Terms of the contract notes

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Terms of the contract notes

  1. 1. TERMS OF THE CONTRACT1a. THE PAROL EVIDENCE RULEThe parol evidence rule is that where the record of a transaction is embodied in a document,extrinsic evidence is not generally admissible to vary or interpret the document or as a substitutefor it.According to GH Treitel, The Law of Contract, 9th ed. p176, there are obvious grounds ofconvenience for the application of the parol evidence rule to contracts: certainty is promoted byholding that parties who have reduced a contract to writing should be bound by the writing andby the writing alone. On the other hand, the parol evidence rule will commonly be invokedwhere a dispute arises after the time of contracting as to what was actually said at that time; andin such cases one of the parties could feel aggrieved if evidence on the point were excludedmerely because the disputed term was not set out in the contractual document. Evidence extrinsicto the document is therefore admitted in a number of situations which fall outside the scope ofthe rule.1b. EXCEPTIONS TO THE PAROL EVIDENCE RULE:(A) WRITTEN AGREEMENT NOT THE WHOLE AGREEMENTIf the written agreement was not intended to be the whole contract on which the parties hadactually agreed, parol evidence is admissible. See: Evans v Andrea Merzario [1976] 2 All ER 930.(B) VALIDITYParol evidence may be given about the validity of the contract, eg to establish the presence orabsence of consideration or of contractual intention, or some invalidating cause such asincapacity, misrepresentation, mistake or non est factum.(C) IMPLIED TERMSWhere the contract is silent on a matter on which a term is normally implied by law, parolevidence may be given to support, or to rebut, the usual implication. See: Burges v Wickham (1836) 3 B & S 669 Page 1 of 9
  2. 2. (D) OPERATION OF THE CONTRACTParol evidence can be used to show that the contract does not yet operate, or that it has ceased tooperate. See: Pym v Campbell (1856) 6 E & B 370.(E) EVIDENCE AS TO PARTIESParol evidence can be used to show in what capacities the parties contracted, eg where a personcontracts ostensibly as principal, evidence is admissible to prove that he really acted as anothersagent so as to entitle the latter to sue (Humfrey v Dale (1857) 7 E & B 266).(F) AID TO CONSTRUCTIONWhere the words of the contract are clear, parol evidence cannot be used to explain theirmeaning, unless they have a special meaning by custom. Parol evidence can, on the other hand,be used to explain words or phrases which are ambiguous, or which, if taken literally, make nosense, as well as technical terms.(G) TO PROVE CUSTOMEvidence of custom is admissible "to annex incidents to written contracts in matters with respectto which they are silent." (Hutton v Warren (1836). Custom can also be used as an aid toconstruction, eg in Smith v Wilson (1832) evidence was admitted of a local custom to show that"1,000 rabbits" meant "1,200 rabbits."(H) RECTIFICATIONA document may fail in accurately recording the true agreement. Equity allows such a writtencontract to be rectified by parol evidence. (See handout on Mistake)(I) COLLATERAL CONTRACTEven though parol evidence cannot be used to vary or add to the terms of a written contract, itmay be possible to show that the parties made two related contracts, one written and the otheroral, ie a collateral contract. See: City & Westminster Properties v Mudd [1959] Ch 129.The Law Commission (1976) recommended that the rule should be abolished, but by 1986concluded that it did not stop the courts accepting parol evidence if this was consistent with theintention of the parties. Page 2 of 9
  3. 3. 2a. REPRESENTATIONS AND TERMSThe first step in determining the terms of a contract is to establish what the parties said or wrote.Statements made during the course of negotiations may traditionally be classed asrepresentations or terms and if one turns out to be wrong, the plaintiffs remedy will depend onhow the statement is classified:A representation is a statement of fact made by one party which induces the other to enter intothe contract. If it turns out to be incorrect the innocent party may sue for misrepresentation.Breach of a term of the contract entitles the injured party to claim damages and, if he has beendeprived substantially what he bargained for, he will also be able to repudiate the contract.If a statement is not a term of the principal contract, it is possible that it may be enforced as acollateral contract (which has developed rapidly in the twentieth century as a significant meansby which the difficulties of fixing a statement with contractual force may be circumvented).How can the courts decide whether a statement is a term or a mere representation? It wasestablished in Heilbut, Symons & Co v Buckleton [1913] AC 30, that intention is the overallguide as to whether a statement is a term of the contract. In seeking to implement the partiesintentions and decide whether a statement is a term or a mere representation, the courts willconsider the following four factors:(A) TIMINGThe court will consider the lapse of time between the making of the statement and the contractsconclusion: if the interval is short the statement is more likely to be a term. See: Routledge v McKay [1954] 1 WLR 615 Schawel v Reade [1913] 2 IR 64.(B) IMPORTANCE OF THE STATEMENTThe court will consider the importance of the truth of the statement as a pivotal factor infinalising the contract. The statement may be of such importance that if it had not been made theinjured party would not have entered into the contract at all. See: Bannerman v White (1861) CB(NS) 844 Couchman v Hill [1947] 1 All ER 103. Page 3 of 9
