Terms of a Contract Lecture

This chapter of the module guide will examine how the parties’ agreements are interpreted. We will examine how the terms of the contract are identified, and assess how the courts interpret the meaning of certain terms.

Are statements made pre-contract terms or representations?

The first point to address is in relation to statements made at the pre-contractual stage, which are not in the written contract. The difficulty with these statements is that they are often made orally. Do these statements form part of the agreement or not? Generally, the courts will take an objective approach to consider the intentions of the parties. There are a number of guidelines which the courts use in order to ascertain the intentions of parties.

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. As example of a puff would be an advertisement for a theme park which stated “you will have the time of your life at our theme park”, what if you didn’t have “the time of your life”, would you be able to sue for breach of contract? Evidently, this is a statement not meant to be taken literally, and is an advertising gimmick. 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: A misrepresentation only allows 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, see the misrepresentation chapter for more information).

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

Misrepresentation: Damages will be limited - the claimant will be put into the position they were in before the contract was made.

It is clear from this that the measure of damages is favourable in the event of a term breaching a contract, as opposed to misrepresentation. However, the ability to recover for damages is slightly different.

Term: Damages will be recoverable based on the remoteness rule from Hadley v Baxendale(1854) 9 Exch 341 (see chapter on damages for more information). This test requires that the loss suffered by the claimant was ‘reasonably contemplated’ by the parties

Representation: Fraudulent misrepresentation will allow for a claim for all direct loss by the claimant, irrespective of forseeability.

In contrast to the right to claim for damages, a representation is much more favourable, as the damage need not be in contemplation of the parties. Therefore, it becomes clear that it is extremely important to the outcome of the case whether a statement is classed as a term or representation, it could be the difference between thousands of pounds in damages.

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. Each will be examined in turn.

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.

The starting point for a court determining whether a written term is a term or a misrepresentation is that it will be a term, and the only term. The case of Henderson v Arthur [1907] 1 KB 10 is authority for this point. Claims pointing to other documents or oral agreements will usually be ignored. This is known as the ‘parol evidence’ rule.

It should be noted that there will be circumstances in which other documents or oral agreements can form terms, but this is the initial starting point for the courts when faced with terms reduced to writing. One such rebuttal to this can be found in J. Evans & Son (Portsmouth) Ltd v Andrea Merzario [1976] 1 WLR 1078. If the contract was intended to be partly written and partly oral, the parol evidence rule will not apply. To this effect, the courts will look at the conduct of the parties from the start to the end of the contract formation.

Exam consideration: Can you think of some example of conduct which may mean that oral evidence is allowed and the parol evidence rule would be displaced?

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 collateral contract would be enforceable, the consideration for the promise would be the making of the main 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. In Grogan v Robin Meredith Plant Hire [1996] CLC 1127 a signing of a time sheet which included clauses was held to be invalid as a time sheet would not have been expected to include contractual terms.

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.

These two contrasting cases should help aid your understanding of this principle.

In Oscar Whell Ltd v Williams [1957] 1 WLR 370, a car seller represented his car to be a model which was worth substantially more than the actual model he was selling. This statement was held not to be a term, as the seller had no specialist knowledge, and used what the registration book told him. Furthermore, the buyers were actual car dealers, and should have discovered the truth.

In Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965] 1 WLR 623 a car dealer stated a car had only done 20,000 miles, when it had done significantly more. As the statement was made by a car dealer, with specific knowledge, the statement was held to be a term.

The distinction between these cases is the credentials of the person making the statement. The private seller did not claim to, nor would it have been presumed that he had specialist knowledge, whereas it would be presumed a car dealer would.

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

The case of Bannerman v White(1861) 10 CB NS 844 Party A asked whether sulphur was used in the product he was buying, explicitly stating he was not interested if they included sulphur. He was assured by Party B that there was no sulphur included. This is an example of expressly confirming the importance of a term, therefore, when there was sulphur included, the defendant could rely on this term to claim for breach of contract.

The case of Pritchard v Cook & Red Ltd unreported, 4 June 1998 provided a test to determine importance. The question to ask is if whether the statement maker is taking personal responsibility for the statement.

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.

In Inntrepreneur Pub Co v East Crown Ltd [2000] 2 Lloyd’s Rep 611, it was stated that the longer the interval between the statement and the contract, there is a greater presumption that the statement is not a term.

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, where Party A were examining a horse, and Party B stated the quality of the horse was fine and they did not need to inspect it. This statement was held to be a term.

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. This is because the statement maker suggests the statement may not be true and he would advise it is confirmed. Ecay v Godfrey(1947) 80 Lloyd’s Rep 286 is good authority for this point.

