Conclusion of a contract

There maybe an extensive negotiation between the parties leading to a conclusion of a contract. This maybe in a form of an oral or written communications such as letters, price lists, advertisings as well as formal contract documents. If a dispute arises, it has to be decided what exactly has been said or written and what is the effects of it.

Certain problems can arise when both parties agree that a certain statement was made, although they disagree on whether that statement was part of a contract and therefore intended to be binding.

Were there terms or representations? Or they are just mere sales talks with no legal effect? Even where the eventual contract is set out in a formal document, statements outside that document may have to be considered as representations, supplemental terms or collateral terms. The effect of a particular statement is a matter of law.

Terms And Representation

The classical statements were made during negotiations is important because it will affect the remedies available if given false statements. Remedies available depends on whether the status of a term inside the contract or a mere representation outside the contract. Breach of term gives the claimant the right for damages; liability is strict; misrepresentation gives a right to damages only if misrepresentation was fraudulent or negligent.

The term-or-representation question is also important if the claimant wants to get out of the contract. It is easier to end any negotiations for misrepresentation allows the claimant to rescind the contract; but only if a serious breach is occurred, allows the claimant to terminate the contract. This caused serious problems when a statement both induces the contract and is incorporated as a term of a contract. Before the Misrepresentation Act 1967, the claimant was confined to his remedies for breach of contract (Compagnie Francaise des Chemin de Fer Paris-Orleans v Leeston Shipping Co), losing his right to rescind the contract for misrepresentation.

In order to avoid difficulty of classifying statements and the consequent uncertainty in defining terms of the contract, a written contract may include an “entire agreement” clause. Such clauses are designed to reinforce the presumption referred to above where the parties have entered into a written contract they intend the written document to contain all the terms of their agreement, by making clear that no statements outside the written contract are intended to have contractual effect, either as terms of the contract or as collateral contracts.

How Is The Representation-Term Distinction Made?

The distinction is said to be based on intention of the parties as objectively manifested by their words and conduct (Helibut, Symons & Co v Buckleton; Oscar Chess Ltd v Williams). The real question is not whether the maker of the statement has agreed to bear the contractual responsibility for the truth of the statement, but whether he should. The courts follow the guidance of several criteria:

(I) The Importance Of The Truth Of The Statement To The Representee:

The more important the statement, is to the representee, the more likely it's a term. (Bannerman v White)

(II) Whether The Speaker Had Special Knowledge:

A court is likely to find it as term if the maker of the statement has special skill or knowledge in the subject-matter of the statement, or is in a better position to ascertain, or bears more responsibility for ascertaining, the accuracy of the statement than the other party. (Dick Bentley Productions Ltd v Harold Smith (motors) Ltd)

(III) Whether The Innocent Party Was Asked To Verify The Truth Of The Statement:

A statement is unlikely to be a term, but maybe a representation, if the maker of the statement tells the other party not to rely solely on the statement but to very it's truth. (Ecay v Godfrey)

(IV) Whether The Speaker Initiated The False Statement Or Merely Passed It On:

Lord Denning in (Routledge v Mckay, Schawel v Reade) speaks about innocent passer by (third party)

(V) Whether the statement was formerly recorded:

A contract may be oral, but if it is recorded in writing, the presumptions are that the document records the complete terms and anything not included is a representation.

Written Terms

Written terms can be incorporated into a contract in three ways: by signature, by reasonable notice and by a previous course of dealing. This issue arises most often in connection with exclusion and limitation clauses, but it is important to remember that the rules apply to any written term.

If contract is put down in writing, any statement appearing in that written agreement will usually be regarded as term, and any prior oral statement that is not repeated in the written agreement will usually be regarded as a representation, due to assumption that if statement left out of written agreement, the parties did not view the statement as important. (Duffy & Ors v. Newcastle United Football Co. Ltd.)

The Parole Evidence Rule:

Under this rule, where there is a written contract, extrinsic (parole) evidence cannot change the express terms laid down in that document. Extrinsic evidence includes oral statements, and written material such as draft, contracts or letters, whether relating to pre-contract negotiations or the parties' post-contractual behaviour. An example of parole evidence rule in practice is Henderson v Arthur. The parole evidence rule ostensibly promotes certainty and predictability and avoids evidential difficulties. (Jacobs v Batavia & General Plantations Trust Ltd)

However, this advantages turn out to be more apparent than real because of the long list of exceptions to the rule necessitated by the equally legitimate demands of justice. Amongst the most important exceptions are claims that:

  • The contract is vitiated exp misrepresentation, mistake, non est factum, duress, and under influence

  • The contract includes terms additional to those contained in the contractual document, whether express or implied.

