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BSM579 Legal Systems and Contract Law

Contract Terms

Topic 10: Contract Terms

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In this topic, we will deal with the following matters:

Express contract terms

Implied contract terms

Incorporated contract terms

We will complete our examination of contract terms in Topic 11

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Contract Terms

We now turn to consider the content of the contract itself. In other words, at this stage, we are satisfied that a valid contract exists. We must now examine its terms. A term in a contract can be one of three basic types:

Express term

Term incorporated by reference

Implied term

We will deal with each of these in turn. With regard to the express and incorporated terms, they will have to be interpreted. As with statutes, the words and language in a contract can be ambiguous or incomplete, and, just as with statutory interpretation, the courts have developed a number of principles to guide the task of contractual interpretation.

1. Express Terms

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An express term of a contract is one that the parties have specifically agreed upon. Most commonly, express terms are to be found in written contracts. However, an express term can be one agreed orally.

Usually, when the parties have entered into a written contract, all of the express terms will be within that contract. However, sometimes one of the parties will allege that something was agreed orally in addition to the written terms. The additional terms might add to the written ones, or it may even be claimed that they contradict them. The question in such a case is: do the courts ignore such claims and concentrate only on the written terms or can they take into account evidence of the oral terms too? The answer is that normally the written terms only are looked at, but sometimes the courts consider evidence of oral terms too.

This is the basic position in Scotland and England, but the formulation of the position is slightly different in these jurisdictions.

In England, there is a common law rule known as the parole evidence rule. This rule provides that where a written contract exists between the parties, they cannot introduce other express terms not contained in the written contract itself. However, this rule only applies where the contract is wholly in writing. Where it is alleged that there are oral terms too, the party seeking to rely on those terms can argue that the rule does not apply since the contract was not wholly in writing. This deprives the parole evidence rule of any real meaningful effect, since it can always be pushed aside by an argument that the contract was partly oral and partly in writing, allowing the opportunity for evidence of the oral terms to be led.

In two leading English cases, evidence was admitted of an oral contract and it was held to overrule the contrary written express term: J Evans & Son (Portsmouth) Ltd. v Andrea Merzario Ltd. [1976] 1 WLR 1078 and Couchman v Hill [1947] KB 554.

The Scottish position is similar, but has a statutory basis. The relevant provision is the Contract (Scotland) Act 1997, s.1:

s 1 Extrinsic evidence of additional contract term etc.

(1) Where a document appears (or two or more documents appear) to comprise all the express terms of a contract or unilateral voluntary obligation, it shall be presumed, unless the contrary is proved, that the document does (or the documents do) comprise all the express terms of the contract or unilateral voluntary obligation.

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(2) Extrinsic oral or documentary evidence shall be admissible to prove, for the purposes of subsection (1) above, that the contract or unilateral voluntary obligation includes additional express terms (whether or not written terms). (3) Notwithstanding the foregoing provisions of this section, where one of the terms in the document (or in the documents) is to the effect that the document does (or the documents do) comprise all the express terms of the contract or unilateral voluntary obligation, that term shall be conclusive in the matter. (4) This section is without prejudice to any enactment which makes provision as respects the constitution, or formalities of execution, of a contract or unilateral voluntary obligation.

The simplest way to deal with the situation is to provide for it in the contract. If not, where the contract appears to contain all of the terms, it will be treated as such, but this is only a presumption that can be rebutted (challenged) by evidence to the contrary.

In both jurisdictions, then, the effect is similar: oral terms can be evidenced, and if accepted, will be added to or will displace the relevant written contract term.

One other point remains on express terms. Where a contract is in writing,

it need not be contained purely in one document. There may be an

exchange of letters, e-mails, faxes. In addition, in the case of an oral contract or a partially oral contract, a number of conversations (face to face or over the telephone) may contribute to the terms of the contract.

Of course, the danger with an oral contractual term lies in the problem of

proof; telephone or face-to-face conversations are not usually recorded,

while a written record is usually indisputable, at least as regards its content.

Where the contract spans a number of documents or conversations, or a mixture of the two, sometimes it can be difficult to decide at exactly which point a contract was concluded. This is a slightly different problem than trying to decide whether a contract has been concluded (agreed) and we have already covered this. Timing can be an issue for a decision on what the terms are, since after the contract has been agreed, any other communication on the subject is contractually irrelevant; it comes too late to be part of the contract since it has already been concluded.

