Contract 6 - Contract Terms

Legal Environment

Contract 6

The Terms of a Contract

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Learning Objectives

Quick Review

Terms of a Contract

Terms v. Representation

Types of Terms

Implied Terms

Exclusion clauses

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Quick Review

A contract is a legally binding agreement

In order to create a valid contract, there must be An offer An acceptance Consideration Capacity to contract Intention to create legal relations

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Terms of a Contract

Now that we know how to create a valid contract, we need to think about what is in a contract

A contract is an agreement

The terms of a contract express what the parties to the contract have agreed

A term in a written contract is often called a clause

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Terms v. Representations

It is often important to identify whether a statement is a term of the contract or a representation made during negotiations about the contract

This is because a term is part of the contract

That means it is binding and the parties must do what the term says

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Terms v. Representations (cont.)

On the other hand, a representation does not form part of the contract so the parties to not have to do what it says

A representation is a statement made to try to get someone to enter into a contract

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Terms v. Representations (cont.)

There are 4 tests to help us decide if a statement is a term or a representation

The importance of the statement

The time between making the statement and making the contract

An oral statement before a written contract

Where one party to the contract has special skill or knowledge

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Importance of the Statement

If the statement is so important that someone would not have entered into the contract without it, then it is a term of the contract (and not a representation)Eg: Angela is a vegetarian. She does not eat any meat. When she orders a pizza she asks the restaurant if it contains any meat. They say, “No.” The reply made by the restaurant would be a term of the contract because Angela would not buy a pizza which contains meat.

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Timing

If some time passes between the statement being made and the contract being created, then the statement is likely to be a representation

However, if the time between the statement and the contract is quite short then it may not be a representation

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Oral Statement / Written Contract

One party makes the statement verbally (ie it is spoken)

The contract is made in writing and does not include the spoken statement

In this case, the spoken statement is likely to be a representation

For example, Routledge v McKay concerned the sale of a motorbike

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Oral Statement / Written Contract

In the verbal negotiations the owner said the motorbike was a 1942 model

In fact, it was from 1930

However, when the written contract was made it did not include any statement about the year

Therefore, the statement was a representation not a term of the contract

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Special Skill or Knowledge

If one of the parties to the contract has special skill or knowledge then statements made by him will be terms of the contract

However, statements made to him will not be terms, they will be representations

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Special Skill or Knowledge (cont.)

Eg 1: If a garage sells a car to Fred then statements made by the garage to Fred would be terms of the contract because the garage are experts on cars. They have special knowledge.Eg 2: If Fred sells his car to a garage, then statements made by Fred about the car are not terms because the garage has special knowledge and should know if Fred is correct.

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Types of Terms

Once we know that a statement is a term in a contract, we need to identify what kind of statement it isThis is important as different kinds of statements have different remedies when a party breaches them A breach of contract occurs when one party does not follow an agreed term of the contract

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Types of Term (cont.)

There are 3 types of term:

Conditions

Warranties

Innominate terms

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Conditions

A condition is a basic and important part of the contract

If one party breaches a condition then the other party may End the contract Refuse to perform their part of the contract Continue with the contract but then sue for

damages

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Warranties

On the other hand, a warranty is not vital to the contract

If one party breaches a warranty then the other party can only continue with the contract and then sue for damages

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Conditions v. Warranties

Two cases involving opera singers show the difference between conditions and warranties

In Poussard v Spiers and Pond, Mrs Poussard was an opera singer. She agreed to sing in an opera starting on 28 November. However, she became ill and was unable to sing until 4 December.

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Conditions v. Warranties (cont.)

The opera company had to hire another singer so that the opera could start on 28 November.

They could only get another singer if they hired her for all the performances of the opera.

