classifying contractual terms

A (comparatively) short post, looking at how contractual terms can be defined as warranty, condition, or innominate. Whether term is defined as warranty or condition defined by importance:

term	importance	if breached, injured party can
condition	major term at root of contract	sue for damages; terminate contract
warranty	minor, ancillary term	sue for damages only

Poussard v Spiers and Pond (1876) 1 QBD 410

actress employed as lead in operetta for season ill so started week late producers engaged substitute and refused her services actress sued for breach of contract and lost court held opening night was high importance thus she breached condition allowing producers to terminate contract

Bettini v Gye (1876) 1 QBD 183

singer engaged for season contract required arrival 7 days early for rehearsals but arrived 3 days early producers tried to terminate contract court held rehearsal terms ancillary do only right to claim damages not terminate

• Parties can avoid confusion by expressly defining terms as warranties/conditions in contract.
• Otherwise may be indicated by statute / judicial precedent.

Where no expression of status, get 'innominate terms':

• courts look at effect breach has on contract using 'Hong Kong Fir Test'

Hong Kong Fir Shipping Co. Ltd v Kawasaki Kisen Kaisha Ltd [1962] 1 All ER 474

defendant chartered ship from plaintiff for 2 years term in contract stated ship would be 'in every way fitted for ordinary cargo service' ship in poor state and crew incompetent 20 weeks use lost plaintiffs admitted ship unseaworthy defendants terminated contract plaintiffs successfully sued for wrongful termination reasoning: defendants were not substantially deprived of whole benefit of contract so only had right to sue for damages, not terminate

• thus where term deemed innominate, rights of innocent party decided by whether they were substantially deprived of whole benefit of contract
• yes - can sue for damages and terminate contracts
• no - can only sue for damages
• courts have tried to limit scope of concept of innominate term (see The Mihalis Angelos [1970] 3 All ER 125 )
  
• but still in current usage (see Cehave NV v Bremner Handelsgesellschaft GmbH, The Hansa Nord [1975] 3 All ER 739 )

(these notes have been produce following my reading of Chapter 7 of Richards’ Law of Contract).

terms of contract - implied terms

My last post looked at express terms, (terms agreed by the parties orally/in writing.

This post looks at implied terms.


Implied terms are those not agreed to by the parties orally or in writing but are introduced to contract by courts or statute to give either effect to unexpressed will of parties, or to insert a term that should reasonably be included in all contracts of that type.

If parties omit primary obligations, court can allow terms to be implied into the contract.

They can be implied either:

• as a matter of fact
• as a matter of law

Terms implied as a matter of fact

Give effect to unexpressed will of parties.

Must be obvious and necessary to give ‘business efficacy’ to the agreement.

Classic test = ‘Officious bystander test’.

"Prima facie that which in any contract is left to be implied and need not be expressed in something so obvious that it does without saying; so that 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’"

(Mackinnon LJ in Shirlaw v Southern Foundaries (1926) Ltd [1939] 2 KB 206)

The Moorcock (1889) 14 PD 64, [1886-90] All ER Rep 530

defendant allowed plaintiff to moor ship, the Moorcock, on their jetty if they paid landing charges while ship was unloading, tide went out and Moorcock’s back was broken on rocks plaintiff sued for damages defendants argued they hadn’t guaranteed safety Court of Appeal found defendants liable as implied undertaking that anchorage would be reasonably safe

2 situations where officious bystander test fails.

1) one party not aware of term

Spring v National Amalgamated Stevedores and Dockers Society [1956] 2 All ER 221

1939, defendants and union agreed rules for transferring members (‘Bridlington Agreement’) 1959, defendants admitted plaintiff in breach of Bridlington agreement TUC ordered union to expel plaintiff plaintiff sued for breach of contract union argued should be term in contract stating Bridlington Agreement must be complied with court held that plaintiff was not aware of Bridlington Agreement so would have said ‘what’s that?’ not ‘oh yes’ in officious bystander test