A good case to illustrate this in action is Thornton v Shoe Lane

Parking Ltd. [1971] 2 QB 163. This case is usually seen as a case on incorporated terms (see below) but it is also a case on timing. The case involved an injury in a car park. Mr Thornton parked his car in the car park. Upon driving onto the car park, he was presented with a ticket generated by a machine and he took it and entered the car park. The

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ticket referred to terms and conditions displayed inside the car park, one of which sought to exclude liability for personal injury to any customer while in the car park (such a clause would be unenforceable today under the UCTA 1977, see later). The Court of Appeal took the view that the printed terms on the ticket came too late. By the time the ticket was taken by the driver, the contract was concluded - the offer was the machine holding itself out as ready to take the money that had to be paid. The acceptance took place when the money was paid. The dispensing of the ticket came afterwards so was too late to affect the terms of an already concluded contract.

2. Terms incorporated by reference

Here, the whole terms of the contract are not to be found in the main contractual document, where the contract is a written one. Instead, the main contract refers to terms in another, separate document and seeks to incorporate them. Where the main contract is oral, again terms might be incorporated by reference to a document. Whether the contract is formed orally or in writing, there are rules to protect the person affected by such terms.

(a) Where the referring document is signed

If the party affected by the terms signs a document referring to them, he is taken to have accepted those terms whether or not he read the referring document properly, or indeed at all. An example of this can be seen in the case in L’Estrange v Graucob Ltd. [1934] 2 KB 394. The exception is when the signature has been procured by fraud or misrepresentation (the latter has been dealt with already - see Curtis v Chemical Cleaning & Dyeing Co. [1951] 1 KB 805 for a case where an innocent misrepresentation about what was being signed meant the term was not deemed to be incorporated). Otherwise, the party signing will be bound by it. In L’Estrange, the term was in very small print on poor quality paper, but was still a part of the contract.

The courts have expressed displeasure at the inflexible approach of this rule. Lord Devlin said this in the House of Lords case McCutcheon v MacBrayne 1964 SC (HL) 28, at 39-40 (we will deal with that case below):

“If it were possible for your Lordships to escape the world of make believe which the law has created into the real world in which transactions of this sort are actually done, the answer would be

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short and simple. [The signature] should make no difference whatsoever. This document is not meant to be read, still less to be understood. Its signature is, in truth, about as significant as a handshake that marks the formal conclusion of a bargain.”

In Scotland, the strict position may be changing. The Inner House of the Court of Session in Montgomery Litho Ltd. v Maxwell 2000 SC 56 did

not follow the normal rule. There, Maxwell was sued by a printing firm for

a debt for printing services tendered to a company that had since gone

into liquidation. Maxwell had been a director of the company. Maxwell had signed a credit application with the printing firm, while he was a director of the company, in which one term provided that the director opening the account was personally liable, along with the company, for any debts incurred by the company to the printing firm. Since he had signed the agreement containing this clause, the normal rule would lead to the conclusion that Maxwell was liable for the debt. The court held that he was not. The reason given by the court was that the term of the contract being relied upon contained an ‘unusual or special condition’ and therefore, in order to be included as a term of the contract, it had to be drawn specifically to the attention of the other party. Here, the term was simply part of the general conditions, and was not so brought to Maxwell’s attention, so it would be ignored as a contract term. The court relied on the Interfoto case (below) but that was not a case where the document containing the term was signed. The Montgomery decision has not yet been followed or disapproved of in a later case, so it is not yet clear if it will remain good authority even in Scotland.

In England, there is no sign of a relaxation of the rule.

It is relatively common in commercial contracts for additional terms to be

incorporated by reference to another, perhaps substantial, document. We have seen this already when dealing with the ‘battle of the forms’ cases. Indeed, there would be nothing to prevent a party from signing a very minimal contract referring to another document containing all of the main terms. Sometimes arbitral rules are incorporated into a contract in this way, and we will examine such a specific case when dealing with arbitration next semester.

(b) Incorporation by notice

Here, the party who seeks to disown the terms referred to does not sign a contract referring to them: his attention is drawn (or attempted to be drawn) to them by a notice. Most often, the main contract is an oral one, with a notice referring to written terms. There is a four-stage process to go through in considering whether such notices are effective.

