CONTRACT LAW ( PART 6)

By Law Teacher

4.1.1 Terms of a Contract – Introduction

Welcome to the fourth lesson of this module guide – the terms that form a contract! The terms of a contract are important to examine how the parties’ agreements are to be interpreted. An understanding of how to identify terms and how the courts may interpret them is vital to this subject area. Terms may sound deceptively simple but can come at a variety of stages in a contract as well as in several forms.

Terms, if incorporated into a contract, are important to determine the extent of damages, for example. It is therefore important to understand what constitutes a term, whether it has been incorporated successfully and whether they are express or implied.

This section will begin by examining whether statements made pre-contract are terms or merely representations as this can substantially affect the form of remedy a party may receive. The differences between these two forms of statement are then further explored in light of the presumptions and guidance which the courts consider. Following this, it is examined how terms may be incorporated successfully into a contract, before discussing their different types. Finally, terms may be incorporated either expressly or impliedly and the distinction between the two methods will be considered.

Below are some goals and objectives for you to refer to after learning this section:

Goals for this section

• To understand the importance of terms to a contract
• To understand what terms are
• To understand what constitutes a term and their different types

Objectives for this section

• To be able to define a term
• To determine whether statements made pre-contract are terms or representations
• To understand what a ‘puff’ is
• To understand the difference between a term and a representation as well as the presumptions the courts will take into account
• To understand how terms may be incorporated and the main ways this may be accomplished
• To be able to distinguish between terms incorporated expressly or impliedly
• To be able to distinguish between the various ways in which terms may be implied
• To understand the different types of terms: conditions, warranties and innominate.

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.

4.1.3 Terms of a Contract Lecture – Hands on Example

The following section will test your knowledge of terms in the context of contract law – what they are, how they are implied into contracts, and the different ways in which they can be classified. After studying the previous sections, you should have the ability to identify the issues in these questions and apply the law appropriately. The answers for the questions can be found at the very bottom of this page.

A question involving the terms of contract can usually be identified by there being some kind of breach in a contract, and there is a question as to whether the term breached has been successfully incorporated into the contract, from this point, there can be questions of the classification of the term. The below example should allow you to get a general idea of how questions involving terms of a contract may appear.

When addressing an issue involving the terms of a contract, this would be a recommended approach.

• Is the statement a puff, a term, or a representation?
• Has the term been successfully incorporated into the contract?
• Is the term express or implied? If implied, how has it been implied?
• What type of term is it?
• What does this mean for the breach of the term?

This step-by-step approach will cover all of the issues and ensure you do not miss one. You will need to have knowledge of the relevant legal principles and relevant cases once you manage to identify the issues.

Scenario

John repairs computers for a living, and also sells various computers and related electrical goods. He has recently formed a number of contracts which he needs some legal advice on. For his repair service, he has a fixed contract which he issues to the customer at the time the contract is made.

1. James has had his computer repaired by John, and is angry about two things. Firstly, outside the shop, there is a sign which says “get your computer running faster than it ever has before!” and James claims his computer is not as fast as it was when he purchased it after the repair.

Is there a claim James could have here?

2. Secondly, James enquired about which operating system John would install on the computer, as he has “no clue what they are and how they work”. John told James that the best operating system there is, Doors 10, which was worth £1,000, would be installed on his repaired computer. James later finds out that Doors 98 has been installed instead, which is free from the Doors website.

Is this statement a term or a representation? What is the significance of this differentiation?

3. The term stating Doors 10 will be installed with all repairs is found in the standard repair terms and conditions document. When James made the contract for his computers repair, John issued him with a ticket which stated “this is a contractual document”, and included a few terms of the contract. It did not include anything about the promise to include Doors 10, but it did state “contract subject to all other standard repair terms and conditions”

Has the term been successfully incorporated into the contract?

1. The statement “get your computer running faster than it ever has before!” is clearly a puff, and not intended to form a term of the contract. It is obvious this is an advertising gimmick and not to be taken literally. The case of Carlill v Carbolic Smoke Ball Co is good authority for this.

2. The question of whether this statement is a term or a representation is one related to specialist skill. Clearly, in this case, it has been made clear that James has no knowledge or specialist skill in the area of operating systems, as he states “he has no clue what they are and how they work”. Therefore, as John has held himself out to have specialist knowledge of the operating system, by virtue of him working on computer repairs, this statement would be held to be a term. The case of Dick Bentley Productions Ltd v Harold Smith (Motors Ltd) would be authority for this.

The significance in this distinction is that the statement being a term means James would have a right to claim for damages automatically. If the statement was only a term, James would have to prove that John made the statement fraudulently or negligently. James would also be able to claim damages on an expectation measure, rather than only a tortious measure.

3. The term in question has clearly not been incorporated by signature, and there is no previous course of dealings between the two, therefore it is an issue of notice. The first requirement is that the term is included in a document in which contractual terms would normally be found. A ticket would suffice, especially since the ticket clearly states “this is a contractual document” – although not conclusive, this statement along with the fact it was issued at the time of the contract means it amounts to a contractual document (Parker v South Eastern Railway)

The second requirement is, there must have been reasonable notice of the existence of the term, which means before or at the time of contracting (Olley v Marlborough Court Ltd). In this case, notice of the term was given at the time of the contract on the ticket. However, the term regarding Doors 10 was included in the standard repair terms and conditions, not in the ticket terms. The ticket terms only referred James to the standard repair terms and conditions. A referral can amount to incorporation, but only where the document is ‘readily available’ (Sterling Hydraulics Ltd v Dichtomatik Ltd). In this case, therefore, it is a question of whether those standard terms and conditions were readily available. If they were, for example, clearly stated on a poster in the shop, they would likely be incorporated. This is a question of fact and more details would be required to make a definitive decision.