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. Only following incorporation will that term become a part of the contractual obligations. There are three main ways by which this may be done:

  1. Signature
  2. Notice
  3. Previous course of dealings

Signature

The case of L’Estrange v E. Graucob Ltd [1934] 2 KB 394 outlines the importance of a signature to the contractual document. It is held that if a party signs a document containing contractual terms, they are wholly bound. The terms are incorporated, and it is immaterial whether or not they read the document.

This presumption is limited in that the signature will not bind if it is fraudulently obtained or is subject to a misrepresentation, as shown in Curtis v Chemical Cleaning and Dyeing Co [1951] 1 KB 805, where the receipt for a dress excluded all liability for damage. The customer only signed the receipt because the assistant misrepresented the terms as applying to damage to the beads and sequins on the dress.

Exam consideration: Aren’t the two decisions in L’Estrange v E. Graucob Ltd and

Curtis v Chemical Cleaning and Dyeing Co [1951] 1 KB 805 conflicting? Surely the customer in Curtis should have been bound no matter what as per L’estrange. Consider the commercial difficulties if the Curtis exception did not operate.

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

Documents

The most famous case on this matter is Chapelton v Barry Urban District Council [1940] 1 KB 532. In this case, Party A hired deckchairs from Party B. The ticket he was given contained a term exempting the council for liability for any injury in relation to the hiring of those chairs. It was held that the term was not incorporated into the contract, as a ticket was a receipt, and not a contractual document.

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

Grogan v Robin Meredith Plant Hire [1996] CLC 1127 confirms that invoices, time sheets and statements of accounts are not documents of contractual intent. However, if one of these documents was part of the offer to contract, they would be held to be a contractual document.

Reasonable Notice

Reasonable notice is an objective consideration of whether the party subject to the terms are aware of the terms. There is no requirement that the party must be privy to the actual contents of the terms, the need only be aware of the fact that they exist.

Parker v South Eastern Railway(1877) 2 CPD 416 ruled that if the document received is one that would normally contain contractual terms in, and it would be common knowledge that this would be so, the party receiving the document would be assumed to have notice.

This objective consideration is highlighted particularly in Thompson v London, Midland and Scottish Railway [1903] 1 KB 41, where it was held to be irrelevant that the individual was illiterate if this fact is not known by the party supplying the document with the terms. If it was, for example, plainly obvious that the individual was blind, the term would not be incorporated.

Terms can also be incorporated by referring the party to a different document which has the terms in. Thompson v London, Midland and Scottish Railway highlights this, the ticket stated “subject to conditions set out in timetables”. Although the actual contractual document did not have these conditions in, the reference was enough to objectively incorporate them.

In order for the terms to be incorporated by reference, the document referred to must be ‘readily available’. In Sterling Hydraulics Ltd v Dichtomatik Ltd [2006] EWHC 2004 QB, a term referred the party to their general terms of sale. However, these terms of sale were not sent with the contractual document, therefore were not incorporated.

Before or at the time of contracting

The reasonable notice must be given either before or at the time of contracting. In Olley v Marlborough Court Ltd [1949] 1 KB 532, a hotel excluded liability for loss to personal possessions of the guests. This notice was on the doors of the hotel rooms. The contract was formed at the hotel desk, therefore the notice was deemed to be after the formation of the contract, and the exclusion could not be relied upon.

One unique circumstance of incorporation and notice relates to ticket machines. The case of Thornton v Shoe Lane Parking Ltd [1971] QB 163 has affirmed the fact if terms of a contract are included on a ticket which is printed after the money has been paid, the contract has been formed already, and therefore the terms are not incorporated. Following, the terms relating to contracts through automated machines must be made clear before the ticket has been purchased, perhaps by a sign or another form of notification.

Different standards for different terms

More onerous or unusual terms have a higher standard of incorporation. In Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1988] QB 433 a term in the contract stipulated there would be a £5 per day late fee. The court considered this term as onerous and unusual, and therefore would have had to have been brought directly to the attention of the party subject to the term. Examples of ways this might be done are:

  • Large sized print in the contract
  • Placed in a box in the document to highlight the term

It should be noted that the term does not need to be both onerous and unusual, only one of the factors need be satisfied - Ocean Chemical Transport Inc v Exnor Craggs Ltd [2000] 1 All ER (Comm) 519

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. Where parties regularly contract with consistency in terms and conditions, the terms may be held to be incorporated - Hardwick Game Farm v Suffolk Agricultural Poultry Producers Association [1969] 2 AC 31. It will be for the party attempting to rely on the fact the term has been incorporated to prove the past dealings have been sufficiently consistent enough to imply the terms into the contract.