  4. 4. (C) REDUCTION OF TERMS TO WRITINGThe court will consider whether the statement was omitted in a later, formal contract in writing.If the written contract does not incorporate the statement, this would suggest that the parties didnot intend the statement to be a contractual term. See: Routledge v McKay [1954] 1 WLR 615 Birch v Paramount Estates (1956) 167.(D) SPECIAL KNOWLEDGE/SKILLSThe court will consider whether the maker of the statement had specialist knowledge or was in abetter position than the other party to verify the statements accuracy. See: Harling v Eddy [1951] 2 KB 739 Oscar Chess v Williams [1957] 1 All ER 325 Dick Bentley Productions v Harold Smith Motors [1965] 2 All ER 65.2b. CONDITIONS AND WARRANTIESTraditionally terms have been divided into two categories: conditions and warranties.(A) CONDITIONSA condition is a major term which is vital to the main purpose of the contract. A breach ofcondition will entitle the injured party to repudiate the contract and claim damages. The injuredparty may also choose to go on with the contract, despite the breach, and recover damagesinstead. See: Poussard v Spiers (1876) 1 QBD 410(Note: The word condition also has another meaning. It may mean a stipulation that a contractshould not be enforceable except on the happening of a given event, or should be brought to anend on the happening of a given event. The condition is then properly called a conditionprecedent, or a condition subsequent respectively. See Cheshire &Fifoot, p153-4).(B) WARRANTIESA warranty is a less important term: it does not go to the root of the contract. A breach ofwarranty will only give the injured party the right to claim damages; he cannot repudiate thecontract. See: Page 4 of 9
  5. 5. Bettini v Gye (1876) 1 QBD 183.(C) INTERMEDIATE TERMSIt may be impossible to classify a term neatly in advance as either a condition or a warranty.Some undertakings may occupy an intermediate position, in that the term can be assessed only inthe light of the consequences of a breach. If a breach of the term results in severe loss anddamage, the injured party will be entitled to repudiate the contract; where the breach involvesminor loss, the injured partys remedies will be restricted to damages. These intermediate termshave also become known as innominate terms. See: Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha [1962] 1 All ER 474 The MihalisAngelos [1971] 1 QB 164 The Hansa Nord [1976] QB 44 Reardon Smith Line v Hansen-Tangen [1976] 3 All ER 570 Bunge Corporation v Tradax Export [1981] 2 All ER 513.(D) NOTEIf the term is described in the contract as a condition that will not be conclusive. See: Schuler v Wickman Machine Tools [1974] AC 235.3. IMPLIED TERMSIn most contracts the primary obligations of the parties are contained in express terms. Inaddition there are various circumstances in which extra terms may be implied into the agreement.A) TERMS IMPLIED BY CUSTOMThe terms of a contract may have been negotiated against the background of the customs of aparticular locality or trade. The parties automatically assume that their contract will be subject tosuch customs and so do not deal specifically with the matter in their contract. See: Hutton v Warren (1836) 1 M&W 466.B) TERMS IMPLIED BY THE COURT(i) Intention of the Parties/Terms Implied as FactThe courts will be prepared to imply a term into a contract in order to give effect to the obviousintentions of the parties. Sometimes the point at issue has been overlooked or the parties have Page 5 of 9
  6. 6. failed to express their intention clearly. In these circumstances, the court will supply a term in theinterests of business efficacy so that the contract makes commercial sense. See: The Moorcock (1889) 14 PD 64.A more recent test is the officious bystander test used to incorporate implied obvious terms(Shirlaw v Southern Foundries [1940] AC 701). If while the parties were making their contract,an officious bystander were to suggest some express provision, they would both reply, "oh, ofcourse." See, eg: Wilson v Best Travel [1993] 1 All ER 353.(ii) Relationship Between the Parties/Terms Implied by LawIn certain relationships and contracts the law seeks to impose a model or standardised set ofterms as a form of regulation. Such terms arising from the relationship between the parties willbe implied as of law. See: Liverpool City Council v Irwin [1976] 2 All ER 39.(C) TERMS IMPLIED BY STATUTESALE OF GOODS ACT 1979Implied terms about title -Section 12 provides:(1) In a contract of sale … there is an implied term on the part of the seller that in the case of asale he has a right to sell the goods, and in the case of an agreement to sell he will have such aright at the time when the property is to pass.(2) In a contract of sale … there is also an implied term that-(a) the goods are free, and will remain free until the time when the property is to pass, from anycharge or encumbrance not disclosed or known to the buyer before the contract is made, and(b) the buyer will enjoy quiet possession of the goods except so far as it may be disturbed by theowner of or other person entitled to the benefit of any charge or encumbrance so disclosed orknown.The term implied by s12(1) is a condition and the term implied by s12(2) is a warranty: s12(5A). Page 6 of 9
