What the parties said or wrote

The parol evidence rule is that where the record of a transaction is embodied in a document, extrinsic evidence is not generally admissible to vary or interpret the document or as a substitute for it.

EXCEPTIONS TO THE PAROL EVIDENCE RULE:

(A) WRITTEN AGREEMENT NOT THE WHOLE AGREEMENT

If the written agreement was not intended to be the whole contract on which the parties had actually agreed, parol evidence is admissible. See:

Evans v Andrea Merzario [1976] 2 All ER 930.

(B) VALIDITY

Parol evidence may be given about the validity of the contract, eg to establish the presence or absence of consideration or of contractual intention, or some invalidating cause such as incapacity, misrepresentation, mistake or non est factum.

(C) IMPLIED TERMS

Where the contract is silent on a matter on which a term is normally implied by law, parol evidence may be given to support, or to rebut, the usual implication. See:

Burges v Wickham (1836) 3 B & S 669

(D) OPERATION OF THE CONTRACT

Parol evidence can be used to show that the contract does not yet operate, or that it has ceased to operate. See:

Pym v Campbell (1856) 6 E & B 370.

(E) EVIDENCE AS TO PARTIES

Parol evidence can be used to show in what capacities the parties contracted, eg where a person contracts ostensibly as principal, evidence is admissible to prove that he really acted as another's agent so as to entitle the latter to sue (Humfrey v Dale (1857) 7 E & B 266).

(F) AID TO CONSTRUCTION

Where the words of the contract are clear, parol evidence cannot be used to explain their meaning, unless they have a special meaning by custom. Parol evidence can, on the other hand, be used to explain words or phrases which are ambiguous, or which, if taken literally, make no sense, as well as technical terms.

(G) TO PROVE CUSTOM

Evidence of custom is admissible "to annex incidents to written contracts in matters with respect to which they are silent." (Hutton v Warren (1836). Custom can also be used as an aid to construction, eg in Smith v Wilson (1832) evidence was admitted of a local custom to show that "1,000 rabbits" meant "1,200 rabbits.“

(H) RECTIFICATION

A document may fail in accurately recording the true agreement. Equity allows such a written contract to be rectified by parol evidence. (See handout on Mistake)

(I) COLLATERAL CONTRACT

Even though parol evidence cannot be used to vary or add to the terms of a written contract, it may be possible to show that the parties made two related contracts, one written and the other oral, ie a collateral contract. See:

City & Westminster Properties v Mudd [1959] Ch 129.

The Law Commission (1976) recommended that the rule should be abolished, but by 1986 concluded that it did not stop the courts accepting parol evidence if this was consistent with the intention of the parties.

REPRESENTATIONS AND TERMS

The first step in determining the terms of a contract is to establish what the parties said or wrote. Statements made during the course of negotiations may traditionally be classed as representations or terms and if one turns out to be wrong, the plaintiff's remedy will depend on how the statement is classified:

A representation is a statement of fact made by one party which induces the other to enter into the contract. If it turns out to be incorrect the innocent party may sue for misrepresentation.

Breach of a term of the contract entitles the injured party to claim damages and, if he has been deprived substantially what he bargained for, he will also be able to repudiate the contract.

If a statement is not a term of the principal contract, it is possible that it may be enforced as a collateral contract (which has developed rapidly in the twentieth century as a significant means by which the difficulties of fixing a statement with contractual force may be circumvented).

Distinguishing terms from mere puffs and representations

Mere puffs: Dimmock v Hallett (1866) 2 Ch App 21

Representations: a statement of fact which induces the other party into the contract i.e. “the

car passed its MOT test first time."

Why distinguish between puffs, representations & terms?

How to distinguish?

Generally looking for intention of the parties, considering the “totality of the

evidence as a whole" assessed using the intelligent bystanderte st:Heilb u t ,

Symons v Buckleton [1931] AC 30, 51 per Lord Moulton.

Other helpful factors:

(i) When was the statement made?

(ii) Is the statement important?

(iii) Did the maker of the statement have special knowledge or skill?