  • The words of the document do not accurately record the parties' agreement

The collective width of these exceptions calls the rule into question since, in practice, it will rarely prevent a party from adducing the sort of evidence the rule prohibits. Today, the rule should be easily rebuttable presumptions that a document purporting to be the contract contains the whole contract.

Collateral Contracts:

There is a way in which an oral statement can be deemed binding, even thought it conflicts with a written contract and does not fall within any of the exceptions to the parole rule. (City v Westminister Properties Ltd v Mudd)

It has been suggested that the device that the device of finding a collateral contract based on an oral statement largely eliminates the parole evidence rule, and the above case does tend to support this view. Use of the device is, however; limited by the fact that a statement can only operate as a collateral contract if supported by separate consideration.

A collateral term could only add to, but not vary or contradict, the written document. To side-step this problem, the courts simply found a collateral contract. However, as Phillimore LJ's dicta shows, it is now accepted that collateral terms and collateral contracts performs the same functions:

(I) Circumventing The Parole Evidence Rule:

Enable the party to add to, vary or contradict a contractual contract

(II) Conferring The Remedial Advantages:

Prior to the Misrepresentation Act 1967, the collateral device was found useful in mitigating the unavailability of damages for innocent misrepresentations.

(III) Overriding The Privity Rule: Shanklin Pier Ltd V Detel Products Ltd

(IV) Overriding Unreasonable Exemption Clauses: J Evans & Sons (Portsmouth) Ltd V Andrea Merzario Ltd

But entering into the main contract will not be consideration for collateral promise if that promise is made after the main contract is concluded; in that case entering the main contract will be past consideration, and therefore not valid. Clauses which seek to deny any legal effect to or exempt liability in respect of statements outside the written contract may be subject to a requirement of reasonableness.

The Incorporation Of Terms

Disputes often arise when one party attempts to rely on a term in a document purporting to be the contract but the term is unknown and very prejudicial to the claimant. The legal question is not whether the statement is a term; rather, it is one of ‘incorporation', whether the disputed term forms part of the contract between these parties. A statement in a document can be incorporated into the contract by

  1. Signature of the document

  2. Reasonable notice of the written terms

  3. Previous dealing of custom

  1. Signature Of The Document

The general rule is that a person is bound by the contents of a contractual document he has signed whether or not he reads or understands it and, even if he does not understand the language in which the contract is expressed (Parker v South Eastern Railway Co, The Luna). The potential harshness of this rule is demonstrated by L'Estrange v F Graucob Ltd.

  1. Reasonable Notice Of The Written Terms

In the course of negotiations, a document may have been delivered by one party to the other, displayed in a notice or incorporated by reference. The proffering party seeking to enforce the terms in the unassigned document must show that he has given the other party adequate notice of them.

  1. Previous Dealing And Customs

In the absence of signature or reasonable notice, a term in printed document may be incorporated by a consistent course of previous dealing between the parties or of the custom of the relevant trade. Terms are more likely to be so incorporated if the parties are of relatively equal bargaining power.

Implied Terms

These are terms which are not laid down in the contract, but which it is assumed both parties would have intended to include if they had thought about it - the may be left out by mistake, or because one or both parties thought them so obvious that they did not need to be spelt out. In order to decide what the intention of the parties was, the courts have developed two overlapping tests: the officious bystander test and the business efficacy test.

The Officious Bystander Test

This test was laid down by Mackinnon LJ in Shirlaw v Southern Foundries

The Business Efficacy Test

This test covers terms which one side alleges must be implied in order to make the contract work - to give it business efficacy. (The Moorcock) The principle in that case was clarified and its limits defined.

Both Tests Are Subjective

Both of this officious bystander and the business efficacy tests are subjective: they ask what the parties in the case would have agreed, and not what a reasonable person in their position would have agreed. Consequently, attempts to imply terms if fact commonly fail for one of two reasons.

First, a term will not be implied in fact where one of the parties is unaware of the subject matter of the suggested term to be implied, or the facts on which the implication of the term is based. (Spring v NASDS)

Secondly, a term will not be implied in fact if it is not clear that both parties would in fact have agreed to its inclusion in the contract; there may be many cases where a term that one party sees as obviously implied is strenuously rejected by the other party; who regards it as against their interest. (Luxor (Eastbourne) Ltd v Cooper)

House of Lords recently emphasized that they would only imply such terms where it was strictly necessary (Equitable Life Assurance Society v Hyman). The House of Lords also stated that a distinction had to be drawn between interpretation and implication. The purpose of interpretation is to assign to the language of the text the most appropriate meaning that the words can legitimately bear.

In conclusion, the remedies of representation and terms are the same but the remedies will be used depends on certain situations.



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