Implied Terms and Frustration Flashcards
What is the difference between a term and a representation?; why is this difference important?
A term is an integral part of the contract, setting out obligations that, if breached, provide grounds for a claim. A representation, however, is a pre-contractual statement that induces one party to enter the contract but doesn’t form part of the binding terms.
Importance: The distinction is significant because breach of a term allows the injured party to claim damages or terminate the contract if it’s a major term. Breach of a representation may allow for rescission or damages for misrepresentation, but it doesn’t typically affect the contract itself.
What is the parol evidence rule? – are there any exceptions to it?
The parol evidence rule prevents the use of oral or external evidence to contradict, modify, or add to a written contract. The purpose is to ensure that written agreements are respected and not altered by potentially unreliable oral statements.
Exceptions include; Ambiguity: External evidence clarifies ambiguous terms
Conditions Precedent: To show that the written contract was conditional on a future event.
Misrepresentation, Fraud, or Duress: Evidence of fraud or undue influence is admissible to challenge a contract.
Incomplete Contracts: Oral terms may supplement incomplete written contracts.
Rectification: To correct a clerical error in the written contract.
Collateral Contract: To prove the existence of a separate contract.
Implied Terms: To imply terms into the contract.
Custom and Usage: To show that a term is implied by custom or usage in a particular trade or industry.
What is the effect of signing a document containing contractual terms?
Signing a document signifies agreement to its terms, even if the signer hasn’t read it. This principle is based on the idea of contractual estoppel, which prevents parties from later denying the document’s terms.
Exceptions: If the signer was misled or the document contained unexpected or onerous terms without sufficient notice, courts may not enforce it.
How can terms be incorporated into a contract?; why is the time of the contract and reasonable notice of terms important to determine?
Terms can be incorporated in various ways:
By Signature: As discussed, signing generally indicates agreement.
By Notice: Reasonable notice of terms, usually through clear display or communication before or at the time of contracting.
By Previous Dealings: Regular, consistent prior dealings may imply agreement to terms, even if not explicitly stated each time.
Importance of Timing and Notice: Terms must be provided in a timely manner, typically before or when the contract is formed. Failure to give reasonable notice means the terms may not be binding, especially if they’re unusual or unexpected.
What are the main ways in which terms can be implied into contracts?
Terms may be implied in several ways:
By Statute: Legislation often implies terms for fairness, such as under the Sale of Goods Act 1979 (e.g., implied term of satisfactory quality).
By Custom: In specific trades, certain customary terms may be implied if they are consistent and reasonable.
By Courts (Common Law): Courts may imply terms to ensure contracts are effective, such as the implied term of cooperation or the business efficacy rule.
How should contracts be interpreted?; should pre-contractual negotiations be admissible to help with the interpretation of contractual terms?
English law generally interprets contracts by the objective meaning of the terms within the document, focusing on what a reasonable person would understand them to mean.
Pre-Contractual Negotiations: Traditionally inadmissible since they could introduce subjective elements. However, negotiations may be relevant in cases of ambiguity or to demonstrate shared understanding of complex terms.
What are the most common frustrating events?
Frustration occurs when an unforeseen event fundamentally changes the contract’s performance:
Impossibility: When performance becomes impossible, such as destruction of the subject matter.
Illegality: When a law change renders the contract illegal.
Radical Change in Circumstances: When events undermine the purpose of the contract (Krell v Henry).
Frustration discharges both parties from further obligations but requires that the event was unexpected and external to the parties’ control.
What is the relevance of foreseeability in the doctrine of frustration?
If a frustrating event was foreseeable at the time of contracting, courts may hold that the parties should have allocated the risk within the contract (e.g., Davis Contractors Ltd v Fareham UDC). This prevents frustration from applying when parties could have foreseen and managed the risk.
What is the role of “fault” in frustration?
Frustration is not available if one party is at fault for causing the frustrating event. This is because frustration is meant for unforeseen events beyond both parties’ control. Fault negates frustration, as courts see the resulting hardship as self-inflicted rather than due to external factors.
What is the legal effect of frustration?
When frustration applies, the contract automatically terminates, releasing both parties from their obligations. The Law Reform (Frustrated Contracts) Act 1943 allows for partial compensation to prevent unfair loss where partial performance has occurred. For instance, expenses already incurred may be recoverable or refundable.
Davis Contractors v Fareham UDC [1956]
Parties: Davis Contractors Ltd (the contractor) and Fareham Urban District Council (the council).
Agreement: Davis Contractors entered into a contract with the council to build 78 houses over eight months for a fixed price of £92,425.