Oscar Chess v Williams[1957] 1 All ER 325:

A person sold a car to a car dealer and said it was a 1948 model. They relied on the car's logbook for this information. Unfortunately the logbook was forged and the car was in fact a 1939 model. It was held that the statement was a representation and not a term. Denning reiterates the Heilbut, Symons v Buckleton test re the totality of the evidence and the use of the intelligent bystander. He stated the statement was an expression of belief and not a contractual promise.

Dick Bentley Productions v Harold Smith (Motors) Ltd[1965] 2 All ER 65:

Car dealers sold a car to a customer and said it had done 20,000 miles. In fact it had done 100,000 miles. It was held that the statement as to the mileage of the car was a term as the maker of the statement had special skill and knowledge compared to the recipient

How can the courts decide whether a statement is a term or a mere representation? It was established in Heilbut, Symons & Co v Buckleton [1913] AC 30, that intention is the overall guide as to whether a statement is a term of the contract. In seeking to implement the parties' intentions and decide whether a statement is a term or a mere representation, the courts will consider the following four factors:

(A) TIMING

The court will consider the lapse of time between the making of the statement and the contract's conclusion: if the interval is short the statement is more likely to be a term. See:

Routledge v McKay [1954] 1 WLR 615

Schawel v Reade [1913] 2 IR 64.

(B) IMPORTANCE OF THE STATEMENT

The court will consider the importance of the truth of the statement as a pivotal factor in finalising the contract. The statement may be of such importance that if it had not been made the injured party would not have entered into the contract at all. See:

Bannerman v White (1861) CB(NS) 844

Couchman v Hill [1947] 1 All ER 103.

(C) REDUCTION OF TERMS TO WRITING

The court will consider whether the statement was omitted in a later, formal contract in writing. If the written contract does not incorporate the statement, this would suggest that the parties did not intend the statement to be a contractual term. See:

Routledge v McKay [1954] 1 WLR 615

Birch v Paramount Estates (1956) 167.

(D) SPECIAL KNOWLEDGE/SKILLS

The court will consider whether the maker of the statement had specialist knowledge or was in a better position than the other party to verify the statement's accuracy. See:

Harling v Eddy [1951] 2 KB 739

Oscar Chess v Williams [1957] 1 All ER 325

Dick Bentley Productions v Harold Smith Motors [1965] 2 All ER 65.

CONDITIONS AND WARRANTIES

Traditionally terms have been divided into two categories: conditions and warranties.

(A) CONDITIONS

A condition is a major term which is vital to the main purpose of the contract. A breach of condition will entitle the injured party to repudiate the contract and claim damages. The injured party may also choose to go on with the contract, despite the breach, and recover damages instead. See:

Poussard v Spiers (1876) 1 QBD 410

Note: The word 'condition' also has another meaning. It may mean a stipulation that a contract should not be enforceable except on the happening of a given event, or should be brought to an end on the happening of a given event. The condition is then properly called a 'condition precedent', or a 'condition subsequent' respectively. See Cheshire & Fifoot, p153-4).

(B) WARRANTIES

A warranty is a less important term: it does not go to the root of the contract. A breach of warranty will only give the injured party the right to claim damages; he cannot repudiate the contract. See:

Bettini v Gye (1876) 1 QBD 183.

(C) INTERMEDIATE TERMS

It may be impossible to classify a term neatly in advance as either a condition or a warranty. Some undertakings may occupy an intermediate position, in that the term can be assessed only in the light of the consequences of a breach. If a breach of the term results in severe loss and damage, the injured party will be entitled to repudiate the contract; where the breach involves minor loss, the injured party's remedies will be restricted to damages. These intermediate terms have also become known as innominate terms. See:

Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha [1962] 1 All ER 474

The Mihalis Angelos [1971] 1 QB 164

The Hansa Nord [1976] QB 44

Reardon Smith Line v Hansen-Tangen [1976] 3 All ER 570

Bunge Corporation v Tradax Export [1981] 2 All ER 513.

(D) NOTE

If the term is described in the contract as a 'condition' that will not be conclusive. See:

Schuler v Wickman Machine Tools [1974] AC 235.

IMPLIED TERMS

In most contracts the primary obligations of the parties are contained in express terms. In addition there are various circumstances in which extra terms may be implied into the agreement.