  7. 7. Sale by description -Section 13 provides:(1) Where there is a contract for the sale of goods by description, there is an implied term that thegoods will correspond with the description.(1A) … the term implied by subsection (1) above is a condition.(2) If the sale is by sample as well as by description it is not sufficient that the bulk of the goodscorresponds with the sample if the goods do not also correspond with the description.Implied terms about quality or fitness -Section 14 provides:(2) Where the seller sells goods in the course of a business, there is an implied term that thegoods supplied under the contract are of satisfactory quality.(2A) … goods are of satisfactory quality if they meet the standard that a reasonable person wouldregard as satisfactory, taking account of any description of the goods, the price (if relevant) andall other relevant circumstances.(2B) … the quality of goods includes their state and condition and the following (among others)are in appropriate cases aspects of the quality of goods -(a) fitness for the purposes for which goods of the kind in question are commonly supplied,(b) appearance and finish,(c) freedom from minor defects,(d) safety, and(e) durability.(2C) The term implied by subsection (2) above does not extend to any matter making the qualityof goods unsatisfactory -(a) which is specifically drawn to the buyers attention before the contract is made,(b) where the buyer examines the goods before the contract is made, which that examinationought to reveal, or(c) in the case of a contract for sale by sample, which would have been apparent on a reasonableexamination of the sample.(3) Where the seller sells goods in the course of a business and the buyer, expressly or byimplication, makes known - Page 7 of 9
  8. 8. (a) to the seller …any particular purpose for which the goods are being bought, there is an implied term that thegoods supplied under the contract are reasonably fit for that purpose, whether or not that is apurpose for which such goods are commonly supplied, except where the circumstances show thatthe buyer does not rely, or that it is unreasonable for him to rely, on the skill or judgment of theseller …The terms implied by sections 14(2) and (3) are conditions: s14(6)Sale by sample -Section 15 provides:(2) In the case of a contract for sale by sample there is an implied term -(a) that the bulk will correspond with the sample in quality;(c) that the goods will be free from any defect, making their quality unsatisfactory, which wouldnot be apparent on reasonable examination of the sample.The term implied by s15(2) is a condition: s15(3).Modification of remedies for breach of condition in non-consumer cases -Section 15A provides:(1) Where in the case of a contract of sale -(a) the buyer would, apart from this subsection, have the right to reject goods by reason of abreach on the part of the seller of a term implied by sections 13, 14 or 15 above, but(b) the breach is so slight that it would be unreasonable for him to reject them,then, if the buyerdoes not deal as a consumer, the breach is not to be treated as a breach of condition but may betreated as a breach of warranty.(2) This section applies unless a contrary intention appears in, or is to be implied from, thecontract.(3) It is for the seller to show that a breach fell within subsection (1)(b) above. Page 8 of 9
  9. 9. SUPPLY OF GOODS AND SERVICES ACT 1982Implied term about care and skill -Section 13 provides:In a contract for the supply of a service where the supplier is acting in the course of a business,there is an implied term that the supplier will carry out the service with reasonable care and skill.Implied term about time for performance -Section 14 provides:(1) Where, under a contract for the supply of a service by a supplier acting in the course of abusiness, the time for the service to be carried out is not fixed by the contract, left to be fixed in amanner agreed by the contract or determined by the course of dealing between the parties, thereis an implied term that the supplier will carry out the service within a reasonable time.(2) What is reasonable time is a question of fact.Implied term about consideration -Section 15 provides:(1) Where, under a contract for the supply of a service, the consideration for the service is notdetermined by the contract, left to be determined in a manner agreed by the contract ordetermined by the course of dealing between the parties, there is an implied term that the partycontracting with the supplier will pay a reasonable charge.(2) What is a reasonable charge is a question of fact. Page 9 of 9

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