clauses are examined, the court will already have determined the contemplated contractual performance; after all, if the court is to characterize some conduct as a "mis-performance" it must have some idea of a "performance". In other words the exemption clause is ruled out as providing a shield for "mis-performance" at a time when we are sup- posedly still in process of determining "performance". Lord Wilberforce's remarks were probably concerned only with exemption clauses that are very general and very defensive in tenor. These clauses do little to identify the contractual obligations, and therefore the courts come to consider them against the background of an already largely formed notion of contemplated contractual performance. The threat to freedom of contract is that this "hypothesis" may too quickly be adopted as an unchallengeable statement of the main purpose of the contract. Once this happens, the presumptions of intention will empty the exemption clause of all significance. 18 C. Time Limits Time limits placed upon the exercise of a remedy are another kind of Suisse Atlantique, which possibly determines the "main purpose" and/or "four corners" independently of the exemption clauses. 180 In fact, this is Lord Wilberforce's discussion of the "peas and beans" problem in Suisse Atlantique, supra note 70, at 433, [1966] 2 All E.R. at 92. 181 Id. at 433, [1966] 2 All E.R. at 93. 182 Here the "main purpose" and "four corners" presumptions are particularly potent. The former rejects provisions which "are inconsistent with what one assumes to be the main purpose of the contract". Glynn v. Margetson & Co., [1893] A.C. 351, at 357, 9 T.L.R. 437 (Lord Halsbury). The latter holds that if you act outside the "four corners" of the contract, then "you cannot rely on the conditions which were only intended to protect you if you carried out the contract in the way in which you had contracted to do it". Gibaud E. Ry. Co., [1921] 2 K.B. 426, at 435 (C.A.) (Scrutton L.J.). So, once the "main purpose" or the "four corners" are identified, the presumptions start eating into the exemption clauses. The critical issue, of course, is how these two features are identified; in particular, what weight is given to the exemption clauses? Our reading of Lord Wilberforce's judgment is that he would take full account of specific exemption clauses, but that general exemption clauses would have to displace a working assumption of the contrac'ual intention. This working assumption of contractual intention would be ascertained "not just grammatically from words used, but by consideration of those words in relation to commercial purpose (or other purpose according to the type of contract) . . .". Suisse Atlantique, supra note 70, at 434, [1966] 2 All E.R. at 94. [Vol. 9:95 "Renedy Stipulation" be asked: (1) Does the time limit run to all or to only some of the possible breaches of contract? (2) Does the time limit strike at repudiation, or damages, or both? (3) Is the time limit of reasonable length? A time limit which covers every breach of contract may be immediately eliminated from consideration. 90 Let us consider a time limit of reasonable length covering both damages and the right to repudiate. In Buchanan v. Parnshaw, ' a horse sold at an auction was warranted to be six years old and sound. The auction condi- tions provided that unless returned within two days, the horse was deemed to be sound. Ten days after the sale the plaintiff purchaser, having discovered that the horse was twelve years old, sought to return the animal. The court held that the plaintiff was not time-barred, since the time limit did not apply to complaints relating to matters other than the soundness of the horse. The defendant invited the court to apply the spirit rather than the letter of the time limit, but the court held that both the letter and the spirit of the auction conditions were against the defendant. The court felt that, while a time limit on claims relating to the fitness of the horse was a wise precaution against mischievious claims, there was nothing to be said for such a time limit on claims relating to the age of the horse. Today's courts might follow this line of reasoning and hold that a time limit on claims relating to the roadworthiness of a vehicle should be enforced as being a safeguard against unjustified complaints about patent defects or as prudently distributing the risk of latent defects. In other words, assum- ing both a time limit of reasonable length and a situation in which such a time limit is in itself reasonable, the courts should enforce that time limit. In such a situation the courts might even be willing to give the benefit of the doubt to a seemingly short time limit. The view that a time limit which is of reasonable length will be enforced (provided that it covers the subject matter of the claim) is found in both Atlantic Shipping & Trading Co. v. Louis Dreyfus & Co. 19 and Sineaton Hansconib & Co. v. Sassoon I. Setty Son & Co. (No. 1). 