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Stage 1- is it a contractual notice?

The first question to ask in such cases is whether the notice referring to the further terms can be regarded as of the requisite status to be effective. To put it another way, it must be a contractual document and not just a receipt or other routine document. This was highlighted in the case of Chapleton v Barry UDC [1940] 1 KB 532. There, a deckchair was hired and the hirer took a ticket from an attendant. This ticket contained a clause excluding liability of the hirers for loss by the customer as a result of the hiring of the deckchair. The Court of Appeal held that this document was merely a receipt and not a contractual document at all. A similar view was adopted in the Scottish case of Taylor v Glasgow Corporation 1952 SC 440. There, the ticket containing the disputed term was held by the Inner House to be designed for a number of purposes: it acted as a receipt; it was a domestic check on the running of the baths in question; it was a record of the type of service paid for by the holder of the ticket. It was not, however, a contractual document. The test in such cases seems to be to consider whether the reasonable consumer would regard the document in question

as of the type that would normally contain contractual terms.

Stage 2- Does the party affected know that the notice contains writing and that such writing normally carries contractual terms?

If the answer to both is “yesthe court will be one step closer to holding that the term is incorporated. In Parker v South Eastern Railway (1877) 2 CPD 416, these rules were pronounced by Lord Justice Mellish

in the Court of Appeal. This case involved a ticket received following the

deposit of a bag by the claimant in a railway cloakroom owned by the defendants. The consequence of the rule developed in that case is that if the party concerned is unaware that there is writing on the document or notice concerned (this would be unusual) he would not be bound by the condition. However, if he was so aware, he would be bound by the conditions, as long as documents of that kind were generally regarded as containing contractual conditions, whether or not the individual had formed that impression. This fits well with the objective approach to contract law (see under interpretation of contract terms, below); the knowledge or impression of the individual is irrelevant - it is the generally accepted position that rules.

A prominent notice on the counter of a photo processing store was

regarded as effective to incorporate a limitation of liability in of Wilkes v

Jessop 2007 CLY 795.

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Stage 3- has the party affected been given reasonable notice of the term?

If the condition has survived the first two stages, the next question is: has the party affected been given reasonable notice of its existence? If not, the condition will not be regarded as forming part of the contract. Each case will depend upon its own facts.

Two cases in which opposite conclusions were reached will indicate how difficult it might be to predict the outcome of any particular case.

In Thompson v London, Midland & Scottish Railway [1930] 1 KB 41 the condition was referred to on the reverse of the claimant’s train ticket where it was stated that the ticket was issued subject to the conditions stated in the company’s timetable. The timetable could only be accessed if bought for an extra charge and on page 552 of the timetable there was a condition excluding liability for injury on the excursion. In addition, the claimant could not read and the ticket was not bought by her but by a relative. The claimant was injured while disembarking the train and sued the railway company. They relied on the exclusion clause in the timetable, and the claim was denied.

In Thornton v Shoe Lane Parking Ltd. [1971] 2 QB 163 (referred to above) the conditions referred to on the ticket issued by the machine came too late. Although this was the ratio decidendi of the decision, it was commented on an obiter basis that the term concerned would not have been reasonably brought to the drivers attention anyway, even if it had come on time, since the condition was displayed on a notice on a pillar opposite the ticket machine and inside an office in the car park. The notice was not visible from the car park entrance.

Although most reasonable notice cases involve tickets, questions can arise out of the prominence of the notice: see the case of Wilkes v Jessop 2007 CLY 795 where the notice limiting liability for damages was in a photograph development store was regarded as prominent and easy to read.

Stage 4 – unusual or onerous condition requires more explicit notice

Some conditions are regarded as so unusual or onerous that the courts have held that the condition should be highlighted prominently, and if it is

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not, it will not be regarded as being incorporated into the contract. The main case in this area is Interfoto Picture Library Ltd. v Stiletto Visual Programmes Ltd. [1988] QB 433. There, a charge of £5 per day per photographic negative for late return of the negatives was relied upon. The term was in a set of terms delivered with the negatives, but the terms were not signed by the borrowers of the negatives. The Court of Appeal held that the term was onerous and unusual and since it had not been drawn fairly to the attention of the other party, it was not incorporated into the contract and could not be relied upon to claim the late return fee. The clause could only have been drawn fairly to the attention of the other party in this case if it were ‘drawn to his attention in the most explicit way’. (A similar test was used by the Inner House in the Montgomery Litho case (above) but unusually that was a case in which the document containing the condition was signed by the party seeking to disown it).

