Terms of a Contract Revision PDF

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Summary

Contract formed when there is: offer & acceptance, intention to create legal relations, consideration.What is the content? Content determines rights and duties of the parties - important to determine breach.  Contract can contain ‘express’ terms and ‘implied’ terms.‘Express’ – Are those expres...

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Contract formed when there is: offer & acceptance, intention to create legal relations, consideration. What is the content? 

Content determines rights and duties of the parties - important to determine breach.

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Contract can contain ‘express’ terms and ‘implied’ terms.

‘Express’ – Are those expressly agreed (whether written down or not). ‘Implied’ – Are those terms that parties have not expressly agreed on.

'Term' Versus 'Representation' Parties will usually make a variety of statements during contract negotiation. Important question: which statements have become terms of contract? Distinguishing between ‘term’ and ‘representation’ is very important because: 

If statement is held to be a ‘term’ of the contract, a failure to comply with it will be a breach of contract. Innocent party will be entitled to a remedy for breach.

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If statement is held to be ‘(mere) representation’, the innocent party cannot claim that there has been a breach of contract. Can claim for misrepresentation if conditions fulfilled.

The main difference is in consequences in relation to amount of damages and termination of contract. If a statement is a term, it sits within the contract and has contractual obligations. A representation falls outside the contract and has no contractual obligations ‘Term’ versus ‘representation’: ‘term’ involves a promise as to the truth of the statement, whereas a ‘representation’ involves no such promise as to truth, although it does induce the making of the contract. How does one decide whether statement is ‘term’ or ‘representation’?

Whether a statement is a term or representation depends, ultimately, on the intention with which the party made the statement. This is an objective test – and the court has developed several principles. We have to look at all the facts we are presented with. BUT no one principle is decisive: it is a matter of judgement. None of the principles are determinant individually, so as an advocate, you would look for as many of the principles as possible to determine whether it is a term or a representation.

Principles I 1- Verification: Statement unlikely to be term if the party making it asks the other party to verify it. In contrast, if the maker of the statement gives assurance that there is no need to verify, statement is probably term. 

Ecay v Godfrey (1947) 80 Ll LR 286 – seller of boat: “Have it surveyed!” the person selling the boat invited the buyer to inspect it themselves. The question was whether the boat was sea worthy. Turns out it did have a problem with rust. The Court ruled that the invitation to have it surveyed meant it was a representation not a term.

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Schawel v Reade [1913] 2 IR 64 – seller of horse: “The horse is sound; otherwise I would tell you!”. Turns out the horse was not completely 'sound'. The Court ruled that this acted as a term as the person selling assumed responsibility.

Principles II 2- Importance: Statement likely to be a term where it is of such importance to the person to whom it is made that, had it not been made, she would not have entered into the contract. If the contract is reliant on the statement then the Court would take the view that it is likely to be a term. 

Couchman v Hill [1947] KB 554 – heifer on auction. Buyer not interested if pregnant (in calf). Statement that it was not in calf, but it actually was. The Court Held that the purchaser's statement that they wouldn’t be interested if the cow was pregnant, of significant importance as they wouldn’t have purchased the cow if it was, therefore it was a term.

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Bannerman v White (1861) 10 CBNS 844 – farmer’s assurance that hops had not been treated with sulphur. The purchaser wouldn’t have bought the hops had they been treated with sulphur.

Principles III 3- Special knowledge/expertise: If the maker of the statement has some special knowledge/skill compared to the other party, statement probably term. If parties have equal knowledge or the person to whom the statement is made has greater knowledge, more likely to be representation. What matters is the relative skill and knowledge of the parties. 

Oscar Chess Ltd v Williams [1957] WLR 370 – a private seller selling to a buyer car dealer. Seller made statement as to model, however, the documentation was incorrect, with the actual car worth less than was the information portrayed it as. No evidence of fraud or attempts to mislead. The dealership later found it was an older model and tried to sue for the difference. The Court held that the dealership actually had superior knowledge to the private seller about

cars and should have known about the nature of the model. As they should've known it couldn’t be called a term. 

Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965] 1 WLR 623 – seller car dealer. Seller made statement as to mileage. This was not true and the car had done a lot more than stated. The seller was found liable as the statement maker had superior knowledge to the people that they were selling it to.

Principle IV 4- Time: 

Inntrepreneur v East Crown [2000] 2 Lloyd’s Rep 611 – the closer in time the statement was made and the time the contract was concluded, the more likely the statement will be treated as term and vice versa. So if a statement is made and a contract is formed very soon after, it will be viewed more likely to be a term.

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Routledge v McKay [1954] 1 All ER 855 – seller of motorbike states that it is a 1942 model; sale takes place 5 weeks later. The Court said that there was too much time between this statement and the contract to constitute the statement as a term of the contract.

Express and Implied Terms Express Terms 

A contract may be agreed upon orally or in writing, or both.

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In a written contract, the contents will be apparent from the document: in case of a dispute, the judge will have to decide on interpretation of a term within the contractual document.

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Oral contracts pose evidentiary problems: in case of a dispute, the judge has to decide what the parties have agreed upon.

Parol Evidence Rule 

General rule: if contract in written document, then anything external to the contract cannot be introduced to supplement it (Jacobs v Batavia & General Plantations Trust Ltd [1924] 1 Ch 287).

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The rule conveys the fact that a contract is a solemn promise and everything in the contract should have been entered into with complete knowledge.

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Exceptions: 

Document not intended to be whole agreement (Allen v Pink (1838) 4 M & W 140) 'we didn’t intend for this written document to be the sum total of everything governing in this contract'.

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To prove terms that must be implied into agreement (Gillespie Bros v Cheney, Eggar & Co [1896] 2 QB 59)

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To prove contract is invalid (Campbell Discount Co v Gall [1961] 1 QB 431)

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Etc, etc,

Does fact of extensive exceptions undermine rule?

Signature 

Person bound by signature – even if haven’t read contract: L’Estrange v Graucob Ltd [1934] 2 KB 394. concerned the contract for installation of slot machines. The contract contained an exclusion. It excluded all liability for the slot ?that the custom meant 98%, and pureness allowed for the inclusion of some impurities.

Implied Terms - Terms Implied By Statute  

Parliament has, in many instances, seen it fit to imply terms into contracts. These can be mandatory or default rules (ie would apply only if parties do not explicitly exclude them).

Example: Sale of Goods Act 1979 ss 12-15 imply several terms into all contracts for sale of goods. 

s. 13(1) – goods to correspond with description.

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s. 14(2) – goods must be of satisfactory quality.

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s. 14(3) – goods must be reasonably fit for purpose.

Example: s. 13 Supply of Goods and Services Act 1982 – services will be carried out with reasonable care and skill. 

Since CRA 2015, these apply only to contracts of sale between traders (business-tobusiness).

Example: Consumer Rights Act 2015 (CRA 2015) – applies to business-to-consumer contracts. 

s. 11 – goods to correspond with description.

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s. 9 – goods must be of satisfactory quality.

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s. 10 – goods must be reasonably fit for purpose.

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s. 49 – service must be supplied with reasonable care and skill.

These consumer ‘rights’ cannot be excluded or restricted. Implied Terms - Terms Implied By Custom Term can be implied into a contract if it is custom or usage in field or market within which parties are operating.  

Only possible if custom does not contradict term of contract. If the custom ‘notorious (in the sense that everyone knows about it), certain and reasonable’, it will bind the parties even if they were unaware of it.

Example: Peter Darlingston Partners Ltd v Gosho Co Ltd [1964] 1 Lloyd’s Rep 149 – contract for sale of ‘pure’ canary seed. Seed only 98% pure. Can buyer reject the goods? Implied Terms - Terms Implied By Courts

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Terms implied by courts are divided into two: 1- Terms implied in fact 2- Terms implied in law

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The difference is important because the test for implication seems to differ.