19! In the former case, the House of Lords held that on its true construction a particular time limit did not apply to claims as to unsea- worthiness but that there was nothing intrinsically offensive about a time limit, even though it was in the form of an exemption clause. '" As Lord 190We say this because the courts, ex hypothesi having lost the power to control by construction, might well turn to proscriptive tactics. If the time limit was seen as being of an unreasonable length, this would be an additional spur to proscription, and, given that time limits are treated as exceptions clauses, Harbutt's would be at hand ready to gobble up more prey. Should the time limit be seen as being of a reasonable length, the arguments for enforcement would be stronger, but we fear that the courts would at the very least veto enforcement in cases of serious breach, and at worst that they would be stung by the breadth of the time limit into retaliatory proscription regardless of the case at hand. 391 2 T.R. 745, 100 E.R. 401 (K.B. 1788). 19 [1922] 2 A.C. 250, [1922] All E.R. Rep. 559. 193 [1953] 2 All E.R. 1471. [1953] 1 W.L.R. 1468 (Q.B.). "'The status of the time limits in Sicaton Hansconzb and Atlantic Shipping is not entirely clear. The query about these cases is this: did the time limits run to 1977] Ottawa Law Review Sumner said, the parties were simply providing their own "statute of limi- tations". 195 In the Smeaton Hanscomb case, a fourteen-day time limit was enforced. Devlin J. treated it as an exemption clause and therefore subject to strict construction; thus, if "instead of delivering mahogany logs the sellers delivered pine logs and the buyers inadvertently omitted to have them examined for fourteen days, it might well be that the sellers could not rely on the time clause". 19. In other words, if there was a gross deviation from the main purpose of the contract, the time limit would be inapplicable. On the facts Devlin J. held that there was no such deviation. Coming at a time when the courts were about to become highly proscriptive of exemption clauses, the decision is remarkable for its concentration on construotion. Where the time limit touches only a right of repudiation, the courts should enforce it, though submitting it to the usual strict interpretation. Such a stipulation would be less severe than those touching "all claims", and it is in fact already statutorily implied under our existing sale of goods legislation. 9' As to a time limit touching only an action for damages, it is again difficult to see why, construction apart, the courts should not enforce such a restriction. Reasonableness will always be a consideration of course; presumably the courts would look to the practicability of a claim's being brought within the stipulated time, and it would not be altogether surprising if consumers were allowed to operate at a rather more leisurely pace than businessmen. In Atlantic Shipping Lord Sumner said: "It does not make any differ- ence that the time allowed is considerable or the formality to be complied with not unreasonable ....," 18 This suggests that the distinction between time limits of a reasonable and of an unreasonable length may be unneces- sary. However, it is submitted that Lord Summer's dictum is to be under- stood not as a general proposition about the relevance of the length of a time limit, but as a refutation of the argument that the construction of the stipula- repudiation as well as to damages? There is no doubt that they covered damages, and we suggest that repudiation also was covered. In Smeaton Hanscomb, the buyers claimed inter alia that they were entitled to reject the goods; the sellers replied by setting up the time limit. In Atlantic Shipping, the charterers do not appear to have claimed back the freight charges which they had paid in full; they simply claimed compensation for the alleged damage to the cargo. Probably the breach would not have justified withholding freight anyway (see Lord Dunedin, supra note 192, at 257, [1922) All E.R. Rep. at 562), but, this apart, our tentative view is that the clauso setting up the time limit would have been wide enough to embrace a claim for re- pudiation. If we are wrong in so classifying either case (and we have some reserva- tions about our interpretation of Atlantic Shipping), then either one or both will servo to support our views on a restriction which touches only a claim for damages. 195 Supra note 192, at 261, [1922] All E.R. Rep. at 564. Supra note 193, at 1473, [19531 1 W.L.R. at 1470. 