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4.1.2 Terms of a Contract Lecture

Are statements made pre-contract terms or representations?

Pre-contractual statements can be categorised as one of the following:

  • Puffs
  • Terms
  • Representations

A puff

A puff is a statement which cannot give rise to legal consequences, as they are never meant to be taken literally and there is no intention to be legally bound. The advertisement in Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 was argued to be a puff unsuccessfully.

Term or representation? Why does it matter?

Both terms and representations provide a remedy for the aggrieved party, therefore, why does it matter which of the two a statement is? The significance is the form of remedy, as the remedies are different for the two. First, it is helpful to define the two.

Term: A promise as to the truth of a statement

Representation: There is no promise, but the statement induces the making of the contract

The ability to claim damages

Term: On a breach of a term, there is automatically a right to claim for damages

Misrepresentation: Allows for a claim for damages if it can be proven that the statement was made fraudulently or negligently, an innocent representation will not result in a claim for damages (unless there is an exception under Section 2(2) of the Misrepresentation Act 1967).

The measure of damages

Term: Damages will be based on an expectation measure – the claimant will be put into the position they would have been in had the contract been properly performed. Damages will be recoverable based on the remoteness rule from Hadley v Baxendale(1854) 9 Exch 341

Misrepresentation: Damages will be limited – the claimant will be put into the position they were in before the contract was made and will allow for a claim for all direct loss by the claimant, irrespective of foreseeability.

The difference between a term and a representation

This section will examine the key differences between a term and a representation, and how the courts will make a decision on the matter. Some presumptions and guiding factors which the courts will consider will be examined, these are as follows:

  1. Is the statement in writing?
  2. Is there any specialist skill or knowledge from one party?
  3. Is there reliance on the statement, or importance placed on the statement?
  4. How long was the lapse of time between the statement being made and the formation of the contract?
  5. Could the party relying on the statement have verified it?

Is the statement in writing?

If a statement is in writing, there will be a presumption that it will form a term of the contract. There are a variety of different rules related to this.

The parol evidence rule

Even if there is a written contract, parties may claim there are other terms in the contract, perhaps ones in another document, or ones from an oral agreement. Claims pointing to other documents or oral agreements will usually be ignored. This is known as the ‘parol evidence’ rule.

Collateral contracts

The parol evidence rule can be circumvented by the use of a collateral contract. The courts may hold that the oral statements following the formation of a written contract may represent a collateral contract which runs alongside the written contract.

This interesting device used by the courts can only be found to exist if the promise contains a term which is different to the ones in the written contract, and does not contradict them at all – Henderson v Arthur [1907] 1 KB 10

The presumption is also limited by statute, any terms which fall foul of the Unfair Contract Terms Act and similar legislation will be void.

The document being signed also must be one which would be expected to contain contractual terms - Grogan v Robin Meredith Plant Hire [1996] CLC 1127.

Is there any specialist skill or knowledge from one party?

If the individual making the statement has some specialist skill/knowledge of the contractual subject matter, or claims to have such knowledge, the presumption is that the statement is more likely to be a term.

Is there reliance on the statement, or importance placed on the statement?

If the individual relying on the statement makes it clear that the statement was of such importance that they would unlikely have contracted without that guarantee, the presumption is that the statement will be a term. This is a two-part test.

  1. Is the statement so important that the party would not have entered into the contract but for the statement?
  2. Is the above importance clear to the statement maker at the time this statement is made, either by an express statement or it would be clear from the contractual circumstances

How long was the lapse of time between the statement being made and the formation of the contract?

The first presumption relating to a lapse of time is that if a party makes a statement, and soon after, the contract is reduced to writing without inclusion of the statement in writing, that statement would not form a term of the contract, and would only be a representation – Heilbut, Symons and Co. v Buckleton [1913] AC 30.

These presumptions can be rebutted if the parties’ intentions are clear through another means.

Could the party relying on the statement have verified it?

There are two presumptions which fall under this heading. First, if a statement maker accepts responsibility for the truth of a statement, the statement will be a term. This was seen in Schawel v Reade [1913] 2 IR 81.

The second presumption is that where a statement is made, but that party advises or tells the other party to verify that statement, the statement will be a representation, not a term - Ecay v Godfrey(1947) 80 Lloyd’s Rep 286.

Incorporation of terms

Once a statement has been identified as a term of a contract, it is not the case that this will always be binding on the parties; the term must have been successfully incorporated into the contract. There are three main ways by which this may be done:

  1. Signature - L’Estrange v E. Graucob Ltd [1934] 2 KB 394
  2. Notice
  3. Previous course of dealings

Notice

In order for a term to be incorporated into the contract, the party who it confers obligations upon must be or ought to be aware of its existence. In light of this, there are two requirements.