In AEG (UK) Ltd. v Logic Resource Ltd. [1996] CLC 265 the term in question required the buyer of goods for export to return any defective goods at his own expense, and this was held to be onerous and in that context had to be drawn ‘fairly and reasonably’ to the attention of the buyer. The term was also unusual since it was not a common or standard term in such contracts. The plaintiffs had not satisfied the test of fairly and reasonably brining the term to the attention of the defendant and so it was held not to be incorporated.

However, in the more recent case of Motours Ltd. v Euroball (West Kent) Ltd. [2003] All ER (D) 165, the court held that there had been sufficient incorporation of the terms even where it was held that the conditions in question were in small print and very difficult to read because of this and because of the colour of the paper on which they were printed. However, these terms were neither unusual nor onerous.

It should be noted that the clause in question, in order to attract this higher standard of notice, must be either onerous or unusual. So there will be two questions in such cases:

1. Is the clause onerous or unusual or both? and if so

2. Has it been, in the circumstances of the case, fairly and reasonably drawn to the attention of the party affected by it?

(c) Incorporation by course of dealing

Sometimes parties deal with each other regularly. Often in such cases, they do so on the basis of standard terms and conditions. Where on each

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occasion there is a contract, properly incorporated, there will be no difficulty. However, what is the situation where, on a particular occasion, the terms used previously are not incorporated? Can an aggrieved party still rely on them on the basis that the parties have always contracted in the past on the basis of the conditions? The answer is “yes”, as long as the course of past dealings has been sufficiently consistent. That does not necessarily mean that it has to have been entirely intact.

In McCutcheon v MacBrayne [1964] 1 WLR 125 the claimant had travelled on the ferry operated by the defendants on several occasions in the past. On some of those occasions he had signed terms and conditions containing a clause excluding liability for loss and on others he had not been asked to sign it. On the occasion in question he had not been asked to sign it. On the journey, the ferry sank and he claimed his losses from the company. His claim succeeded - the clause could not be relied upon since the course of dealing involving the term had not been sufficiently consistent.

Another example is the Scottish case of Grayston Plant Ltd. v Plean Precast Ltd. 1976 SC 206. This case involved the hire of a crane. The parties had entered into a contract for the hire of the crane 12 times over 4 years, prior to the occasion in question. In each case, the contract was an oral one, but was followed up by an acknowledgement of order form that referred to “General Conditions” that could be supplied upon request. It was never supplied to the hirer and was never asked for by them. The practice of the owner was to include a copy of the conditions when there was a written contract, but all contracts with this hirer were oral. These conditions made the hirer liable for damage to the crane. The crane was damaged while in the hirer’s possession and the question was whether the general conditions had been incorporated. The court held that the condition had not been incorporated since fair and reasonable notice of it had not been given when it could easily have been by copying the general conditions with the acknowledgement of order form. So, consistency is sometimes not sufficient: there is still a fair and reasonable notice requirement.

More recently, it was held that terms that had been accepted in 14 orders over a period of 12 months had been incorporated by a course of dealing:

Motours Ltd. v Euroball (West Kent) Ltd. [2003] All ER (D) 165.

However, where it can be shown that the party concerned knew that conditions of the sort relied upon were used in the particular trade concerned, this is likely to influence the decision of the court, even where a prior course of dealing has not been established. This was the position adopted by the Court of Appeal in British Crane Hire Corp Ltd. v Ipswich Plant Hire Ltd. 1975 Q.B. 303. There, the course of dealing consisted of two previous transactions, many months before and were not

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known about by the manager who ordered the crane on this occasion. However, the terms in the conditions of hire were held to be incorporated in this case since the conditions were habitually imposed in this trade and the parties were of equal bargaining power.

However, the British Crane decision was distinguished in the recent case of Ofir Scheps v Fine Art Logistics Ltd. [2007] EHWC 541. This case concerned a sculpture by Anish Kapoor, entitled Hole and Vessel II, which was made of polystyrene, cement, earth, acrylic and pigment. The judge (Mr Justice Teare in the High Court) said this of the sculpture at paragraph 1 o his judgement:

“It is not possible for me to describe it. One expert described it as sensous and sexy, the other as clumsy and somewhat absurd.”