A) TERMS IMPLIED BY CUSTOM

The terms of a contract may have been negotiated against the background of the customs of a particular locality or trade. The parties automatically assume that their contract will be subject to such customs and so do not deal specifically with the matter in their contract. See:

Hutton v Warren (1836) 1 M&W 466.

B) TERMS IMPLIED BY THE COURT

(i) Intention of the Parties/Terms Implied as Fact

The courts will be prepared to imply a term into a contract in order to give effect to the obvious intentions of the parties. Sometimes the point at issue has been overlooked or the parties have failed to express their intention clearly. In these circumstances, the court will supply a term in the interests of 'business efficacy' so that the contract makes commercial sense. See:

The Moorcock (1889) 14 PD 64.

A more recent test is the 'officious bystander test' used to incorporate implied obvious terms (Shirlaw v Southern Foundries [1940] AC 701). If while the parties were making their contract, an officious bystander were to suggest some express provision, they would both reply, "oh, of course." See, eg:

Wilson v Best Travel [1993] 1 All ER 353.

(ii) Relationship Between the Parties/Terms Implied by Law

In certain relationships and contracts the law seeks to impose a model or standardised set of terms as a form of regulation. Such terms arising from the relationship between the parties will be implied as of law. See:

Liverpool City Council v Irwin [1976] 2 All ER 39.

TERMS IMPLIED BY STATUTE

ACT SALE OF GOODS 1979

Implied terms about title

Section 12 provides:

(1) In a contract of sale … there is an implied term on the part of the seller that in the case of a sale he has a right to sell the goods, and in the case of an agreement to sell he will have such a right at the time when the property is to pass.

(2) In a contract of sale … there is also an implied term that-

(a) the goods are free, and will remain free until the time when the property is to pass, from any charge or encumbrance not disclosed or known to the buyer before the contract is made, and

(b) the buyer will enjoy quiet possession of the goods except so far as it may be disturbed by the owner of or other person entitled to the benefit of any charge or encumbrance so disclosed or known.

The term implied by s12(1) is a condition and the term implied by s12(2) is a warranty: s12(5A).

Sale by description

Section 13 provides:

(1) Where there is a contract for the sale of goods by description, there is an implied term that the goods will correspond with the description.

(1A) … the term implied by subsection (1) above is a condition.

(2) If the sale is by sample as well as by description it is not sufficient that the bulk of the goods corresponds with the sample if the goods do not also correspond with the description.

Implied terms about quality or fitness

Section 14 provides:

(2) Where the seller sells goods in the course of a business, there is an implied term that the goods supplied under the contract are of satisfactory quality.

(2A) … goods are of satisfactory quality if they meet the standard that a reasonable person would regard as satisfactory, taking account of any description of the goods, the price (if relevant) and all other relevant circumstances.

(2B) … the quality of goods includes their state and condition and the following (among others) are in appropriate cases aspects of the quality of goods -

(a) fitness for the purposes for which goods of the kind in question are commonly supplied,

(b) appearance and finish,

(c) freedom from minor defects,

(d) safety, and

(e) durability.

(2C) The term implied by subsection (2) above does not extend to any matter making the quality of goods unsatisfactory -

(a) which is specifically drawn to the buyer's attention before the contract is made,

(b) where the buyer examines the goods before the contract is made, which that examination ought to reveal, or

(c) in the case of a contract for sale by sample, which would have been apparent on a reasonable examination of the sample.

(3) Where the seller sells goods in the course of a business and the buyer, expressly or by implication, makes known -

(a) to the seller …

any particular purpose for which the goods are being bought, there is an implied term that the goods supplied under the contract are reasonably fit for that purpose, whether or not that is a purpose for which such goods are commonly supplied, except where the circumstances show that the buyer does not rely, or that it is unreasonable for him to rely, on the skill or judgment of the seller …

The terms implied by sections 14(2) and (3) are conditions: s14(6)

Sale by sample

Section 15 provides:

(2) In the case of a contract for sale by sample there is an implied term -

(a) that the bulk will correspond with the sample in quality;

(c) that the goods will be free from any defect, making their quality unsatisfactory, which would not be apparent on reasonable examination of the sample.

The term implied by s15(2) is a condition: s15(3).