Terms Implied In Fact 

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Term implied in fact is implied into the individual contract to give effect to what the court perceives to be unexpressed intention of the parties. There are two tests for implication: 1- Officious bystander test 2- Business efficacy test.

Implied Terms By Fact 2 

Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72

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(a) the implication of a term was not dependent on proof of an intention of the parties; the court was not concerned with the hypothetical answer of the actual parties, but with that of notional reasonable people in their position;

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(b) a term should not be implied into a detailed commercial contract merely because it appeared fair or because the parties would have agreed it if it had been suggested to them.

Officious Bystander Test 

Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206: ‘… something so obvious that it goes without saying; so that, if while the parties were making their bargain, an officious bystander were to suggest some express provision for it in the agreement, they would testily suppress him with a common “Oh, of course!”’ (Per MacKinnon LJ)

Business Efficacy Test 

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The implication is necessary to give the transaction such business efficacy as the parties must have intended. The Moorcock (1889) 14 PD 64

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A term could only be implied if, without the term, the contract would lack commercial or practical coherence (eg, necessity)

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Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72

Officious Bystander vs Business Efficacy? 

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The relationship between the officious bystander and business efficacy tests has not been entirely clear. Supreme Court in Marks & Spencer Plc said: business necessity and obviousness could be alternatives, in the sense that only one of them needed to be satisfied; Compare: Lord Hoffmann in Attorney-General of Belize v Belize Telecom Ltd [2009] UKPC 10: what does the contract mean to a reasonable person having all the relevant background information? Thus, arguably, implication of a term = interpreting the contract.

Terms Implied In Law 

These terms are implied into all contracts of a certain type, not just into the particular contract in question.

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This implication is based on the nature of the contract, rather than the supposed intention of the parties.

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Traditional view of test for implication: necessity, not reasonableness Liverpool City Council v Irwin [1976] QB 319 - Council leased flats. Defendant tenant withheld rent, protesting the Council’s failure to maintain the block. Is there an implied duty on the Council? Lord Wilberforce in Irwin : 

‘… In my opinion such obligation should be read into the contract as the nature of the contract itself implicitly requires, no more, no less: a test, in other words, of necessity. […] I have reached exactly the same conclusion as that of Lord Denning MR, with most of whose thinking I respectfully agree. I must only differ from the passage in which, more adventurously, he suggests that the courts have power to introduce into contracts any terms they think reasonable… A just result can be reached, if I am right, by a less dangerous route.

Exclusion Clauses Exclusion clauses -> provisions of the contract which seek to exclude or restrict liabilities which otherwise might arise on a breach of contract. Defence or Definition Peter inserts a clause into his contracts to the following effect: 'no liability is accepted for any damage, howsoever caused, to any goods during the course of transit.' Two views may be adopted as a result of such a clause:

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One is that it defines the obligations which the contracting parties have chosen to accept. Courts have traditionally seen exclusion clauses as defensive in their nature. It is to defend Peter from a claim against damaged goods.

The Function of an Exclusion Clause    

They help in the allocation of risks under the contract. Exclusion clauses can help reduce litigation costs by making clear the division of responsibility between the parties. As they are common forms of modern contracts they allow the mass production of contracts and reduce negotiating costs. However, they can produce a result that is socially harmful, in which they are used by the powerful in society to exclude liability towards the weaker party, thereby leaving the weak without a remedy.

An Outline of the Law    

Firstly, it must be shown that the exclusion clause is properly incorporated into the contract. Secondly, it must be shown that, properly interpreted, the exclusion clause covers the loss which has arisen. Thirdly, there must be no other rule of law which would invalidate the exclusion clause. Now the courts have been given power under the Unfair Contract Terms Act 1977 (UCTA) and the Consumer Rights Act 2015 (CRA) to regulate the exclusion clause.