The plaintiff bought the sculpture and had hired the defendants to uplift the sculpture from the auction house where it had been bought and store it for a period. The sculpture, however, went missing from the defendant’s storage units. The evidence from the defendant’s general manager was that he believed that, by mistake, the sculpture had been paced in a skip and destroyed at a waste transfer station. The plaintiff had paid US $35,000 for the sculpture. The plaintiff sued the defendants for breach of contract since they had lost the sculpture. The defendants argued that their liability was limited to a maximum payment of £350 per cubic metre of the volume of the missing or damaged item, in line with a clause to this effect in their standard terms and conditions. If this term was held to be incorporated into the agreement, this would limit their liability to £587.13. It was accepted that this term had not been drawn to the attention of the plaintiff, but the defendants argued that such a term was normal in contracts for the storage of fine art. The plaintiff had no knowledge of this condition, although he was held to be aware (due to his experience in the area) that limitation of liability clauses were not uncommon in such contracts. It was held however, that the limitation of liability term was not properly incorporated, since nothing was done to make the plaintiff aware that he was contracting on the basis of the standard terms and conditions of the defendants. There was also no objective reason why the plaintiff would believe this to be the case.

3. Implied Terms

These are terms that are assumed to exist in a contact. They are not agreed between the parties, either orally or in writing, but the law assumes that they exist. They are invisible. However, when they are assumed to exist, they have equal force to the express terms of the contract: they are not inferior in any way and can be fully enforced.

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Indeed, it would not be uncommon for a court action to be based purely on an implied term. Of course, the party relying on the implied term would still have to show that a contract existed and will often require to prove the content of the express terms. Where there is no contract, there cannot be any terms available to be enforced, implied or otherwise.

There are two categories of implied terms: terms implied by law and terms implied in fact.

(a) Terms implied by law

These are terms forced upon the parties by law in certain situations. No account is taken by the law of the intention of the parties, presumed or otherwise. This goes against the classic theory of contracts which provides that they are purely consensual devices. However, the law regards certain situations as being so worthy of protection that the usual theory is ignored.

The main examples of such implied terms are those involving consumer protection, in other words contracts where an individual is contracting to buy goods or services from an entity which is trading in those goods or services.

In the case of goods, the main implied terms exist in the Sale of Goods Act 1979, as amended. Sections 12- 15 set out the implied terms with s. 14 being the most important and commonly used:

s 12 Implied terms about title, etc.

(1) In a contract of sale, other than one to which subsection (3) below

applies, there is an implied term on the part of the seller that in the case of a sale he has a right to sell the goods, and in the case of an agreement to sell he will have such a right at the time when the property is to pass.

(2) In a contract of sale, other than one to which subsection (3) below

applies, 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 any charge 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 the owner or other person entitled to the benefit of any charge or encumbrance so disclosed or known.

(3) This subsection applies to a contract of sale in the case of which

there appears from the contract or is to be inferred from its circumstances an intention that the seller should transfer only such

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title as he or a third person may have.

(4) In a contract to which subsection (3) above applies there is an

implied term that all charges or encumbrances known to the seller and

not known to the buyer have been disclosed to the buyer before the contract is made.

(5) In a contract to which subsection (3) above applies there is also an

implied term that none of the following will disturb the buyer's quiet

possession of the goods, namely--

(a)

the seller;

(b)

in a case where the parties to the contract intend that the seller

should transfer only such title as a third person may have, that person;

(c) anyone claiming through or under the seller or that third person

otherwise than under a charge or encumbrance disclosed or known to

the buyer before the contract is made…

s 13 Sale by description.

(1) Where there is a contract for the sale of goods by description, there

is an implied term that the goods will correspond with the description…

…(2) If the sale is by sample as well as by description it is not sufficient that the bulk of the goods corresponds with the sample if the goods do not also correspond with the description.

(3) A sale of goods is not prevented from being a sale by description by

reason only that, being exposed for sale or hire, they are selected by the buyer…

s 14 Implied terms about quality or fitness.

(1) Except as provided by this section and section 15 below and subject

to any other enactment, there is no implied term about the quality or

fitness for any particular purpose of goods supplied under a contract of sale.