Modification of remedies for breach of condition in non-consumer cases

Section 15A provides:

(1) Where in the case of a contract of sale -

(a) the buyer would, apart from this subsection, have the right to reject goods by reason of a breach on the part of the seller of a term implied by sections 13, 14 or 15 above, but

(b) the breach is so slight that it would be unreasonable for him to reject them,

then, if the buyer does not deal as a consumer, the breach is not to be treated as a breach of condition but may be treated as a breach of warranty.

(2) This section applies unless a contrary intention appears in, or is to be implied from, the contract.

(3) It is for the seller to show that a breach fell within subsection (1)(b) above.

SUPPLY OF GOODS AND SERVICES ACT 1982

Implied term about care and skill

Section 13 provides:

In a contract for the supply of a service where the supplier is acting in the course of a business, there is an implied term that the supplier will carry out the service with reasonable care and skill.

Implied term about time for performance

Section 14 provides:

(1) Where, under a contract for the supply of a service by a supplier acting in the course of a business, the time for the service to be carried out is not fixed by the contract, left to be fixed in a manner agreed by the contract or determined by the course of dealing between the parties, there is an implied term that the supplier will carry out the service within a reasonable time.

(2) What is reasonable time is a question of fact.

EXCLUSION AND LIMITING CLAUSES

Introduction

A clause may be inserted into a contract which aims to exclude or limit one party's liability for breach of contract or negligence. However, the party may only rely on such a clause if (a) it has been incorporated into the contract, and if, (b) as a matter of interpretation, it extends to the loss in question. Its validity will then be tested under (c) the Unfair Contract Terms Act 1977 and (d) the Unfair Terms in Consumer Contracts Regulations 1999.

INCORPORATION :

The person wishing to rely on the exclusion clause must show that it formed part of the contract. An exclusion clause can be incorporated in the contract by signature, by notice, or by a course of dealing.

1. SIGNED DOCUMENTS

If the plaintiff signs a document having contractual effect containing an exclusion clause, it will automatically form part of the contract, and he is bound by its terms. This is so even if he has not read the document and regardless of whether he understands it or not. See:

L'Estrange v Graucob [1934] 2 KB 394.

However, even a signed document can be rendered wholly or partly ineffective if the other party has made a misrepresentation as to its effect. See:

Curtis v Chemical Cleaning Co [1951] 1 KB 805.

2. UNSIGNED DOCUMENTS

The exclusion clause may be contained in an unsigned document such as a ticket or a notice. In such a case, reasonable and sufficient notice of the existence of the exclusion clause should be given. For this requirement to be satisfied:

(i) The clause must be contained in a contractual document, ie one which the reasonable person would assume to contain contractual terms, and not in a document which merely acknowledges payment such as a receipt. See:

Parker v SE Railway Co (1877) 2 CPD 416

Chappleton v Barry UDC [1940].

(ii) The existence of the exclusion clause must be brought to the notice of the other party before or at the time the contract is entered into. See:

Olley v Marlborough Court [1949] 1 KB 532.

(iii) Reasonably sufficient notice of the clause must be given. It should be noted that reasonable, not actual notice is required. See:

Thompson v LMS Railway [1930] 1 KB 41.

What is reasonable is a question of fact depending on all the circumstances and the situation of the parties. The courts have repeatedly held that attention should be drawn to the existence of exclusion clauses by clear words on the front of any document delivered to the plaintiff, eg "For conditions, see back". It seems that the degree of notice required may increase according to the gravity or unusualness of the clause in question. See:

Thornton v Shoe Lane Parking [1971] 1 All ER 686

Interfoto v Stiletto Ltd [1988] 1 All ER 348.

3. PREVIOUS DEALINGS

Even where there has been insufficient notice, an exclusion clause may nevertheless be incorporated where there has been a previous consistent course of dealing between the parties on the same terms. Contrast:

Spurling v Bradshaw [1956] 2 All ER 121

McCutcheon v MacBrayne [1964] 1 WLR 125.

As against a private consumer, a considerable number of past transactions may be required. See:

Hollier v Rambler Motors [1972] 2 AB 71.

Even if there is no course of dealing, an exclusion clause may still become part of the contract through trade usage or custom. See:

British Crane Hire v Ipswich Plant Hire [1974] QB 303.