197It is similar in the sense that under s. 11(1)(c) of the Sale of Goods Act 1893, 56 & 57 Vict., c. 71, where the contract is not severable, the buyer loses the right to repudiate once he has accepted the goods. It is not identical, because we are postulating that the time limit set is reasonable, but is nonetheless shorter than would otherwise be available. See also the Misrepresentation Act 1967, c. 7, s. 4. 198 Supra note 192, at 361, [1922] All E.R. Rep. at 564. [Vol. 9:95 "Remnedy Stipulation" tion in that case allowed it to run to claims as to seaworthiness. In short. Lord Sumner was saying no more than that the time limit could not avail the shipowners, notwithstanding that it set the reasonable period of three months. It is submitted that the courts would be astute enough to hold that a clause imposing an unreasonable time limit was not incorporated, or. failing this, that on its true construction it was merely hortatory. or did not apply to the breach in question, or was subject to the doctrine of fundamental breach. This last possibility might follow from Harbutt' or. rather, might spring from the idea that at a certain stage a time limit in form becomes a genuine "substantive" exemption clause; the clause could then be treated as being repugnant to the notion of a contractual promise. This short survey of time limits reveals a fairly clear pattern. Where the time limit is of a reasonable length. then the courts will enforce it sub- ject only to a strict construction of the provision-the strategy of "tortuous constructions". However, where the time limit is unreasonably short, the courts will generally do their utmost to find some ground for refusing to enforce the provision. , 9 D. Summary The assertions, "You are presumed not to have intended this" and "You cannot do this" are the two central strategies available to the courts to control undesirable manifestations of contractual freedom. In the area of restrictive "remedy-stipulations". the former approach has manifested itself in the strategy of "tortuous constructions" with its concomitant presumptions of intention; while the latter approach has manifested itself in the proscriptive doctrine of fundamental breach. The former strategy in- fringes freedom of contract, because, in its stronger form. it makes no at- tempt to discover the real intention of the contracting parties, while, in its weaker form, it rides along with the perceived real intention only so long as reasonable results are produced, or the evil of an unreasonable result is out- weighed by the evil of an obviously "rigged" decision. The latter technique represents a blunt restriction on freedom of contract, it shrinks the area of contractual freedom and is analogous to the refusal to enforce penalty clauses. In the strategy of "tortuous constructions" it is obvious that the references to the parties' intention are perfunctory-deferential rather than influential. The proscriptive doctrine is not entirely overt, but it is covertness at its most open. It is located in a conceptual "No Man's Land". neither saying "'You did not intend this" nor explicitly saying "You cannot do this". The attack against restrictive remedy stipulations affecting claims to damages and/or repudiation, whether by denial of liability or by time limits, has spanned bailment, shipping. sale of goods, hire-purchase, and work and materials situations. Identifying the rationale of the campaign is inestim- ably difficult, but several clues have been suggested. 9 Sed quaere the case of a time limit on repudiation only. 1977] Ottawa Law Review cuts into freedom of contract, but at least principled paternalism is an identifiable opponent, and no threat to the public faith in our judicial pro- cess. C. Judicial Technique We have observed on a number of occasions that "remedy-stipulation" generates both difficult and "hard" cases. We considered the problem of difficult cases at some length in section III, suggesting that where the real intention of the parties is not clear-as in the case of non-existent or uni- lateral intention-the courts face a limited number of alternatives: they may settle for a reasonable result, rely upon the common standards of the parties, or doggedly plug on after the intention. The traditional pressure to base the judgment upon the parties' intention breeds an unhealthy covertness in judicial technique. Freedom of contract is the source of our trouble here; if it were not for that doctrine, judicial techniques would not look so in- adequate. It is suggested that the goal of finding real common intention is sometimes unattainable and consequently produces deleterious effects within the judicial process. Instead, we should pursue a goal that is both attainable and acceptable. Thus, within the area of remedy-stipulation, we should drop as our goal the ascertainment of real common intention; we might replace it with, for instance, a goal of finding common standards, which would make for a more overt approach to the problem. 