Contra preferentum: cardinal rule of construction that says interpret the clause of a contract strictly against the party who included it; interpret them narrowly
Here, be very careful with dates of cases. Go through development of the law.
Steps to take:
Was there a breach?
Is there a clause excluding liability for this breach?
Acknowledge that there is some confusion in this area:
Difference between majority and dissent in Hunter.
Read contract and interpret the terms and if the clause was meant to apply to this would-be breach then apply it (issue of construction); if clause does NOT apply, usual rules with regard to breach apply (Photo and majority in Hunter).
Was the agreement unconscionable (if yes, clause does not apply, if not, clause applies) – Majority in Hunter.
Apply dissent test in Hunter – clauses should not automatically lose validity but should be given their natural and true construction and then the court must decide whether to give effect to it in the context of a fundamental breach. What is reasonable in light of what has occurred (not reasonableness of clause but of what has occurred).
State Conclusion.
Karsalis v. Wallis (1956;Eng.CA) [FB]
When fundamental breach occurs, the exemption clauses are no longer valid b/c breach goes to total failure of the obligation; it goes to root of K. If K is at an end, can’t rely on exemption clause to limit lbl b/c validity of exclusion clause ends w/ K.
Suisse Atlantique v. N.V. Rotterdamsche (1967;HL) [Eliminates FB]
An indigestible ruling by 5 different judges that apparently eliminated the FB doctrine. HL tried to repeal FB doctrine. In case of FB, must read K and see if exclusion clause applies.Unlike Karsales, this case was not about consumer protection since the two parties had equal bargaining power. This ruling lead to confusion in Mitchell, Photo and Beaufort. FB may have outlived its purpose when Unfair Contract Terms Act enacted in 1977.
Photo Production v. Securior (1980;HL)
D provided patrol guards for cheap prices. Entered into K with P to guard their factory. D’s employee deliberately set fire that caused a lot of damage. D relied on exclusion clause unless S could foresee damage.
Court said because of Suisse Atlantique (notion of FB no longer law) exclusion clauses are not nullified by FB. That case said look at clause and if it was intended to apply to this breach, apply it and if not, don’t; determine if applies through true construction of the K.
To have exemption, wording must be clear to rebut contra perferentum-here was clear; thus no liability (D could rely on clause).
Read K to see if what occurred was a breach and what the consequences are. If K does not say anything about this breach, usual rules of breach apply; is issue of construction whether or not clause applies.
This case eliminated notion of FB until Beaufort.
Beaufort Realties v. Chomedey Aluminum (1980 few months after Photo; SCC)
D entered into K with P (construction company) to supply and install aluminum windows in apartment building being constructed by P. K included clause in which D waived rights and privileges to register liens (right over another’s property to protect a debt charged in that property) if P failed to pay advances. P was dissatisfied with with D’s workmanship and withheld payments. P did fail to pay advances due under K and D filed a lien against title of property.
Trial: court said P committed FB (by not paying) and D was justified in treating K as at an end and P could not rely on exclusion clause. SCC also said was FB - applied Photo Productions. Must construe K and see if it applies.
Here, SCC says they follow Photo but they in fact apply FB doctrine and treat K and terms as extinguished. Application different than what they say they will do.
Discussed Suisse Atlantique: interpretation is the true construction of the K is the governing consideration in deciding if the clause is unaffected and enforceable notwithstanding a FB.
In this case, context of entire K, it said the true construction of the exclusion clause was that the waiver ceased to bind D once communicated that K was at an end. P cannot rely on it - case re-introduced FB.
Securicor (1982;HL)
HL made a distinction b/w exclusion clauses, which should be construed contra preferentum and limitation clauses which should be construed naturally.
George Mitchell v. Finney Lock Seeds (1983;HL) [Reasonableness]
Denning discusses clauses and freedom of K. Goes over history of law in this area - he is trying to protect the consumer by imposing a reasonable standard.
Said courts used “secret weapons” to limit exclusion clauses:
“True construction of contract”: courts used it to depart from natural meaning.
“Fundamental breach”: courts said not allowed to apply limitation clauses against a breach that went to the very root of the K.
Securicor cases said that doctrine of FB no longer applicable (replaced by test of reasonableness) and made distinction between complete exclusion clauses (construe contra proferentum) and limitation clause (construe naturally).
What courts were really doing was only enforcing clauses they thought were fair and reasonable. Purpose is consumer protection but Denning gave examples about big companies not the ‘little man’. GM is wrong, not law in Canada until…Hunter, maybe.
Hunter Engineering v. Syncrude (1989;SCC)
D entered into K with P for gearboxes. K included warranty and excluded liability for damages for consequential loss of use arising from breach of K, fundamental or otherwise-gearboxes were defective and D sued for cost of repairs. At trial, Syncrude won for breach of statutory warranty and fundamental breach of K.
Majority (Dickson) unconscionablility: SCC adopted reasoning in Photo: is a matter of construction - interpret terms to determine exactly what parties agreed to.
Replaced doctrine of FB with rule that holds parties to terms of agreement provided terms are not unconscionable. Laid FB to rest - deal with unconscionability directly to protect weak from strong. In this case, clause should be enforced.
Dissent (Wilson): exclusion clauses should be considered within the entire context of K and deserve to be enforced; BUT when there is a FB is it fair and reasonable to allow party who breached to rely on protection of clause? – That is, they breached in the secure knowledge was no liability.
Courts must balance desire of allowing parties to make bargains and undesirability of enforcing bargains in favour of repudiating party.
Clauses should not automatically lose validity but should be given natural and true construction and then the court must decide whether to give effect to it in the context of a FB.
What is reasonable in light of what has occurred at outset (not reasonableness of clause).
Disagrees that doctrine of unconscionablitiy should be used as it is too narrow and as it is about inequality of bargaining power and there may be times when is equality and clause still should not apply. - unconscionability is a more uncertain tool.
In this case, nothing unfair or unreasonable so give effect to clause.
Notes
Probably no difference in application between Dickson’s and Wilson’s test.
Cases today still talk about FB and construction-Beaufort still being applied.