4. PRIVITY OF CONTRACT

As a result of the doctrine of privity of contract, the courts held that a person who is not a party to the contract (a third party) was not protected by an exclusion clause in that contract, even if the clause purported to extend to him. Employees are regarded in this context as third parties. See:

Adler v Dickinson [1954] 3 All ER 396

Scruttons v Midland Silicones [1962] AC 446.

5. COLLATERAL CONTRACTS

Even where an exclusion clause has been incorporated into a contract, it may not have been incorporated in a collateral contract. See:

Andrews v Hopkinson [1957] 1 QB 229.

6. THE BATTLE OF THE FORMS

A problem arises if one party sends a form saying that the contract is made on those terms but the second party accepts by sending a form with their own terms on and stating that the contract is on the second party's terms. The "rule of thumb" here is that the contract will be made on the last set of terms sent. See:

British Road Services v Arthur Crutchley Ltd [1968] 1 All ER 811.

B. INTERPRETATION

Once it is established that an exclusion clause is incorporated, the whole contract will be construed (ie, interpreted) to see whether the clause covers the breach that has occurred. The basic approach is that liability can only be excluded by clear words. The main rules of construction are as follows:

1. CONTRA PROFERENTEM

If there is any ambiguity or uncertainty as to the meaning of an exclusion clause the court will construe it contra proferentem, ie against the party who inserted it in the contract. See:

Baldry v Marshall [1925] 1 KB 260

Houghton v Trafalgar Insurance Co (1954).

Very clear words are needed in a contract to exclude liability for negligence. See:

White v John Warwick [1953] 1 WLR 1285.

2. THE MAIN PURPOSE RULE

Under this rule, a court can strike out an exemption clause which is inconsistent with or repugnant to the main purpose of the contract. See:

Glynn v Margetson [1893] AC 351

Evans Ltd v Andrea Merzario Ltd [1976] 1 WLR 1078.

3. THE DOCTRINE OF FUNDAMENTAL BREACH

· Prior to 1964, the common law considered that a fundamental breach could not be excluded or restricted in any circumstances as this would amount to giving with one hand and taking with the other. This became elevated to a rule of law.

· However, the rule of law approach was rejected in UGS Finance v National Mortgage Bank of Greece [1964] 1 Lloyd's Rep 446, on the basis that it conflicted with freedom of contract and the intention of the parties. The question of whether a clause could exclude liability for a fundamental breach was held to be a question of construction.

· The UGS case was unanimously approved by the House of Lords in the Suisse Atlantique case [1967] 1 AC 361, and Photo Production Ltd v Securicor Transport [1980] AC 827.

C. THE UNFAIR CONTRACT TERMS ACT 1977

The basic purpose of UCTA 1977 is to restrict the extent to which liability in a contract can be excluded for breach of contract and negligence, largely by reference to a reasonableness requirement, but in some cases by a specific prohibition.

1. THE SCOPE OF UCTA 1977

The Act does not apply to insurance contracts; the sale of land; contracts relating to companies; the sale of shares; and the carriage of goods by sea (Schedule 1); or to international supply contracts (s26).

Business Liability and Dealing as a Consumer

Most of the provisions of the Act apply only to what is termed "business liability". This is defined by s1(3) as liability arising from things done by a person in the course of a business or from the occupation of business premises. The exceptions are ss6 and 7 where the Act also applies to private contracts.

The Act gives the greatest protection to consumers. Under s12(1) a person "deals as a consumer" if he does not contract in the course of a business while the other party does contract in the course of a business; and if it is a contract for the supply of goods, they are of a type ordinarily supplied for private use or consumption. But see:

Peter Symmons & Co v Cook [1981] 131 NLJ 758

R & B Customs Brokers v United Dominions Trust Ltd [1988] 1 WLR 321.

2. THE MAIN PROVISIONS

s2, Exemption of Liability for Negligence

* Under s2(1) no one acting in the course of a business can exclude or restrict his liability in negligence for death or personal injury by means of a term in a contract or by way of notice.

