Misrepresentation, Non-Disclosure and Breach ... - Law Commission

(1) The protection only applies to standard policy terms. It does not interfere
with the freedom of large businesses to negotiate contracts on an
individual basis. We are told that for most insurance obtained through
Lloyds, the broker puts forward terms and the parties then negotiate on
this basis. These contracts would not be affected by the proposal.
(2) It applies to any term that defines cover in a way that policyholders would
not reasonably expect, whether it be a warranty, a condition precedent to
liability or to cover, an exception or a narrow definition of the risk. It would
not affect other terms such as notification clauses, since these do not
affect the cover, though it could be extended to do so if that were thought
to be desirable. 28
(3) The section would apply only if the effect of the term were to render the
cover substantially different from what the insured reasonably expected.
This would depend on how the term was presented and what information
was given to the insured. The reform would provide a strong incentive to
insurers to re-write their contractual documents in a way that their
policyholders can understand.
(4) It would provide a better solution than treating small businesses as if they
were consumers. We would prefer to make a distinction on the basis of
how the contract was negotiated rather than attempt to find some other
proxy for those who need protection and those who do not, such as size
or nature of the business.
The arguments against
Freedom of contract
8.73 It is often argued that the law should not interfere with freedom of contract.
Instead, a dynamic and innovative market is best served if the parties are allowed
to agree what they want. This argument was put to the joint Law Commissions
when we first recommended unfair contract terms legislation in 1975. 29 In 1975
we replied that:
It is valid only to the extent that there is true freedom of contract to
interfere with, and the objection has no validity where there is no real
possibility of negotiating contract terms, or where a party is not
expected to read a contract carefully or to understand its implications
without legal advice. 30
8.74 It is of course difficult to distinguish between situations where there is genuine
freedom of contract and those where there is not. The fact that the contract is on
standard terms suggests that freedom is limited. Where one party does not fully
understand what the standard terms require, it is limited still further.
28 Notification of claims will be considered in our second Consultation Paper.
29 Exemption Clauses: Second Report by the two Law Commission (1975) Law Com No 69;
Scot Law Com No 39, at paras 66 and 67.
30 As above, para 67.
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