2) uncertainty whether both parties would have agreed to term

Shell (UK) Ltd v Lostock Garages Ltd [1976] 1 WLR 1187, [1977] 1 All ER 481

contract stated Shell would supply petrol to defendant if they bought only from Shell price-war developed so that defendants were paying more than neighbours also supplied by shell plaintiffs argued should be implied term that Shell would not ‘abnormally discriminate’ Court of Appeal refused claim as found Shell would not have agreed to the term

Terms implied as a matter of law

• inserts a term that should reasonably be included in all contracts of that type
• obligations that arise whether the parties would have agreed to it or not
• if courts find for its existence in a particular contract, that case becomes authority for inclusion in all contracts of that type

Liverpool City Council v Irwin [1976] 2 All ER 39

council let flats with tenancy agreement that set out no obligations on council re maintenance of flats lifts broke, rubbish chutes broke plaintiff withheld rent as protest at lack of maintenance council brought action for possession of flat plaintiff brought counter-action for breach of implied obligation House of Lords implied term as matter of law stated duty on landlord to keep common areas in ‘reasonable repair and usability’

• eventually a term implied by the courts as a matter of law may be given statutory authority
• key statute areas = contracts for sale of goods and standard of care in contracts for services
• Sale of Goods Act 1979
• Supply of Goods and Services Act 1982
• Late Payment of Commercial Debts (Interest) Act 1998
• Consumer Protection (Distance Selling) Regulations 2000
• Sale and Supply of Goods to Consumers Regulations 2002

Terms implied under Sale of Goods Act 1979

s 12 - title

• implied seller has right to sell
• buyer has right to enjoy ‘quiet possession’ of goods
• goods will be free of undisclosed encumbrances (interest held by someone other than owner)
• applicable to consumer and private sales

Rowland v Divall [1923] 2 KB 500

4 months after purchase, buyer discovered car was stolen returned it to true owner sued on implied condition that he should get back full purchase price even though value depreciated in 4 months since purchase court agreed as he had paid to be full owner as was not

s 13 - goods shall correspond with description

Beale v Taylor [1967] 1 WLR 1193

defendant advertised car in private sale as ‘Herald convertible, white, 1961, twin carbs’ private buyer later discovered it was 2 cars stuck together (description fitted rear half) court held seller liable under s 13 even though seller didn’t know as he had relied on description’

• note: reliance by buyer on description of goods must by proved (see Harlingdon & Leinster Enterprises Ltd v Christopher Hull Fine Art Ltd [1990] 1 All ER 737 )
• applicable to consumer and private sales

s 14(2) -goods supplied in course of business shall be of merchantable quality

• (n/a if buyer specifically told about defects or inspected before sale)
• private sales not covered
• but what defines ‘course of business’?
• originally defined as integral or incidental to business
• BUT grey area e.g. what if estate agent sells company car to private buyer
• later defined as having to be regularly entered into as part of business (see R & B Customs Brokers Co. Ltd v United Dominations Trust [1988] 1 All ER 847 )
• BUT too restrictive

Stevenson v Rogers [1999] 1 All ER 613

defendant fisherman sold boat to plaintiff plaintiff claimed defendant in breach of s 14(2) of Sale of Goods Act 1979 as boat not of ‘merchantable quality’ Court of Appeal held sale was in course of defendants business so s 14(2) applicable thus ‘course of business’ no longer requires regularity

• thus no grey area – a sale is simply private or business
• ‘merchantable quality’ defined in s 14 (6) as:
• ‘fit for the purpose or purposes for which goods of that kinds are commonly bought as it is reasonable to expect having regard to any description applied to them, the price (if relevant) and all other relevant circumstance’
• phrase ‘reasonably expect’ means buyer can’t expect second hand cars to be as good as news ones
  

Bartlett v Sidney Marcus Ltd [1965] 1 WLR 1013, [1965] 2 All ER 753

purchaser was told car’s clutch defective seller offered to repair or reduce price by £25 buyer chose latter after 300 miles, had to replace clutch & cost £45 more than expected held car was merchantable quality as was fit for purpose and quality of second hand car