* Under s2(2) liability for negligence for any other kind of loss or damage can be excluded provided the term or notice satisfies the requirement of reasonableness.

s3, Exemption of Liability for Breach of Contract

Where one party deals as a consumer or on the other party's written standard terms of business, then the other party cannot exclude or restrict his liability for breach of contract, non-performance of the contract or different performance of the contract unless the exemption clause satisifies the requirement of reasonableness.

s4, Unreasonable Indemnity Clauses

Indemnity clauses in contracts where one of the parties deals as a consumer are unenforceable unless they are reasonable.

s5, Guarantees of Consumer Goods

A manufacturer or distributor cannot exclude or restrict his liability in negligence for loss arising from defects in goods ordinarily supplied for private use or consumption by means of a term or notice contained in a guarantee.

s6, Exemption of Implied Terms in Contracts of Sale and Hire-Purchase

* In contracts for the sale of goods and HP, the implied terms as to title cannot be excluded or restricted by a contract term: s6(1).

* The implied terms as to correspondence with description or sample, fitness for purpose and satisfactory quality cannot be excluded or restricted by any contract term against a person dealing as a consumer: s6(2).

* Where the person is not dealing as a consumer, such liability can only be excluded or restricted in so far as the term is reasonable: s6(3).

s7, Exemption of Implied Terms in other Contracts for the Supply of Goods

* Exclusion clauses relating to title in contracts of hire are subject to the reasonableness test.

* The implied terms as to correspondence with description or sample, fitness for purpose and satisfactory quality cannot be excluded or restricted at all in consumer contracts.

* Where the person is not dealing as a consumer the exemption is subject to the requirement of reasonableness.

s8, Exemption of Liability for Misrepresentation

Any clause which excludes or restricts liability for misrepresentation is ineffective unless it satisfies the requirement of reasonableness.

s10, Exclusion Clauses in Secondary Contracts

Section 10 contains an anti-avoidance provision which prevents the rights preserved under one contract from being removed by a secondary contract.

3. THE REQUIREMENT OF REASONABLENESS

Under s11(1) the requirement of reasonableness is that "the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made."

Section 11(2) provides that, in determining whether the clause is a reasonable one for the purposes of ss6 and 7, regard shall be had to the Guidelines set out in Schedule 2 of the Act, which are as follows:

(1) The bargaining strengths of the parties relative to each other and the availability of alternative supplies.

(2) Whether the customer received an inducement to agree to the term. (The supplier may have offered the customer a choice: a lower price but subject to an exemption clause or a higher price without the exemption.)

(3) Whether the customer knew or ought reasonably to have known of the existence and extent of the term.

(4) Where the term excludes or restricts any relevant liability if some condition is not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable.

(5) Whether the goods were manufactured, processed or adapted to the special order of the customer.

Under s11(3) in relation to a notice (not being a notice having contractual effect), the requirement of reasonableness is that it should be fair and reasonable to allow reliance on it, having regard to all the circumstances obtaining when the liability arose or (but for the notice) would have arisen. This provision applies a test of reasonableness to disclaimers for tortious liability. See:

Smith v Eric Bush [1989] 2 All ER 514.

Under s11(4) where the exclusion clause seeks to limit liability rather than exclude it completely, the court must have regard to two factors: the resources available to meet the liability, and the extent to which insurance cover was available to the party aiming to limit liability. See also:

Ailsa Craig Fishing Co v Malvern Fishing Co [1983] 1 All ER 101

George Mitchell v Finney Lock Seeds Ltd [1983] 2 All ER 737

St Albans District Council v ICL [1996] 4 All ER 481.

Section 11(5) provides that it is up to the person who claims that a term or notice is reasonable to show that it is.

4. s13 CLAUSES

A party to a contract may try to disguise an exclusion clause, even though the effect of such a clause is to exclude liability. Section 13(1) tries to stop this and prevents:

(a) making the liability or its enforcement subject to restrictive or onerous conditions;

(b) excluding or restricting any right or remedy in respect of the liability, or subjecting a person to any prejudice in consequence of his pursuing any such right or remedy;

(c) excluding or restricting rules of evidence or procedure.

Such clauses are void or must be reasonable if they exclude or restrict liability respectively. Section s13, for example, will apply to terms: (a) imposing a time limit for making claims; (b) limiting a buyer's right to reject defective goods; and (c) stating that acceptance of goods shall be regarded as proof of their conformity with the contract. See also:

Stewart Gill v Horatio Myer [1992] 2 All ER 257.