(2) Where the seller sells goods in the course of a business, there is an

implied term that the goods supplied under the contract are of satisfactory quality. (2A) For the purposes of this Act, goods are of satisfactory quality if

they meet the standard that a reasonable person would regard as satisfactory, taking account of any description of the goods, the price (if relevant) and all the other relevant circumstances. (2B) For the purposes of this Act, 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 all 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 quality of goods unsatisfactory--

(a) which is specifically drawn to the buyer's attention before the

contract is made,

(b) where the buyer examines the goods before the contract is made,

which that examination ought to reveal, or

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(c) in the case of a contract for sale by sample, which would have been

apparent on a reasonable examination of the sample….

…(3) Where the seller sells goods in the course of a business and the buyer, expressly or by implication, makes known--

(a)

to the seller, or

(b)

where the purchase price or part of it is payable by instalments and

the goods were previously sold by a credit-broker to the seller, to that

credit-broker, any particular purpose for which the goods are being bought, there is an implied term that the goods supplied under the contract are reasonably fit for that purpose, whether or not that is a purpose for which such goods are commonly supplied, except where the circumstances show that the buyer does not rely, or that it is

unreasonable for him to rely, on the skill or judgment of the seller or credit-broker:

(4) An implied term about quality or fitness for a particular purpose

may be annexed to a contract of sale by usage.

s 15 Sale by sample.

(1) A contract of sale is a contract for sale by sample where there is an

express or implied term to that effect in the contract.

(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 would not be apparent on reasonable examination of the sample…

There is a whole branch of the law surrounding the sale of goods legislation and numerous reported cases. We do not have the space to deal with these in this module, but the implied terms above are the best examples. In terms of remedies for breach of these implied terms, the 1979 Act provides for those too - the right to reject the goods within a reasonable time or to keep the goods and seek damages.

Turning to the supply of services, there are implied terms there too. In Scotland, there are the following implied terms, all implied at common law (not by statute):

That a reasonable price will be charged for the services

 

That reasonable care and skill services

will

be used

in

delivering

the

That the services will be delivered within a reasonable time

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In England, these implied terms also exist, but in the case of the implied term of reasonable care and skill, this is statutory in origin: the Supply of Goods and Services Act 1982, s.13-15:

s 13 Implied term about care and skill.

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.

s 14 Implied term about time for performance.

(1) Where, under a contract for the supply of a service by a supplier acting in the course of a business, the time for the service to be carried out is not fixed by the contracts, left to be fixed in a manner agreed by the contract or determined by the course of dealing between the parties, there is an implied term that the supplier will carry out the service within a reasonable time. (2) What is a reasonable time is a question of fact.

s 15 Implied term about consideration.

(1) Where, under a contract for the supply of a service, the consideration for the service is not determined by the contract, left to be determined in a manner agreed by the contract or determined by the course of dealing between the parties, there is an implied term that the party contracting with the supplier will pay a reasonable charge. (2) What is a reasonable charge is a question of fact.

It is important to note that the Act, and therefore the implied terms, only apply where there is a contract for the “transfer of goods” which is not a contract for the sale of goods or a hire-purchase agreement (s.1(2)(a), (b)). So a ‘pure’ contract for services where no goods are transferred in the process (for example a solicitor-client contract or a surveyor/architect- client contract) does not fall within the Act.

The distinction between those implied in respect of services and those implied in sale of goods contracts is that in contracts of the former type, the test of reasonableness exists: in the case of goods under the 1979 Act, the sole question is, for example in the case of quality, whether the goods are of satisfactory quality or not - the reasonableness of the actings of the seller of the goods is irrelevant.

One more point about the implied terms in both cases - goods and services - they apply not only in cases where a trader sells to an individual, but also in a contract between commercial entities.

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Terms implied in fact

It is sometimes said that the distinction between the two types of implied terms is blurred and difficult to see in all cases. However, for the purposes of this module, the distinction will be kept free from any such debate.

Terms implied in fact have a different basis from those implied in law:

they originate from the common law and from the consensual theory of contract law. Such terms are accepted only where the courts can say that the term is necessary to make the contract work or where it can be implied on the basis of custom. In such cases, the courts are willing to imply the term on the basis that the parties can be assumed to have agreed the term. In other words, the implication of such a term is based upon the obvious intention of the parties, not by force of law.

