Introduction To Terms

Question 1

What are the terms of a contract?

Answer 1

The terms of a contract are its contents.

They define the rights and obligations arising from the contract.

Question 2

Contractual terms may be…

Answer 2

…expressed or implied

Question 3

What are express terms? How can a contract be agreed?

Answer 3

Express terms are statements made by the parties, by which they intend to be bound.

A contract can have terms agreed in writing, or agreed orally, or a mixture of the two.

Question 4

What are implied terms?

Answer 4

Implied terms are not formed by statements made by the parties – they have not been agreed upon, orally or in writing.

Nonetheless, the law deems that they exist.

Question 5

Statements made by the parties during negotiations leading up to a contract can be divided into three groups:

Answer 5

• Mere puffs – statements of no legal significance.
• Statements of fact or law which the parties do not intend to be binding. These statements are classified as representations if they help to induce the making of the contract.
• Statements of fact which the parties intend to be binding. These are terms of the contract.

Question 6

Why does the distinction between representations and terms matter?

Answer 6

The distinction between representations and terms becomes important when the statement turns out to be untrue, or the promise is not fulfilled.

The court then has to decide which statements are contractual terms and which are non-contractual representations, inducing the contract but forming no part of it.

If a statement is a term of the contract and this term is not fulfilled, this will amount to a breach of contract, for which the innocent party may claim, amongst other remedies, damages.

If the untrue statement is not a term of the contract but a representation, this may amount to a misrepresentation.
This is not the same as a breach of contract, but the innocent party may still be able to obtain a remedy in the law of misrepresentation.

Also note that a statement can be both a term and a representation, giving rise to an action for both breach of contract and misrepresentation.
This element does not address the law in relation to misrepresentation.

Question 7

How do I know if a statement was a representation or a term (or both)?

Answer 7

The difference between a representation and a term is that only the latter is intended to be binding.

In seeking to discover whether the parties intended to be bound by a statement made by one of them, the court will apply an objective test based on the question, ‘what would a reasonable person understand to be the intention of the parties, having regard to all the circumstances?’

Where a statement is made during negotiations for the purpose of inducing the other party to enter into the contract, there is, prima facie, ground for inferring that the statement was intended to be a binding term of the contract.

However, the inference can be rebutted if the party making the statement can show that it would not be reasonable to hold them bound by it.

The court will take into account any factors which appear to be relevant.

There are no hard and fast rules to be applied but some useful guidelines may be discerned from the case law set out in the following pages.

Question 8

How do you determine a representation or term of the contract?

Answer 8

Did the parties intend the statement to binding?

Take into account:

· The importance of the statement

· The timing of the statement

· The reduction of the contract into writing

· Special knowledge of the skill of the person making the statement

· Assumption of responsibility

Considering all of these, if the answer is yes then the statement is a term of the contract.

Breach gives rise to a claim for breach of contract.

If the answer is no then the statement is either:

· a representation (if false, a claim for misrepresentation might be possible);

· a mere puff, with no legal effect

Question 9

One factor which the courts take into account is…

Answer 9

…the importance attached to the statement by one of the parties.

Question 10

A statement may be regarded as a term of the contract if…

Example?

Answer 10

…it can be shown that the injured party considered it so important that it would not have entered into the contract but for that statement.

An example of the application of this guideline can be seen in the case of Bannerman v White (1861) 10 CB NS 844.

In this case, in respect of negotiations to purchase hops, the defendant said, ‘if they have been treated with sulphur, I am not interested in even knowing the price of them’. When the plaintiff produced samples, the defendant again enquired whether sulphur had been used and was assured that it had not.

In fact, a small amount of the crop, some five acres out of a total of 300 acres, had been treated with sulphur.

The defendant treated the contract as repudiated, and the question as to whether they were entitled to do so hinged upon whether it could be regarded as a condition of the agreement that the hops may be rejected if sulphur had been used.

It was argued by the plaintiff that the conversation relating to the sulphur was preliminary to entering the contract and, as such, was not part of the contract.

The court held that the statement was understood and intended by the parties to be a term of the contract of sale.

Question 11

The time of the making of the statement appears to be an important factor. If the statement was made…

Answer 11

…at the time of contracting, it is more likely to be a term of the contract than if it was made at an early stage of the negotiations.

If, on the other hand, there is a delay between the making of the statement and the parties entering into the contract, then it is less likely to be treated as a term.

Question 12

Give an example of where timing was important in a case.

Answer 12

In Routledge v McKay [1954] 1 WLR 615 the private seller of a motorcycle told the buyer, in good faith, that it was a 1941 or 1942 model.

One week later, the buyer and seller entered into a contract of sale. The written memorandum of the sale did not mention the year of the model. The motorcycle was a 1930 model and the buyer sued for breach of contract.

The Court of Appeal held that the lapse of time between the making of the statement and entering into the contract meant the statement as to the year of the model was a representation and not a term of the contract.