• consequence of defect can also be a factor (see Bartlett v Sidney Marcus above where fact car defect could have kicked in on motorway was stated as factor in judgement).
• problems with deciding merchantable quality (e.g. how long after delivery could defect b found) so changes made by Sale and Sale of Goods Act 1994 s 1

s14(3) - goods sold in course of business shall be fit for purpose

• if buyer expressly/impliedly makes purpose goods are being bought for known, implied they are fit for purpose, even if not usual purpose
  
• does not apply if buyer cannot reasonable rely on judgement of seller
• see Godley v Perry [1960] 1 WLR 9, [1960] 1 All ER 36

s15 - condition implied where sale by sample

• quality of bulk must be same as sample
• buyer must be given opportunity to compare bulk with sample
• any defects must be discoverable by reasonable examination of sample
  

Terms implied under Supply of Goods and Services Act 1982

Contracts for supply of goods:

• applies to contracts for transfer of ownership of goods and contracts of service
• same implied terms as in Sale of Goods Act 1979
  
• (with Sale and Sale of Goods Act 1994 and Consumer Protection (Distance Selling) Regulations 2000 amendments)
  

Contracts for supply of services:

• adds extra terms for supply or services to 1982 act
• supplier will carry out service with reasonable care and skill

Wilson v Best Travel [1993] 1 All ER 353

plaintiff went on holiday in Greece booked through tour operator defendant fell through glass in hotel glass thickness was up to Greek standard but not UK standard court held since tour operator had inspected hotel and it complied with Greek regulations, defendant not in breach of

• and within reasonable period of time
• where consideration not set, consumer must pay reasonable charge
  

Terms implied under Late Payment of Commercial Debts (Interest) Act 1998

Act arose as small businesses were suffering effects of big business paying invoices late.

Implied term that any qualifying debt carries simple interest at BOE base rate + 8%.

s 2(1) - Act only applies contracts for supply of goods and services where supplier and consumer both acting as businesses

s 3(1) - qualifying debt

• qualifying debt - debt created by an obligation to pay contract price
• excepted debts - debts that already carry right to interest by another Act or law
  

s 4 - period interest runs for

• debt begins from payment date agreed between supplier and buyer
• if advanced payment required on agreed date
  
• if not linked to part-performance, debt starts on day obligation performed
• if linked to part-performance, debt begins day part-performance is completed
• contracts of hire, debt starts on last day of hire
  
• in all other cases runs from either:
• day supplier performs obligation, or
• day supplier given notice of the debt (whichever is later)
  

s 5 - court can remit right to interest or apply reduced rate if consider just to do so.

Terms implied under Consumer Protection (Distance Selling) Regulations 2000

Implementation of EU Distance Selling Directive (Directive 97/7/EC)

reg 3 & 4 -defines distance contract

• any time where no simultaneous physical presence of consumer and supplier
• e.g. teleshopping, email, catalogues etc.
  

reg 5(1) -list of excepted contracts

• contracts for the sale or disposition of land
• construction of a building
• financial services
• contracts via automated vending machine
• contracts via operator on public phone
• auction contracts
  

reg 6 - list of contracts only partially covered

• not covered by reg 7 - 19(1):
• supply of food, beverages or goods for regular consumption supplied to work/home by regular roundsmen
• accommodation, transport, leisure to be provided within specified period / on specified date
• not covered by reg 19(2) - (8):
• contracts for a package under Package Travel , Package Holidays and Package Tours Regulations 1992
  

reg 7 -info supplier must provide prior to conclusion of contract

• supplier ID
• supplier address (if advance payment required)
• product description
• price
• delivery costs
• payment arrangements
• details of delivery / performance
• period price valid
• minimum contract duration (e.g. in case of mobile phone contract)
• for telephone comms, ID and call purpose to be given at start of call

reg 8 - confirmation in writing to be given to consumer of all of above

• PLUS:
• right to cancel
• return of goods requirements on cancellation (e.g. who bears cost)
  
