Insurance Contract Law Issues Paper 2 Warranties - Law Commission

8.10 These provisions require the court to start with three questions: 2
(1) What contractual performance did A reasonably expect?
(2) What contractual performance does B claim to be entitled to render?
(3) Is there a substantial difference between the two?
8.11 Is so, the court must then ask whether the term satisfies the requirement of
reasonableness, given the circumstances that were or ought to have been in the
contemplation of the parties when the contract was made.
8.12 The first question must be approached broadly as a matter of fact. As Lord
Bingham pointed out in Zockoll Group Ltd v Mercury Communications Ltd, the
“answer cannot depend on the proper construction of the contract”. 3 If a party
could only reasonably expect that which the contract actually provided there
would never be any discrepancy between the two. Instead, in a case such as Kler
Knitwear the court would need to start by asking whether the claimants
reasonably expected that, if they were late in checking the sprinkler system,
claims for storm damage would be paid. If so, the court would then ask whether
this was what the contract in fact provided? If not, was the difference substantial?
After this initial hurdle has been cleared, the court would then need to consider
whether the clause introducing a warranty was fair at the time the contract was
made.
Industry standard terms
8.13 A difficult question about UCTA is how it applies to industry standard wording. In
our 2005 report we discussed the meaning of “written standard terms of
business”. If one party regularly uses industry standard terms, and puts them
forward for the contract in question, then it is probable that they would be caught
by sections 3 and 17. During consultation, several consultees suggested that
there should be a special exemption for terms drafted by a trade association.
However, we decided against such an exemption:
The reason is that there can be no guarantee that terms will be fair
simply because they were drawn up by a third party and are used
widely in the relevant market. The terms might have been drawn up
by a trade association that represents the interests of one party and
not those of the other party; and yet may be used in the vast majority
of contracts in the market because, for example, the other party
usually lacks the sophistication or the bargaining power to demand
terms more favourable to it. 4
2
See Zockoll Group Ltd v Mercury Communications Ltd [1999] EMLR 385, per Lord
Bingham.
3 Above, at p 395.
4 Unfair Terms in Contract (Law Co No 292; Scot Law Com No 199) (2005) para 4.61.
97