Contract Terms

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Introduction

The terms of a contract lay down the rights and obligations of the parties to the contract

If a term is breached a cause of action can result

Distinction between a term and a representation

Terms bind and are contractual, whilst representations do not bind and are usually not contractual

Therefore, breaching a representation is not a cause of action for breach of contract

  • An innocent party can only claim misrepresentation

The "guiding factors" and "presumptions" in distinguishing a term from a representation

Whether something is a term or a representation depends on the objective intention of the parties - so if what was said was meant to form part of the agreement, then that will be a term

The “guiding factors” and “presumptions” the court asks itself are:

  • 1) Has the Statement been reduced to writing?
  • 2) Does one party have specialist skill or knowledge?
  • 3) The importance placed upon the statement
  • 4) Has there been a lapse in time between the statement being made and the contract being formed?

1) Has the Statement been reduced to writing?

If a statement is written down it is more likely to be a term

If the statement is signed that is greater evidence it is a term (L’Estrange v F Graucob 1934)

Parole evidence rule:

  • Parties may try to claim there is oral evidence that it was not their intention for the statement to be a term – the parol evidence rule states that if the statement is written the courts will simply say that IS the intention and any oral statements cannot be terms

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CONTENT

2) Does one party have specialist skill or knowledge?

If a party relies on the specialist statement when entering a contract that can be a term e.g. if Party A makes a statement (which only they know because of their professional/knowledgeable understanding) which induces party B to enter into a contract, then that statement can be a term of the contract

See, for example, Dick Bentley Productions v Harold Smith [1965]. However, compare this case with Oscar Chess v Williams [1957]

3) The importance placed upon the statement

The statement maker must know the other party thought the statement was important for it to be a term

Surrounding circumstances could make the statement important e.g. Bannerman v White (1861)

4) Has there been a lapse in time between the statement being made and the contract being formed?

If the statement was made a long time before the contract was finalised the less likely it is a term e.g. Routledge v McKay [1954]

Incorporation of a term

If a statement is identified as a term it is only binding if it forms part of the contract (incorporated)

3 methods of incorporating a term (see exclusion clauses):

  • By Signature (L’Estrange v Graucob [1934])
  • By Notice (Thompson v LMS Railway [1930])
  • By previous dealings (British Crane hire v Ipswich Plant Hire [1975])

It is not always necessary for all terms to be agreed expressly; instead, the court will imply terms to reflect the party intentions

  • Terms are implied in fact, in law, and in custom

Terms implied in fact<

Parties must have intended such terms to be a part of the contract but felt it unnecessary to expressly state the term

Terms are implied in fact when:

  • 1) To give contract “business efficacy”
  • 2) The “officious bystander” test

1) Business efficacy:

  • A term will be implied if it supports their commercial intention
  • See, for example, The Moorcock (1889)

2) The “Officious bystander” test:

  • A term will be implied if it is “something so obvious that it goes without saying” – so, an officious bystander would know the term is necessary (Shirlaw v Southern Foundries [1939])

Terms implied in law

1) A term implied in law by the court

  • See, for example, Liverpool City Council v Irwin [1977] → The court implied a term, after a dispute arose, that the council had “to take reasonable care to keep [the flats] in reasonable repair and usability”
  • There has been tension between the Court of Appeal and House of Lords as to when a term should be implied by the courts → Lord Wilberforce said (in Irwin) that the court will imply a term in law if it is necessary to do so (House of Lords). But Denning said it should be about reasonableness (Court of Appeal)

2) Terms implied in law by statute

  • Statute automatically implements terms into certain contracts e.g. Sale of Goods Act 1979

3) Terms implied in law by customs

Types of terms

1) Conditions

2) Warranties

3) Innominate (or intermediate) terms → although, these are not really terms!

1) Conditions

Breaching a condition will end the contract

A condition is a fundamental term of a contract. Therefore, breaching a condition is a 'repudiatory' breach

2) Warranties

Not as important as conditions, so a contract will not automatically end if a warranty is breached

However, damages can be sought

  • It is important to identify a term as a condition or a warranty because one ends the contract and the other does not

The innocent party can accept the breach of warranty and withdraw from the contract:

  • But the breach must be clear and unequivocal
  • The withdrawl must be communicated to the contract breaker (Vitol v Noref (1996))
  • Once he/she decides to withdraw it is irrvocable

OR the innocent party can affirm and waive the right to withdraw

  • This keeps the contract alive, but he/she can still claim damages for the breach of contract
  • Again, the waiving of the right to withdraw must be clear and unequivocal. Mere inactivity is not affirmation. HOWEVER, affirmation can be implied: Yukong Line of Korea v Rendsburg Investment Corporation of Liberia (1996)
  • If the innocent party waives the right to withdraw it is irrevocable, unless there is a fresh breach of the contract (Johnson v Agnew)

Often statute will expressly say whether a term is a condition or a warranty e.g. the Sale of Goods Act 1979 s12: an implied term as to title is expressly stated, so should be a condition

Also, the parties can identify a term as a condition or warranty

If both statute and the parties cannot deem whether a term is a warrants or a condition the court will look to the importance of such a term

3) Innominate terms

An innominate term is a term which cannot be identified as either a condition or a warranty

The court will determine whether the term is a condition or a warranty depending on the seriousness of the breach and at the time of the breach

Bunge v Tradax: ‘unless the contract makes it clear (…) that a particular term is a condition or only a warranty, it is an innominate term’ Lord Scarman

Advantage of clarifying a term as innominate:

  • Flexibility for the court: they can look at why a party may have wanted a contract to end

Disadvantage of classifying a term as innominate

  • Party uncertainty: hard for parties to regulate conduct

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