Incorporation One way in which the court regulates the use of exclusion and limitation clauses is through the application of the rules on incorporation. Generally speaking, unless the clause is incorporated as a term of the contract, it will not operate so as to exclude or restrict liability that would otherwise arise under the contract. Incorporation of Written Terms Three hurdles must be overcome before such terms can be incorporated.  The first is that notice of the terms must be given at or before the time of concluding the contract. Olley v Marlborough Court [1949] 1 KB 532  Mrs. Olley checked in at the defendant’s hotel;  A notice displayed in Mrs. Olley’s room purported to exclude liability for stolen property;  Mrs. Olley had some property stolen and sued the hotel;  The CA held that the exclusion clause was ineffective because the contract had been made at the time Mrs. Olley checked in (i.e., before she had seen the clause).  Secondly, the terms must be contained or referred to in a document which was intended to have contractual effect.

Where the exclusion clause is not in a signed contractual document, the party seeking to rely on the clause must show that he took reasonable steps to bring the provision to the other party’s notice. Chapelton v Barry UDC [1940] 1 KB 532  Mr Chapelton went to the beach with Miss Andrews;  By the side of a café there was a pile of deckchairs belonging to the Council and a sign stating that the deckchairs were available for hire at a rate of 2 pence per 3-hour session;  The notice asked the public to obtain tickets from an attendant and retain them for inspection;  Mr Chapelton took two chairs from the attendant and two tickets;  When Mr Chapleton sat down on his chair, the chair collapsed injuring him;  Mr Chapelton sued the Council who sought to rely on words printed on the back of the ticket excluding any liability on the part of the Council for injuries sustained by the public;  Mr Chapleton had glanced at the tickets before putting them in his pocket but had not realised that the tickets contained any conditions;  The Court of Appeal held that the words were ineffective: the terms of the offer had been contained in the notice by the pile of chairs;  The ticket given to Mr Chapelton was not like a railway ticket but was merely a receipt which acted as evidence that money had been paid.  Thirdly, reasonable steps must be taken to bring the terms to the attention of the other party. Parker v South Eastern Railway (1877) 2 CPD 416  It was held here that the test is whether the defendant took reasonable steps to bring the notice to the attention of the claimant, not whether the claimant actually read the notice. As a result, in Thompson v London, Midland and Scottish Railway Co Ltd [1930]:  An exclusion clause that was contained in a railway time-table was held to be validly incorporated despite the claimant being illiterate. The more unreasonable and unusual the clause, the greater the degree of notice required by the courts. In J Spurling Ltd v Bradshaw [1956], Denning LJ famously said that some clauses would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient. Bingham LJ in the case of Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] argued that cases on sufficiency of notice are concerned with the question 'whether it would in all the circumstances be fair (or reasonable) to hold a party bound by any conditions … of an unusual and stringent nature'. The courts have not always been able to agree whether a particular terms is onerous or unusual'. This point divided the CA in AEG (UK Ltd v Logic Resource Ltd [1996], where the majority held that a clause requiring the purchaser to return defective goods at his own expense had not fairly and reasonably been drawn to the attention of the purchaser. Hobhouse LJ dissented and warned that:  'if it is to be the policy of English law that in every case those clauses are to be gone through with, in effect, a toothcomb to see whether they were entirely usual and entirely desirable in the particular contract, then one is completely distorting the contractual relationship between the parties and he ordinary mechanisms of making contracts. It will introduce uncertainty into the law of contract.'

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This point was well made as the clause was already under attack under the UCTA 1977 and, in the view of Hobhouse LJ, it was 'under the provisions of the Act that problems of unreasonable clauses should be addressed and the solution found'.

Signed documents Where the clause is contained in a signed contractual document, the party signing the document will generally be bound by the clause whether or not she actually read the document before signing it. L’Estrange v Graucob [1934] 2 KB 394  C ran a café and wanted to buy a cigarette machine from D;  C signed, without reading, a document headed ‘Sales Agreement’ which contained, in small print, a clause which excluded, inter alia...