• after-sales service and guarantee arrangements
• complaints address
• must all be communicated by time goods delivered
  

reg 10 -method of cancellation

• if left at suppliers last known address and addressed to supplier deemed to have been given on date left
• cancellation by post deemed to have been given on date posted
• fax and email cancellation deemed given on date sent
• telephone not sufficient method of cancellation
  

reg 11 -cancellation/cooling off period for supply of goods

• commences on day contract concluded
• expires 7 working days after good received
• (note: period doesn't start until info in reg 8 received - if never sent, period ends 3 months and 7 working days after goods received)
  

reg 12 - cancellation/cooling off period for supply of services

• as reg 11 except period commences on day contract concluded rather than good
  

reg 13 -exceptions where consumer has no right to cancel

• supply of services where
  
• (with consumer consent) performance begun before end of cancellation period
• goods custom made / personalised
• perishables / fast deteriorating goods e.g. flowers
• goods that go out of date quickly e.g. newspapers
• copyable goods once packaging opened e.g. computer games
  
• gaming, betting, lottery
  

reg 14 -return of goods on cancellation

• reimburse within 30 days
• return and security immediately
  
• supplier can make reasonable charge if consumer doesn't return goods (some exceptions)
  

reg 15 -automatic cancellation of any related credit agreement on cancellation of contract

• supplier must inform creditor immediately
  

reg 17 - consumer duty to retain good and take reasonable care of them

reg 19 - performance of order within 30 days of consumer order

• (unless another period agreed to)
• if supplier unable to perform must inform consumer and refund within 30 days of expiry of above
• supplier can provide substitute good if allowed for in contract
  

reg 21 - fraudulent use of payment card

• consumer entitled to cancel and re-credit

reg 24 -unsolicited goods

• can be treated by consumer as gift
• rights of sender lost (unless sent for business)
• chasing payment / threatening action an offence
  

Terms implied under Sale and Supply of Goods to Consumers Regulations 2002

Add additional rules for consumer guarantees.

reg 15 - enforceability of 'consumer guarantee'

• takes effect when goods delivered
• contents must be in plain English and set out
• steps for claiming
• geographical scope
• time limit
• name and address of guarantor
• if guarantor fails to comply enforcement authorities (e.g. OFT) can grant injunction as they see fit
  

Terms can also be implied by custom

See Hutton v Warren (1836) 1 M & W 466, [1835-42] All ER Rep 151

(these notes have been produce following my reading of Chapter 7 of Richards’ Law of Contract).

terms of contract - express terms

In an oral contract, the judge must decide what parties have agreed to bas on evidence presented. But in a written contract, role of judge is to decide issues concerning term or terms in contract.


This post looks at express terms, that is terms agreed by the parties orally or in writing.

(Note: by contrast, my next post looks at implied terms which are not agreed to by the parties orally or in writing but are introduced to contract by courts or statute to give either effect to unexpressed will of parties, or insert a term that should reasonably be included in all contracts of that type).

Main problems facing courts re express terms:

1. are statements made by parties terms of the contract?
2. what evidence can parties submit to prove a contract document misstates their original intentions?

Incorporation of statements as terms of the contract

Term of contract or representation?

Term of contract:

• expression of a willingness by the parties to agree to abide by that obligation
• breach means parties can sue for breach of contract

Representation:

• persuades other party to enter contract but not intended to be term
• party can’t take action if not complied with
• BUT if party makes untrue statement to induce other party to enter contract could be liable under:
• tort of deceit, or
• Misrepresentation Act 1967, or
• innocent representation

Court decides whether term of contract or mere representation using objective approach.

Courts use several tests to decide what a ‘reasonable man’ would view the intentions of the parties to be.

1) Timing:

• Time between making statement and making contract
  

Bannerman v White (1861) 10 CBNS 844

defendants indicated that they didn’t want hops treated with sulphur then parties negotiated sale of hops plaintiff gave samples defendants asked again if treated with sulphur, plaintiffs said no after sale, plaintiffs discovered 5/300 had been treated so repudiated contract argued they had stressed importance about treatment and seller knew about treatment so = term of contract plaintiff said question was in negotiations and not part of contract jury found in favour of plaintiff defendant

Routledge v McKay [1954] 1 All ER 855

new registration book said registered 1941 but actually registered in 1932 1949, seller innocently stated to buyer that motorcycle was 1941/2 model week later, contract of sale made which didn’t mention reg date buyer found out real registration date and claimed damages for breach of warranty court time between negotiations and contract too long so incorrect statement representation not term of contract