They did this and refused the services of Mrs Poussard once she was better

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Mrs Poussard raised a court action to try to make the company pay her

However, the court said that Mrs Poussard breached a condition of the contract when she was unable to perform on 28 November

This was a basic term of the contract

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The position was different in Bettini v Gye

Bettini was an opera singer

He agreed to sing in London in a number of theatres beginning on 30 March

He also agree that he would arrive in London 6 days before the first performance in order to practise

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Bettini became ill and did not arrive in London until 3 days before the first performance

The opera company refused to allow him to sing

They said he had breached the contract

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However, the court said that the part of the agreement about practicing was a warranty not a term

That meant it was not a basic part of the contract. It was subsidiary part.

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Innominate Terms

These are terms which may be either conditions or warranties

It depends how serious the breach of the contract is

If the breach is serious the court will say the term was a condition

If the breach was less serious then the court will say it was a warranty

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Innominate Terms (cont.)

For example, if you buy a used car (that is, one which has already been owned by someone else) then one of the things which affects the price you pay is the number of kilometres which it has travelledA car which has travelled a high number of kilometres is worth less because it has been used moreIt is more likely to wear out

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Therefore, if a garage is selling you a used car and they tell you that it has travelled 32,000 km

If the car has really travelled 60,000 km, then a court would say there was a breach of condition because of the big difference between 60,000 and 32,000

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However, if the car had really done 34,000, then the court would say the statement was only a warranty

The difference between 34,000 and 32,000 is not significant

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Implied Terms

So far, we have only looked at statements which the parties actually make in words or writing

However, contracts can also have implied terms

These terms are not stated expressly by the parties, but they are still regarded as being terms of the contract

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Implied Terms (cont.)

There are 3 ways in which implied terms become part of a contract:

Implied by statute

Implied by custom

Implied by a court

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Implied by Statute

Some statutes say that certain terms are included in contracts even if the parties to the contract do not include them expresslyFor example, the Sale of Goods Act 1979, implies terms concerning the quality of the good soldThis means that even if the parties do not mention anything about the quality of the goods being sold in the contract, the Sale of Goods Act includes a term about quality automatically

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Implied by Statute (cont.)

Therefore, if one party supplies the other with goods of poor quality, the other party can rely on the term implied by the Sale of Goods Act even though the parties did not include any terms about quality themselves

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Implied by Custom

Some terms may not be included in a contract by the parties, but they are regarded as having been included automatically because it is customary in that kind of business or contract

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Implied by Custom (cont.)

So for example, a school makes a contract with a foreign teacher

In the contract, the school agrees to provide the teacher with a place to live

However, the contract does not mention which party will pay for the gas and electricity and phone calls

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Implied by Custom (cont.)

If there was any argument about who should pay, the teacher could argue that the custom is that schools pay for the gas and electricity but teachers have to pay for the phone calls which they make

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Implied by Court

A contract represents what the parties have agreed

Therefore, a court is usually unwilling to make changes to a contract

However, a court will say that a term should be implied in a contract if it thinks it is commercially necessary (ie, it makes good business sense)

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Implied by Court (cont.)

In the case of The Moorcock, a boat was damaged while it was tied up to be unloaded

There was nothing in what the parties agreed to suggest that the company in charge of unloading had said it was safe to unload there

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Implied by Court (cont.)

However, the court decided that there was an implied warranty that the place where the boat was to be unloaded would be safe

This makes good sense in business

No sensible boat owner would pay to have his boat unloaded in a place which would damage his boat

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Exclusion Clauses

Exclusion clauses are terms of a contract which try to limit the liability of one of the parties if they breach the contract

These clauses can create unfair situations where one party is able to insist they are included in the contract because that party is much stronger than the other party

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Exclusion Clauses (cont.)

One area where the courts and Parliament have tried to control the effect of exclusion clauses is in contracts between business and individual consumers

This is because the business is usually in a stronger position than the consumer

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A common situation is where the business has a standard printed contract

The consumer only has a choice of signing (and making a contract) or not signing (and not making a contract)

There is no opportunity for the consumer to negotiate to try to improve his (or her) position

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An example might be booking a holiday with a travel company where the terms of the contract are printed in the travel company’s holiday brochure

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Dealing with Exclusion Clauses

When a court looks at an exclusion clause, it thinks about 3 things:

Has the exclusion clause been included in the contract?