  1. The term must be included in a document in which contractual terms would normally be found
  2. There has been reasonable notice of the existence of these terms before or at the time of contracting - Parker v South Eastern Railway (1877) 2 CPD 416

Documents

See Chapelton v Barry Urban District Council [1940] 1 KB 532. Here are the two main factors to consider when assessing a document to decide whether it is contractual:

  1. What the document is called is not conclusive – the document does not have to be specifically identified as a contract
  2. This document must be delivered before the contract or at the time of the contract - Olley v Marlborough Court Ltd [1949] 1 KB 532.

Previous course of dealings

There are some occasions where notice of terms will not be required to be given. This will be on the basis that the parties have had a previous course of dealings, and therefore will be aware of all the relevant terms – Hardwick Game Farm v Suffolk Agricultural Poultry Producers Association [1969] 2 AC 31.

The two requirements are:

  1. There must be sufficient notice of the term - Spurling v Bradshaw [1956] 1 WLR 461
  2. The previous dealings must have been sufficiently consistent - McCutheon v David MacBrayne Ltd [1964] 1 WLR 125.

Nature of terms – express or implied?

A term may be incorporated into the contract either expressly or impliedly. Express terms are those which have been explicitly communicated between the parties orally or in writing. The intention of the parties is clear and there is little discussion to be had of these.

Implied terms are those terms which fill the gaps in the contract. Terms can be implied in the following ways:

  1. Custom
  2. Law
  3. Fact

Terms implied by custom

The main three requirements are:

  1. The term is clearly established and ‘notorious’ in that trade context
  2. The term is not inconsistent with any of the express terms
  3. Both parties must be involved in the trade context in such a way that they would be expected to be aware of the term being custom in that context

Terms implied by law

Terms in law can be implied irrespective of the intentions of the parties, they relate to legal obligations imposed either by the courts or by statute.

Terms implied by the courts

The basic requirements for a term to be implied by courts are:

  1. The term is implied in all contracts of that type, as a policy matter
  2. The term must be necessary
  3. The term must be reasonable to imply

See Liverpool City council v Irwin [1977] AC 239.

Terms implied by statute

Where it has been deemed necessary by the legislature, certain terms have been implied into contracts by statute. The most obvious example of this relates to the sale or supply of goods.

Terms implied by fact

Courts should not interfere and imply terms – Attorney-General of Belize v Belize Telecom Ltd [2009] UKPC 10. There are two methods of implication at fact:

  1. The ‘officious bystander’ test - Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206
  2. The ‘business efficacy’ test has two grounds - SABIC UK Petrochemicals Ltd v Punj Lloyd Ltd [2013] EWHC 2916 (TCC)

Different types of terms

Contractual terms can be classified as one of three different types of terms:

  1. Conditions
  2. Warranties
  3. Innominate

Conditions and warranties

If a condition of a contract is breached, the aggrieved party can choose to bring all contractual obligations to an end, and will have the right to sue for damages. A condition will be typically described as being of fundamental importance to the contract.

In contrast, a warranty is of less importance to the contract. The result of a breach of warranty is the innocent party can claim damages for that specific breach of contract, but will not be able to bring the contract to an end.

There are three main ways the classification can be presumed:

  1. Statutory presumption
  2. Identified by parties
  3. The importance of the term to the contract

Statutory presumption

As we are now aware, there are some terms of contracts which are implied by statute, for example the Sale of Goods Act.

Identification of the term by parties

The parties may imply a term to be a condition or a warranty - L Schuler AG v Wickman Machine Tools Sales Ltd [1974] AC 235.

Importance of the term to the contract

In the absence of statutory or party intention, a holistic overview of the contract will be required in order to ascertain the importance of the term to the contract. The presumption being the more important the term is to the contract, the more likely the term will be a condition. Subsequently, if a term is less important to the contract, it will more than likely be a warranty.

See Poussard v Spiders(1875) LR 1 QBD 410 and Bettini v Gye (1875) LR 1 QBD.

Innominate terms

An innominate term is one which strikes a middle ground between a condition and a warranty. The result of such a term is that the courts will classify the term upon breach of it - Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26.

The question the courts ask is:

  • Will the breach deprive the innocent party of a substantial part of their bargain?

If yes, the term is likely to be a condition, if no, the term is likely to be a warranty.


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