The general approach here is that terms are only implied in clear cases. Lord Justice Waller in the recent Court of Appeal case of Ultraframe (UK) Ltd. V Tailored Roofing Systems Ltd. [2004] EWCA Civ 585, put it in this way:

“The court's usual role in contractual interpretation is, by resolving ambiguities or reconciling apparent inconsistencies, to attribute the true meaning to the language in which the parties themselves have expressed their contract. The implication of contract terms involves a different and altogether more ambitious undertaking:

the interpolation of terms to deal with matters for which, ex hypothesi, the parties themselves have made no provision. It is because the implication of terms is so potentially intrusive that the law imposes strict constraints on the exercise of this extraordinary power. There are of course contracts into which terms are routinely and unquestioningly implied. If a surgeon undertakes to operate on a patient the term will be implied into the contract that he exercises reasonable care and skill in doing so. It is inconceivable that any patient would in any imaginable circumstance commit his bodily well-being to the ministrations of a surgeon who did no undertake that obligation, or that a surgeon could hope to remain in practice without professing to discharge. Again, quite apart from statute, the courts would not ordinarily hesitate to imply into a contract for the sale of unseen goods that they should be of merchantable quality and answer to their description and conform with sample. It is hard to imagine trade conducted, in the absence of express agreement, on any other terms. But the difficulties increase the further one moves away from these paradigm examples. In the first case, it is probably unlikely that any terms will have been expressly agreed, except perhaps the nature of the operation, the fee, and the time and the place of operation. In the second case, the need for implication usually arises where the contract terms have not

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been spelled out in detail or by reference to written conditions. It is much more difficult to infer with confidence what the parties must have intended when they have entered into a lengthy and carefully-drafted contract that have omitted to make provision for the matter in issue. Given the rules which restrict the evidence of the parties' intention when negotiating a contract, it may well be doubtful whether the omission was the result of the parties' oversight or of their deliberate decision; if the parties appreciate that they are unlikely to agree on what is to happen in a certain not impossible eventuality, they may well choose to leave the matter uncovered in their contract in the hope that the eventuality will not occur. The question of whether a term should be implied, and if so what, almost inevitably arises after a crisis has been reached in the performance of the contract. So the court comes to the task of implication with the benefit of hindsight, and it is tempting for the court then to fashion a term which will reflect the merits of the situation as they then appear. Tempting, but wrong.”

Moving from the general approach, we will now consider some examples.

Necessity

So, the first alternative test is necessity, not reasonableness. This was noted in the landmark House of Lords case of Liverpool City Council v Irwin [1977] AC 239:

“…it is not enough for the court to say that the suggested term is a reasonable one, the presence of which would make the contract a better or fairer one; it must be able to say that the insertion of the term is necessary.”

On what basis might a term be said to be necessary? One common example is a term that is required in order to give “business efficacy” to the contract. That was the justification used by the Court of Appeal in the elderly case The Moorcock (1889) 14 PD 64.

The courts appear to be, if anything, tightening the test. In the recent case of Equitable Life Assurance Society v Hyman [2002] 1 AC 408, the test was stated to be a matter of ‘strict necessity’.

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In the recent case of Ultraframe (UK) Ltd. V Tailored Roofing Systems Ltd. [2004] EWCA Civ 585 (cited above) the Court of Appeal refused to imply a term that one of the parties would not try to ‘poach’ the customers of the other party since this would involve the implication of a term that was not necessary to give efficacy to the agreement.

Custom or usage in the trade/ class of contract

Although the main underlying test is one of necessity, there is an alternative possibility: that the term should be implied where there is, to use the words of Lord Wilberforce in the Liverpool case, “an established usage”. Here, the test involves considering the circumstances of contracts of the type in question and asking: “in this trade, is such a term customary?” In a line of Scottish cases, the test is put in this way by Lord Maclaren in Morton & Co. v Muir Brothers 1907 SC 1211:

“The conception of an implied condition is one with which we are familiar in relation to contracts of every description, and if we seek to trace any such implied conditions to their source it will be found in almost every instance that they are founded either on universal custom or in the nature of the contract itself. If the condition is such that every reasonable man on the one part would desire for his own protection to stipulate for the condition and that no reasonable man on the other hand would refuse to accede to it, then it is not unnatural that the condition should be taken for granted in all contracts of this class without the necessity of giving it formal expression.”