The two requirements are:

  1. There must be sufficient notice of the term
  2. The previous dealings must have been sufficiently consistent

Sufficient notice

Sufficient notice refers to the terms being present at some point in the previous dealings. In Spurling v Bradshaw [1956] 1 WLR 461, the parties had dealt with each other for a number of years. After every contract, Party A sent Party B a “landing account” which excluded their liability. Due to the fact there was such a large amount of previous dealings, this term was held to be included in all of the following agreements.

The parties in Spurling v Bradshaw had dealt with each other for a number of years, but it is unclear exactly how many dealings are required to result in a decision such as in Spurling v Bradshaw. The case of Hollier v Rambler Motors (AMC) Ltd [1972] 2 QB 71 confirmed that three or four dealings over five years did not result in any terms being implied due to previous course of dealings.

Exam consideration: As there is no law which tells us exactly how many previous dealings are required to result in terms implied through a previous course of dealing, in a problem question, ensure to contrast both cases and form a reasoned judgment - there can’t be a wrong answer if you substantiate your conclusion well!

Consistency in the dealings

This requirement highlights the need for consistency in the previous dealings, if the terms between the parties are subject to change each time, incorporation through previous course of dealings will not be possible.

McCutheon v David MacBrayne Ltd [1964] 1 WLR 125 was a case in which the consistency in the dealings was not sufficient. In the past course of dealings, there was inconsistency in whether one party was required to sign a “risk note” which included an exclusion clause. In the particular dealing where the other party attempted to rely on this clause, the risk note was not signed. The court could not incorporate the term due to the inconsistency of the dealings, as the dealings only sometimes required the risk note to be signed.

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. For example, take a contract in which an individual goes to a restaurant for a meal. The express contractual terms will be for the exchange of an amount of money for the food. However, there will be implied terms as to the quality of the food; for example, it will be implied that the food will be cooked correctly. If for each and every contract each term needed to be expressed, it would be very tedious and inefficient. Therefore, terms can be implied in the following ways:

  1. Custom
  2. Law
  3. Fact

Terms implied by custom

There is potential for terms to be implied based on established custom or usage in the relevant field. An example of this can be found in Hutton v Warren(1836) 1 M & W 466, in relation to an agricultural lease. In this case, a term was implied by custom that the tenants were entitled to an allowance for seed and labour. This was usual and custom in agricultural leases. 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

An example which satisfied this test was in British Crane Hire Corporation Ltd v Ipswich Plant Hire Ltd [1975] QB 303, in which the ‘Contractors’ Plant Association’ terms were implied, as they were custom in the business context and both parties were involved in the plant hire business.

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

The case of Liverpool City council v Irwin [1977] AC 239 is the leading authority here. In this case, the council let some flats to tenants. The communal areas of the flats were not maintained, meaning the tenants could not use the stairs and lifts. The contract was quiet as to the obligations of the council the repair any of these communal areas. The tenants refused to repair these, and the council attempting to evict them. The contract did give the tenants an explicit right to use the stairways and lifts, therefore, incidental to this, the House of Lords implied a term which required the council to keep these areas in repair, so that the tenants could use them.

Therefore, it can be seen that the implied term was a necessity in order for the tenants to be granted other rights in the contract. The implied term must be incidental to the granted rights, and cannot be entirely separated. In Spring v Guardian Assurance plc [1995] 2 AC 296 this approach was clarified. Lord Woolf explained that it was also based on what ‘normal practice’ would be in the context.

In Liverpool City Council v Irwin, as ‘normal practice’ would be for the council to maintain the communal areas, this term was able to be implied.

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.

The Sale of Goods Act 1979 imposes a variety of obligations on sellers and confers various rights to buyers. Here is a quick overview of some of the more implied terms

  • Section 14(2) implied that in the sale of goods in the course of a business, there is an implied term that the goods will be of satisfactory quality
  • Section 14(3) implies that the goods sold will be fit for the required purpose if the buyer has made this purpose clear
  • Section 13(1) implies that where goods have been sold by description, the goods will correspond with this description

Terms implied by fact

Some contracts will include terms which are implied by the facts surrounding the contract, on the basis of the parties’ intentions. This is a strange implication, as the courts have always wished to focus on giving effect to the parties’ intention, surely if they intended something to be a term of the contract, they would have expressed this wish and it would not have to be implied? The starting position, therefore, is that the courts should not interfere and imply terms - Attorney-General of Belize v Belize Telecom Ltd [2009] UKPC 10

However, it is sometimes necessary to imply facts in order fill the gaps in the contract where the parties had not expressly set out certain terms. This can only be where the court entirely satisfied that the contract actually meant to include the terms implied at fact. There are two methods of implication at fact:

  1. The ‘officious bystander’ test
  2. The ‘business efficacy’ test

The ‘officious bystander’ test

This test was created in Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206. Essentially, it would be a term implied because it would be so obvious that it would go without saying. The test, as explained by MacKinnon LJ is:

“If, while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common ‘Oh, of course!’”