How should the exclusion clause be interpreted?

Does the Unfair Contract Terms Act 1977 apply to the exclusion clause?

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Included in the Contract

An exclusion clause has to be part of the contract or it has no effect

There are 3 ways that an exclusion clause can become a term in a contract By signature By notice By custom

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By signature

If someone signs a contract which contains an exclusion clause then the exclusion clause is a valid term in that contract

This is true even if the person did not read the contract before signing it

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By notice

Except in the case where someone does not read the contract, an exclusion clause is only valid where the person knew about it or was given notice of itFor example, you arrive at a hotel and book a room for a few daysWhen you get to your room, you find a sign inside which says that the hotel is not responsible if any of your things are stolen

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By notice (cont.)

However, the hotel will not be able to rely on this exclusion as the contract was made before you got to your room

The contract was made at the reception desk of the hotel before you had a chance to see the sign

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By notice (cont.)

If the exclusion clause is very severe (the payment of a lot of money, for example) the court will not usually allow the exclusion clause to be in another document (or sign) which is referred to by the contract

The person entering into the contract should have the opportunity to read the actual exclusion clause

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By custom

If the parties have previously entered into other contracts with each other which contained exclusion clauses, then the clause may become part of later contracts too

But the party affected by the clause must know it was in the previous contracts

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Interpreting Exclusion Clauses

Courts usually attempt to limit exclusion clauses by giving them a very narrow meaningIf the clause is unclear or ambiguous, then the court will usually interpret the meaning of the clause against the person who wants to rely on the clauseThis is referred to as the contra proferentem rule

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Contra Proferentem Example

In Alexander v Railway Exective, a man left several boxes to be looked after at a station The man was given receipts for the boxesHe was going to send instructions to say where the boxes should be sentBefore the station received those instructions the man’s assistant visited the station

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Contra Proferentem Example (cont.)

He was allowed to open the boxes even though he did not have any of the receipts from the station

The assistant stole several things from the boxes

The man sued the station for breach of contract

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Contra Proferentem Example (cont.)

The station tried to avoid paying damages for the stolen property by relying on an exclusion clause printed on the receiptsPart of this said that the station was not liable if it delivered things to the wrong personThe court said that this did not include giving it to an unauthorised person who had no receipt

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Unfair Contract Terms Act 1977

This Act prohibits clause which try to exclude liability for death or injury resulting from negligence

The Act also says that an exclusion clause in a contract with a consumer is only valid if it is reasonable

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Summary

It is important to know if a statement is a term of a contract or simply a representationThere are 4 tests to decide this: The importance of the statement The time between making the statement and

making the contract An oral statement before a written contract Where one party to the contract has special skill

or knowledge

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Summary (cont.)

There are 3 types of term:

Conditions

Warranties

Innominate terms

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Summary (cont.)

Implied terms are included in a contract even though the parties did not create them

There are 3 ways in which implied terms become part of a contract: Implied by statute Implied by custom Implied by a court

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Summary (cont.)

Exclusion clauses are terms of a contract which try to limit the liability of one of the parties if they breach the contract

There are 3 ways that an exclusion clause can become a term in a contract By signature By notice By custom

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Summary (cont.)

The courts and Parliament try to limit the effect of exclusion clauses

The courts give a narrow meaning to exclusion clauses

Parliament passed the Unfair Contract Terms Act 1977

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Reading

(MacIntyre) Pgs. 99-108, 112-120, 122 essential points

(Kelly) Pgs. 161-166 (skip mistake in respect of domains), 167-171, 175-178, 183-184

Contract 6 - Contract Terms

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Transcript of Contract 6 - Contract Terms