Issue: Due to severe post-war labor and material shortages, the project took 22 months instead of eight and cost substantially more than anticipated. Davis Contractors sought additional payment beyond the fixed price, arguing that the contract had been “frustrated” due to unforeseen circumstances, making the original contractual obligations fundamentally different.
KEY PRINCIPLES:
Radical Change Test: Frustration requires a change so significant that it makes the contract essentially different from what was initially agreed upon.
Foreseeable Events: If parties could have foreseen or planned for an event, frustration is less likely to apply.
Impossibility vs. Inconvenience: Simply making the contract more difficult or costly doesn’t suffice for frustration; it must be rendered impossible or fundamentally altered.
This case reinforced that frustration is an exceptional remedy, only applicable when unforeseen events make contractual performance impossible, rather than merely inconvenient or more expensive.
Shirlaw v Southern Foundries Ltd [1939]
Parties: Mr. Shirlaw (the managing director) and Southern Foundries Ltd (the company).
Agreement: Shirlaw was employed as managing director of Southern Foundries for a fixed term of 10 years.
Issue: Partway through Shirlaw’s term, Southern Foundries was taken over by another company. The new owners altered the company’s constitution, giving them the power to remove directors at will, and subsequently dismissed Shirlaw before his 10-year term ended. Shirlaw sued for breach of contract, arguing that his dismissal violated an implied term of his employment contract that he would not be arbitrarily removed before the end of the fixed term.
KEY PRINCIPLES:
The Officious Bystander Test
The Test: If a term is so obvious that it goes without saying, and if an outsider suggesting it would be met with agreement from both parties, it can be implied.
Application: Here, it was implied that Southern Foundries would not act in a way that would prevent Shirlaw from fulfilling his role as managing director for the agreed 10-year term, as this was essential to the contract’s purpose.
This case established the officious bystander test, which remains a cornerstone for implying terms in English contract law.
It reinforced that implied terms are only inserted when they’re necessary to reflect the parties’ original intent and to make the contract effective.
The case clarified that terms implied by the courts must be both obvious and necessary for the contract to function as intended.
Krell v Henry [1903]
Parties: Mr. Krell (the landlord) and Mr. Henry (the tenant).
Agreement: Henry rented a flat from Krell specifically to watch the procession for King Edward VII’s coronation, scheduled for June 26-27, 1902. The procession was the main reason for renting the room, but this was not explicitly stated in the written agreement—though it was clearly understood by both parties.
Issue: The coronation was unexpectedly postponed due to the king’s illness, meaning there would be no procession on those dates. Henry no longer wished to rent the flat, as the main purpose for which he rented it was now impossible to achieve. Krell sued Henry for the unpaid balance, arguing that Henry was still liable for payment.
KEY PRINCIPLES:
Frustration of Purpose: This case illustrates that a contract may be discharged if an unforeseen event fundamentally changes the circumstances, so the purpose of the contract is no longer achievable.
The principle applies when the event was not foreseeable and was crucial to the contract’s foundation, as both parties must have implicitly relied on the occurrence of the event for their obligations.
This case expanded the doctrine of frustration by clarifying that frustration applies not only to situations where performance is impossible but also where the underlying purpose of the contract has been destroyed.
It set a precedent that frustration can release parties from their obligations when the contract’s purpose is thwarted by an unforeseen event, as long as this purpose was the mutual basis of the contract.
Wells v Devani [2019]
Parties: Mr. Wells (a property owner) and Mr. Devani (an estate agent).
Agreement: Mr. Devani, an estate agent, verbally agreed to help Mr. Wells sell his flats. Devani introduced a buyer, and a sale was completed. However, they had not discussed the exact conditions under which Devani would receive his commission (specifically, when and how the commission would be payable).
Issue: Mr. Wells refused to pay the commission, arguing that there was no binding contract because the agreement lacked essential terms, specifically on when Devani’s commission would be due.
KEY PRINCIPLES:
Implied Terms for Business Efficacy: The Supreme Court reaffirmed the principle that courts can imply terms into a contract if they are necessary for making the contract effective and reflect the parties’ likely intentions. Here, the implied term was that Devani would be paid his commission upon the sale of the property.
The court also reinforced that, in determining whether a contract exists, the intention to create legal relations and the completeness of the agreement are essential, even if minor details are missing.
This case highlights the courts’ willingness to imply terms to make a contract enforceable when essential elements are clear but not fully articulated. It emphasises that courts will consider the business context and implied understandings in commercial agreements.
It also underscores the importance of objective interpretation in contract formation, focusing on whether, from an objective viewpoint, the parties intended to be bound.