This standard is rather strict and subsequently it becomes difficult to imply terms using it. The difficulty is that is requires a theoretical unquestionable assent by both parties to the implied term.

The ‘business efficacy’ test

The business efficacy test refers back to our initial example of a customer buying a food in the restaurant. This test allows the courts to imply terms based on business efficacy, which would have been presumed to form terms of the contract.

The Moorcock(1889) 14 PD 64 is a prime example of this. In that case, there was a contract to unload a ship on the river Thames. The parties were aware the ship would settle on the riverbed at low tide. The ship was damaged at low tide when it was above hard ground, rather than mud as it should have been. There was not an express term to ensure the ship was above mud at low tide, but the court implied such a term.

The reasoning behind this term being implied is that this term must have been the intention of the parties, as without this term, the contract could not have been performed as intended and it was needed for the contract to work.

Generally, it was set out in SABIC UK Petrochemicals Ltd v Punj Lloyd Ltd [2013] EWHC 2916 (TCC) that the two grounds a term can be implied into the contract on the grounds of business efficacy are:

  1. The term is necessary for the contracts operation
  2. It would be obvious the parties would understand this term was intended

Exam consideration: Under which of the two tests do you think our example of a contract for food in a restaurant would be implied terms as to the quality of the food fall?

Different types of terms

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

  1. Conditions
  2. Warranties
  3. Innominate

The importance of this classification is the extent a breach of each term will have in the event they are breached.

Conditions and warranties

A condition is the most important of terms. 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, their contractual obligations will continue despite this breach.

As you can identify, it will be of utmost importance when a party breaches a term whether that term is a condition or a warranty. 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. It may be the case that the statute in question expressly defines whether the term is a condition or a warranty. To use the example we examined when discussing terms implied at statute, the terms in the Sale of Goods Act 1979 are a mixture of conditions and warranties, which are all expressly defined as such.

Identification of the term by parties

The parties may imply a term to be a condition or a warranty. Take the following example of two terms in a contract.

  • If the windows are not cleaned on time, I will have no further obligations under the contract
  • I will be entitled to £50 if the windows are not cleaned on time

There is no express reference to the terms here being a condition or a warranty, but it is clear the first term would be a condition, as if it is breached, the obligations under the contract are ceased, and the second one will only allow for a claim for damages of some kind.

Interestingly, the fact that the parties have expressly labelled a term as a condition or a warranty will not always mean this is the case. In L Schuler AG v Wickman Machine Tools Sales Ltd [1974] AC 235 a term in the contract stated a term would be a condition. However, the court held it was not a term, as due to its lack of importance to the contract, to treat it as a condition was unreasonable. This brings us to the final way of categorising a term.

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.

The two contrasting cases of Poussard v Spiders(1875) LR 1 QBD 410 and Bettini v Gye(1875) LR 1 QBD give an excellent illustration of this. Both contracts involved similar facts in which there was a singer who was contracted to perform in a show. Both had terms in the contract that they must attend rehearsals and that they must perform in the show.

In Poussard, the singer failed to perform on the opening night of the show. This was held to be a condition. In Bettini, the singer failed to show up to rehearsals, this was held to be a warranty. Clearly, the performance in the show was of more importance in the contract, and could therefore be classified as a condition, whereas the term to show up for rehearsal in Bettini could only be a warranty due to its lack of importance to the contract as a whole.

Innominate terms

An innominate term is one which strikes a middle ground between a condition and a warranty, and it would be unfair to classify the term as either. The result of such a term is that the courts will classify the term upon breach of it. Once the term has been breached, the court can clearly see the consequences and seriousness of the breach, and are able to make a fully informed judgement on whether it should be a condition or warranty.

An example of such a term comes in Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 in a contract for the lease of a ship. The term is question was that the ship must “be in every way fitted for ordinary cargo service”. This term was breached when the ship was not kept in adequate repair, which resulted in the ship only being at sea for six months of the contract.

This breach was considered to be a breach of warranty, due to the less serious nature of the breach. The same term could have been breached by the ship not being seaworthy and actually sinking, destroying the subject of the contract, therefore in such a case the breach would have been serious and would likely be classified as a condition. The question the courts ask it:

  • 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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