Unit 5a Notes - Terms and Sources of terms Flashcards
State the two basic things a contract with terms must have
- Capacity - Each party must have the legal power to bind itself contractually. For example persons under the age of eighteen (minors) and persons of unsound mind or under the influence of alcohol have limitations on their power to contract.
- Legality - The courts will not enforce a contract which is deemed to be illegal.
Explain the distinction between terms versus mere representations
A statement, written or oral, made during the negotiations leading to a contract, may be a term of the contract or merely a representation inducing the contract.
A representation is something that is said by the offeror in order to induce the offeree to enter into the contract. It may or may not become a term of that contract.
The distinction between terms and representations is important because, if a statement is untrue, the remedies available to the innocent party differ:
if the representation becomes a term of the contract, the innocent party has remedies for breach of the term as well as for misrepresentation
if, however, the representation does not become a term of the contract, the innocent party will have remedies only for misrepresentation which are based on equitable remedies
Explain the distinction between Express vs Implied Terms
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. They must be clear for them to be enforceable.
Implied terms are not expressly included in the contract, but they are nevertheless still part of the contract. They may be implied by statute or by the courts, or rarely by custom. An example of this is a contract of employment which has implied terms such as an employee’s duty to obey lawful and reasonable orders
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.
Explain the overview of the different sources of terms in a contract
You have;
Express Terms
Then Implied terms
Within Implied Terms you also have Terms incorpirated via law which can be via the courts or via statute
You also have terms implied via Custom and Usage
State the 3 ways terms can be Implied into a contract
Terms can be implied in the following ways:
- By Custom
- By Law and
- By Fact
Explain how a term can be implied into a contract via Custom/usage
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;
- The term is clearly established and ‘notorious’ in that trade context
- The term is not inconsistent with any of the express terms
- 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.
Explain terms can be Implied into a contract 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:
- The term is implied in all contracts of that type, as a policy matter
- The term must be necessary
- The term must be reasonable to imply
The case of Liverpool City council v Irwin [1977] AC 239 is the leading authority here where the House of Lords implied a term which required the council to keep these areas in repair, so that the tenants could use them.
This approach was clarified In Spring v Guardian Assurance plc [1995] 2 AC 296 where 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.
Explain how terms can be Implied into a contract 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:
The ‘officious bystander’ test
The ‘business efficacy’ test
Explain the two methods of implication of implied terms of fact in contracts
There are two methods of implication at fact:
The ‘officious bystander’ test
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.
“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!’”
The ‘business efficacy’ test:
The business efficacy 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. 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] that the two grounds a term can be implied into the contract on the grounds of business efficacy are:
- The term is necessary for the contracts operation
- It would be obvious the parties would understand this term was intended
State the 3 types of Terms
There are three types of terms:
- conditions
- warranties
- innominate terms.
Explain the definition and distinction between the 3 types of terms
The distinction between the types of term is important because it determines the remedies that may be available in the event of a breach.
Condition: A condition is an important term going to the root of the contract.
Warranties: A warranty is a less important term, which is incidental to the main purpose of the contract. Breach of warranty results in damages only.
Innominate terms: An innominate or indeterminate term is neither a condition nor a warranty.
The remedy depends on the effects of the breach:
Breach can result in damages or discharge or both. Discharge entitles the innocent party to repudiate the contract and claim damages.
If trivial “ damages only i.e. term is treated as if it were a warranty.
if serious “ damages, discharge or both i.e. term is treated as if it were a condition
Define an Exclusion Clause and the primary common law Rules for them to be valid
Exclusion clauses
Definition: An exclusion clause (or exemption clause) is a term that seeks to exclude or limit a party’s liability for breach of contract.
Common law rules:
In order to be valid an exclusion clause must satisfy two conditions:
- it must be incorporated into the contract and
- it’s wording must cover the loss.
State the 3 key ways that a Term or Exclusion clause may be incorporated into a contract
There are 3 key ways a Terms or Exclusion clauses can be incorporated into a contract:
- Incorporation by Signature
- Incorporation by Notice (Reasonable notice)
- Incorporation via Previous dealings or ongoing relationship
Explain what is meant by Incorporation by Signature and the key case law in this area
In incorporation by signature, it includes a clause written on a document that all the parties have signed. Besides that, in incorporation by notice, it includes an exclusion clause if the person relying on a contract took a rational measure to draw notice in order to attract other parties’ attention.
The case of L’Estrange v Graucob (1934) established that a clause is incorporated by signature even if the signatory did not read or understand the document.
It was held that Mrs L’Estrange could not claim damages on the grounds that she “did not see” the clause in the contract. There was no evidence of fraud or misrepresentation that might have mitigated this judgement.
In L’Estrange v Graucob (1934) the ratio of the case is best summarised by Scrutton LJ:
When a document containing contractual terms is signed, then, in the absence of fraud, or, I will add, misrepresentation, the party signing it is bound, and it is wholly immaterial whether he has read the document or not.
However, the situation in L’Estrange v Graucob (1934) can be contrasted with Curtis v Chemical Cleaning (1951) in which it was held that a signature does not incorporate the clause if the effect of the term was misrepresented. I.e. if the signatory is forced or tricked into signing something then the exclusion clause is not valid or enforceable..
Curtis v Chemical Cleaning (1951) - Liability for damage to a wedding dress was not excluded due to misrepresentation of the clause.
Explain what is meant by Incorporation by Reasonable Notice
and the key case law in this area
For a clause to be incorporated by notice, reasonable steps must have been taken to bring it to the attention of the other party at the time the contract was made.
The test for incorporating terms into a contract by notice – actual or reasonable notice must take place before or at the time of the contract - (Thompson v London Midland and Southern Railway; Parker v SE Railway).
What ‘reasonable steps’ are depend on the circumstances. Whether the law regards them reasonable is dependent on how reasonable the terms are or if it excludes too much liability then it may not be reasonable notice.
Key Factors determining if it passes the test:
- Nature of the document
- Timing
- Onerous terms