2) Reduction of contract into writing

• if oral agreement later reduced to writing and statement made orally left out, courts assume omitted statement was mere representation (see Routledge v McKay above)

3) Importance of the statement

• statement viewed as term is injured party wouldn’t have entered contract without it (see Bannerman v White above)

Couchman v Hill [1947] 1 All ER 103

plaintiff bought heifer at auction described in catalogue as ‘unserved’ conditions of sale stated auctioneers didn’t warrant condition or description before sale, auctioneer, on request of plaintiff, confirmed heifer unserved 8 weeks later, heifer died from carrying calf too young court held plaintiff could claim damages as ‘unserved’ = warranty which overrode conditions of sale

Oscar Chess Ltd v Williams [1957] 1 All ER 325

plaintiffs (motor dealers) bought car from defendants for £290 plaintiffs described car, as in reg book, as 1948 model 6 months later plaintiffs discovered it was 1939 model and sued for damages plaintiffs’ action failed as defendants not held to have intended to bind themselves as to correctness of reg book – innocent misrepresentation

4) Special knowledge or skill

• courts more likely to view as term if party has specialist knowledge

Schawel v Reade [1913] 2 IR 81

plaintiff looking for stallion examined defendant’s horse during examination, defendant stated: “You need not look for anything: the horse is perfectly sound” so plaintiff ended exam price agreed days later, purchase completed 3 weeks later horse proved unfit to stud so plaintiff sued defendant argued mere representation court held was term of contract as defendant had specialist knowledge of condition

• note re: Oscar Chess v Williams this rule explains why apparently important statement was not seen as term i.e. dealer had more knowledge

5) Parol evidence rule

• = courts will not allow evidence which tries to add / vary / contradict terms of written contract
• BUT number of exceptions developed
• 1986 Law Commission, Law of Contract: The Parol Evidence Rule, Report No. 154 stated rule no longer existed
• Exceptions to parol evidence rule – can put forward evidence which shows:
• Custom
• a custom / trade usage
• Non-operation
• parties had agreed contract wouldn’t start until some vent had occurred
• i.e. contract not changed, just suspended
• Invalidity
• lack of capacity, mistake or misrepresentation
• Rectification
• true intentions of parties inaccurately reflected because e.g.
• parties drafted it themselves
• requirements communicated poorly to lawyer
• incompetent lawyer
• Incompleteness
• contract not intended to be complete reflection of agreement
• in which case oral agreements admissible

J Evans and Son (Portsmouth) Ltd v Andrea Merzario Ltd [1976] 2 All ER 930

defendant (carriers) shipped machinery for plaintiffs used standard conditions used by trade pre-1967, defendants used trailers and agreed machinery would always be carried below deck 1967, defendants switched to containers and assured plaintiffs machinery would still be stored below deck BUT new standard conditions said could be stored on deck later plaintiff’s good were washed off deck plaintiff sued for breach of contract successfully court held defendants could not rely on written contract only and allowed plaintiffs to adduce oral evidence

Collateral contracts

Defined by Lord Moulton in Heilbut, Symons & Co. V Buckleton [1913] AC 30 :

“It is evident, both on principle and on authority that there may be a contact the consideration for which is the making of some other contract, ‘If you will make such and such a contract, I will give you one hundred pounds’, is in every sense of the of the word a complete legal contract. It is collateral to the main contract, but each has an independent existence, ad they do not differ in respect of their possessing to the full the character and status of a contact.”

Mere representation in principal contract may still be term in collateral, secondary contract

City and Westminster Properties (1934) Ltd v Mudd [1958] 2 All ER 733

defendant rented plaintiff’s shop for 6 years and slept in adjoining annex when lease came up for renewal, plaintiff’s added clause to use ‘showrooms, workrooms and offices only’ defendant asked if he could still sleep in annex and plaintiffs agreed so he signed lease when he slept in annex, plaintiffs brought action for forfeiture of the lease court held that promise not to enforce clause was collateral contract so defendant not in breach

Thus collateral contracts can have effect of altering /adding/contradicting terms in main contract.

(these notes have been produce following my reading of Chapter 7 of Richards’ Law of Contract).