It should be noted that this test does not involve the adoption of the term

on the basis of the view of the reasonable man. This test has been followed in Scotland: see Crawford v Bruce 1992 SLT 524 and GM Shepherd v North West Securities Ltd. 1991 SLT 499. Although this is a Scottish formula, it expresses the usage test that exists in both jurisdictions.

Of course, it is sometimes difficult to decide whether, in a particular case,

a certain custom has been established. It has been held that a practice

must, in order to amount to a usage, be certain, in the sense of being clearly established, notorious in the trade concerned and it must be reasonable (see Ungoed-Thomas J in Cunliffe-Owen v Teather & Greenwood [1967] 1 WLR 1421).

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It has also been made clear, however, that repetition of the practice will not necessarily be enough; the motive for adopting such a practice is important. In other words, the practice must be adopted not out of courtesy, but out of a feeling of legal necessity. Slade LJ put it in this way in General Reinsurance Corp v Forsakringsaktiebolaget Fennia Patria [1983] QB 856:

“There is, however, the world of difference between a course of conduct that is frequently, or even habitually, followed in a particular commercial community as a matter of grace and a course which is habitually followed because it is considered that the parties concerned have a legally binding right to demand it.”

Topic Activities

Activity 1- Suggest 1.5 hours

Consider the cases of Grayston Plant Ltd. v Plean Precast Ltd. 1976 SC 206 and British Crane Hire Corp Ltd. v Ipswich Plant Hire Ltd. 1975 Q.B. 303 (or excerpts from them). It could be said that these cases, in allowing for the possibility of incorporated terms through a course of dealing (albeit that in Grayston, the term was held not to be incorporated), encourage laziness between commercial parties. Is there an argument for simply abandoning this kind of implied term, and insisting that commercial parties to a contract must specifically incorporate any terms they wish to have applied, otherwise the term is not a part of the contract?

Activity 2-Suggest 1 hour

Read the following cases (or an excerpt of them):

J Evans & Son (Portsmouth) Ltd. v Andrea Merzario Ltd. [1976] 1 WLR 1078 and Couchman v Hill [1947] KB 554 (or excerpts from them).

and the Contract (Scotland) Act 1997, s.1.

Do you take the view that the result in such cases/legislation can lead to confusion between contracting parties? Should parties be allowed to agree on a matter orally that has already been covered in a written

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contract? Would it not always be possible to revise, in writing, the written contract or is there a place for oral revisal?

Activity 3- Suggest 1.5 hours

Compare the cases of Montgomery Litho Ltd. v Maxwell 2000 SC 56, a Scottish case (or an excerpt from it) and Interfoto Picture Library Ltd. v Stiletto Visual Programmes Ltd. [1988] QB 433 (or an excerpt from it) a similar English case. Do you agree with the outcome of these cases? Should signature of a document by a commercial party not be sufficient to bind that party, no matter what the relevant term is and how it is specified?

Activity 4-Suggest 1 hour

Read the very interesting judgement of Lord Denning in Thornton v Shoe Lane Parking Ltd. [1971] 2 QB 163. Do you agree with what he says? Do you think his style of expression is interesting and easy to follow? Consider also the case of Thompson v London, Midland & Scottish Railway [1930] 1 KB 41 (or an excerpt of it). Do you think the result is harsh here?

References

McKendrick, Contract Law Text, Cases and Materials, (2 nd edn, Oxford, University Press, Oxford, 2005) Chapters 8, 9 and 10.

Poole, Textbook on Contract Law, (9 th ed. Oxford University Press, Oxford, 2008) Chapter 5.

Poole, Casebook on Contract Law, (9 th ed. Oxford University Press, Oxford, 2008) Chapter 6.

Woolman and Lake, Contract Law, (3 rd edn. W.Green/Sweet and Maxwell, Edinburgh, 2001) Chapters 7 and 9 (Scots Law text).

Huntley et al, Contract: Cases and Materials, (2 nd ed. Thomson/W.Green, Edinburgh, 2003) Part 4 (Scots Law Text).

Further Reading

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Bradgate, Unreasonable Standard Terms (1997) 60 MLR 582.

Phang, Implied Terms Revisited [1990] JBL 394.

Phang, Implied Terms in English Law: Some Recent Developments [1993] JBL 242.

Phang, Implied Terms Again [1994] JBL 255.

MacDonald, The Duty to Give Notice of Unusual Contract Terms [1988] JBL 375.