Question 13

The decision in Routledge v McKay was influenced by…

Answer 13

… Reduction of the contract into writing

the court was influenced by the fact that the contract had been reduced into writing and the written contract made no mention of the previous oral statement about the motorcycle being a 1941 or 1942 model.

The inference drawn by the court was that the statement could not have been regarded as significant by the parties. If it had been, they would have ensured its inclusion in the written agreement.

Consequently, the court concluded that the statement regarding the year of the model was never intended to be a term of the contract but a representation.

Note that this is not necessarily decisive in classifying the statement as a mere representation. Other factors may be taken into account, to which we now turn.

Question 14

How does Special knowledge or skill affect identifying the terms or representation of a contract? Example?

Answer 14

Where the party who made the statement had exclusive access to information or special knowledge as compared with the other party, this is likely to be taken into account in the latter’s favour.

Perhaps the best indication of the effect of the concept of skill and knowledge can be seen in the contrasting cases of Oscar Chess Ltd v Williams [1957] 1 WLR 370 and Dick Bentley v Harold Smith [1965] 1 WLR 623.

Question 15

What happened in Oscar Chess Ltd v Williams?

Answer 15

The claimant car dealers, Oscar, agreed on a trade-in of Williams’ old car as part of a new purchase. Williams had no knowledge of the motor trade.

The registration book of the car traded in gave its date as 1948 and Williams confirmed this date in good faith. It was later discovered that the date should have been 1939 and the car was worth much less than thought.

The Court of Appeal held that the age of the car was not a term of the contract and therefore there was no breach of contract by Williams.

It was clear that the skill and expertise lay in the hands of Oscar, the car dealers, and not in the hands of Williams, who was making the statement.

Consequently, the statement remained as a representation without contractual force.

Question 16

What happened in Dick Bentley Productions v Harold Smith (Motors)?

Answer 16

Mr Smith, of the defendant company, told Mr Bentley that a car had done 20 thousand miles only since the fitting of a new engine and gearbox.

The milometer also showed 20 thousand miles. Later that day, Mr Bentley took his wife to see the car and Mr Smith repeated his statement.

Mr Bentley bought the car but it soon became clear that it had done more than 20 thousand miles since the change of engine and gearbox.

The Court of Appeal held that the statement as to the mileage was a term of the contract.

The defendant was a car dealer who should be taken to have better knowledge of such matters than Mr Bentley, who was not involved in the motor trade.

Question 17

What happened in Dick Bentley Productions v Harold Smith (Motors)?

Answer 17

Mr Smith, of the defendant company, told Mr Bentley that a car had done 20 thousand miles only since the fitting of a new engine and gearbox.

The milometer also showed 20 thousand miles. Later that day, Mr Bentley took his wife to see the car and Mr Smith repeated his statement.

Mr Bentley bought the car but it soon became clear that it had done more than 20 thousand miles since the change of engine and gearbox.

The Court of Appeal held that the statement as to the mileage was a term of the contract. The defendant was a car dealer who should be taken to have better knowledge of such matters than Mr Bentley, who was not involved in the motor trade.

Question 18

In terms of Assumption of responsibility / further checks…

Answer 18

A statement may become a term of the contract where the vendor expressly accepts the responsibility for the soundness of the sale item in question.

This factor was taken into account in Schawel v Reade [1913] 2 IR 81 (HL). Here, the claimant required a horse for stud purposes. He attempted to examine the defendant’s horse but was told that he need not look for anything and that the horse was sound in every way.

The price was agreed and delivery of the horse took place three weeks later.

The horse was not in fact fit for stud purposes and the judge directed the jury to consider two points: did the defendant, at the time of the sale, represent that the horse was fit for stud purposes? Did the purchaser act on that in purchasing the horse?

Both questions were answered in the affirmative and consequently, the statement was deemed to be a term of the contract.

Another factor which may have been at work in Schawel was that the defendant, by the strength of his statement, actually dissuaded the plaintiff from making further checks himself with regard to the fitness of the horse for stud purposes.

This can be contrasted with Ecay v Godfrey (1947) 80 Lloyd’s Rep 286, where the seller of a boat stated that it was sound but advised the buyer to have it surveyed.

This advice showed that the seller did not intend that his statement should be taken as a term of the contract and that the onus of verification of the soundness of the boat lay with the purchaser.

Question 19

Statements made by the parties during negotiations can be divided into…

Answer 19

…’mere puffs’, representations or terms of the contract.

Question 20

If an untrue statement is a term of the contract then…

Answer 20

… this may give rise to a claim for breach of contract.

Question 21

A representation is likely to be a term if…

Answer 21

…the parties intended the statement to be binding.

Question 22

A representation is likely to be a term if the parties intended the statement to be binding. To ascertain if this is the case, the court will consider:

Answer 22

‒ The importance of the statement.

‒ The timing of the statement.

‒ The reduction of the contract into writing.

‒ Special knowledge or skill of the person making the statement.

‒ Assumption of responsibility by the person making the statement.