20' Or we might be altogether more radical. We might suggest that trying to make the "diffi- cult" case that much easier is a poor sort of reform which clings to the tradi- tional idea of respecting the bargain struck by the parties, and therefore gives rise in turn to many "hard" cases. We might set our goal as reasonable re- sults, a goal which has both practicability and justice on its side. Practice may already have taken us to this point; theory must soon follow. Then there are the "hard" cases, also originating in the principle of freedom of contract but arising only when the parties' intention is clear. We can hardly deny the effectiveness of judicial techniques for sabotaging contractual intention in the name of just results, but where this occurs in the course of an ostensible search for contractual intention, it is undesirable. As in the cases of frustration and misrepresentation, legislation has been introduced to put this judicial quest for justice on a solid and legitimate basis; 209 one hopes that this will herald a new era of judicial candour. D. Judicial Policy Our conclusion is that the prevailing judicial attitude towards remedy- stipulation is one of control rather than freedom. Legislative interest in 208 If common standards elude us, we might then turn to the goal of reasonable results: see Gillespie Bros. v. Roy Bowles Transport Ltd., supra note 87, at 421, [1973] 1 All E.R. at 205 (Buckley L.J.). 209See the Law Reform (Frustrated Contracts) Act 1943, 6 & 7 Geo. 6, c. 40; the Misrepresentation Act 1967, c. 7; and now the Supply of Goods (Implied Terms) Act 1973, c. 13. [Vol. 9:95 "Renedy Stipulation" exemption clauses points to a similar policy on the part of Parliament. Anyone who treats the policy question as being one exclusively of legal merit or demerit is unlikely to reach a sound judgment; for the social and economic ramifications cannot be ignored. To take a standard example, what will be the reaction of the laundry proprietor who learns that the courts will be unlikely to uphold his attempt to limit his liability for loss or damage to articles accepted for cleaning? Will he adjust his prices, accept a nar- rower range of articles, or plough his capital into a less hazardous enter- prise? 210 However, if we wish to make an exclusively legal evaluation of the policy of control, we must consider the general philosophy of the law of contract. It is doubtful whether an area subject to control could co-exist with an area where the prevailing philosophy is freedom, particularly if the demarcation lines between the respective areas are not apparent. We might also question the implication that contractual activities are truly discrete: if remedy-stipulation is to be controlled, will this not affect the supposed freedom to choose one's terms? Clearly it will, for it will no longer be possible to count on a stipulation that a risk is assumed only partially; the courts might hold that it is assumed to the full. The policy of control nar- rows down the range of options open to the parties; if they assume an ob- ligation, then they will risk being held fully responsible for breach of the obligation. Certain dramatic consequences might easily ensue. It is one thing to say that if the parties assune a certain obligation, they cannot avoid it by qualifying remedies for breach; but it is quite another matter to say that if the parties enter into a certain type of contract, theY must assume certain obligations. In practice the transition is not difficult. Once the possibility of qualifying the remedies is eliminated from the equation, all that stands in the way of making the transition is the possibility that the undertaking has not been assumed in the first place. This is easily rectified by importing certain implied terms into the contract. As we have seen, the courts face the choice either of construing such express provisions as remedy- stipulations or of using them in defining the contractual obligations. Does the stipulation indicate that the teeth are being taken out of a promise or that a promise was never made? This seems to us to be one of the most in- teresting and certainly one of the most significant choices facing the courts today. 211 To be blunt, the courts have sovereignty over remedies; the ques- tion now is whether they also want sovereignty over the substantive con- tractual obligations. "'0On the insurance problems here. see LAW COMMISSION, WORKtNG PAPER 39, supra note 69, at 23-24, (1971). 211 But legislation can blunt both the interest and the significance: see the Supply of Goods (Implied Terms) Act 1973. c. 13. especially the new s. 55(9) (contained in s. 4); and the Draft Exemption Clauses (England and Wales) Bill. supra note 147, especially clauses 12(1) and 12(2). 1977]