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Contents
Introduction 51 52 53 Is a statement or assurance a term of the contract? The use of implied terms The classification of terms into minor undertakings and major undertakings Reflect and review 54 55 57 60 66
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Introduction
We have examined many of the basic requirements necessary for the formation of an enforceable contract: offer and acceptance (Chapter 2), consideration (Chapter 3) and other necessary requirements such as certainty and intention (Chapter 4). As you will now realise, when all these requirements are present, a contract is formed. We will now determine the content, or terms, of the resulting contract. In other words, what is the extent of the obligations undertaken? What are the parties to the contract obliged to do? It is of critical importance to establish the terms of any contract because the question of whether or not the contract has been breached depends upon whether one party has failed to perform according to the terms of the contract. In addition, the rights that an injured party has following a breach of contract by another party depend upon whether the term breached was a major term or a minor term. This chapter deals with three areas concerning the content of the contract. These are:
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whether a particular statement made or assurance given in the course of the negotiations leading up to the contract forms part of the contract how terms can be implied into a contract either by operation of a statute or by common law how, and why, the major or essential undertakings of a contract are distinguished from the minor or inessential ones.
Learning outcomes
By the end of this chapter and the relevant reading, you should be able to:
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explain when a statement forms a part of the contract (and when it does not) compare the effect of a statement which is a term and a statement which is not a term of the contract explain why and when courts will imply terms into contracts provide an explanation as to the limits upon courts in implying terms into contracts establish the different categories of contractual undertakings (terms) explain how to determine within which category a particular term should be placed understand the consequences attendant upon a breach of each of these different categories of undertakings.
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McKendrick, Chapter 8: What is a term?, pp.143146. McKendrick, Chapter 9: The sources of contractual terms 9.1 Introduction and 9.2 The parole evidence rule, pp.147149. Poole, Chapter 6: Content of the contract and principles of interpretation Section 1 Pre-contractual statements terms or mere representations?, pp.212221
Contracts in practice are never as simple and neat as the contracts that are explained in legal textbooks. Legal texts leave the reader with the impression that the process begins simply with an invitation to treat, followed by an offer and a corresponding acceptance. In practice, however, there may be lengthy negotiations and exchanges prior to the formation of the contract. Some of these exchanges may be insignificant; others may be highly significant. What is important for our purposes is to determine which of these statements form a part of the contract and which do not. This is important because those statements that form a part of the contract are terms and breach of a term of a contract gives rise to a right to damages and, possibly, a right to terminate the contract (see Chapter 14: Performance and breach). If the statement does not form a part of the contract, it is said to be a mere representation. If a mere representation is not true, there is not a breach of contract because the representation is not a part of the contract. Note: Terminology. You will notice in your reading on this topic that many of the cases discuss whether the statement is a warranty (by which they mean a term of the contract or of a separate, collateral, contract) or a representation (a mere puff; a statement which has no legal significance). We have avoided using the term warranty here because it confuses the discussion set out in Section 5.3: The classification of terms into minor and major undertakings, where the term warranty is used to mean something slightly different. Please note further that many of the matters considered here are best understood once you have a grasp of the concept of a misrepresentation dealt with in Chapter 9 of the subject guide. It may be of assistance to you to review these matters again once you have covered Chapter 9.
See Chapter 9, Misrepresentation, section 9.1.1 Misrepresentation and contractual terms and section 9.2 Remedies for misrepresentation.
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2. where one party is clearly relying upon the other, this is indicative that the statement is intended to be a term, and 3. the relative knowledge of the parties is significant because if one party has a much greater knowledge of the matter than the other, this is again indicative that the statement is intended to be a term of the contract. A number of cases illustrate how these principles have been applied by the courts: Oscar Chess Ltd v Williams (1957); Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd (1965); Schawel v Reade (1913); Couchman v Hill (1947).
Activity 5.1
Think of the circumstances in which a purchaser will rely upon a sellers expertise as to the good being sold. In what situations will a purchaser rely upon a seller?
Activity 5.2
Is it relevant to ask, as Lord Denning does in cases such as Dick Bentley Productions v Harold Smith (Motors), whether the defendant was innocent of fault as an aid to determining the existence of contractual intention? Does this shed any light on the way judges decide what is the proper inference?
Activity 5.3
What is the parole evidence rule? Is it still important? If not, why not?
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Summary
It is important to determine whether a statement or assurance is a term of the contract or a representation because it determines the remedy available to the injured party. If the statement is a term of the contract, or of a collateral contract, the injured party may bring an action for damages. If it is a representation, the injured party must establish that the statement is an actionable misrepresentation.
explain when a statement forms a part of the contract (and when it does not) compare the effect of a statement which is a term and a statement which is not a term of the contract.
Anson, pp.127132.
McKendrick, Chapter 9: The sources of contractual terms 9.8 Implied terms, pp.163166. Poole, Chapter 6: Content of the contract and principles of interpretation Section 4 Implied terms, pp.248262. Goode, R. The statutory implied terms in favour of the buyer, Elements of the law of contract Study pack.
We have, thus far, thought of contractual terms as express terms. I order a pair of roller skates from a local sports equipment shop. I stipulate that they are to be a size 42, have four in-line wheels and that the colour will be black. I agree to pay 99 for the skates. The shopkeeper stipulates that he will deliver them on Friday. All of the matters in this exchange amount to express terms. These express terms do not necessarily form the entirety of the contract between the shopkeeper and myself. In certain circumstances, a court will imply terms into a contract. Thus, in the example above, a court would imply that the roller skates were of satisfactory quality (because of s.14(2A) of the Sale of Goods Act 1979). What we will consider in this part is the circumstances in which courts will imply terms into a contract. In considering this area, it is important to bear in mind that courts are generally reluctant to imply terms into a contract. The courts generally consider their role to be that of an interpreter of contracts rather than a maker of them. The more frequently terms are implied into a contract, the greater the extent to which the court has created the contract rather than merely interpreted it. In Crossley v Faithful & Gould Holdings Ltd [2004] the Court of Appeal declined to find that there was an implied term within the contract of employment which provided that an employer ought to take reasonable care of an employees economic wellbeing. The introduction of such a term would be a major extension of the existing law and would place an intolerable burden upon employers. Dyson LJ observed that courts in cases involving implied terms ought not to focus on the elusive concept of necessity but to recognise that, to some extent at least, the existence and scope of standardised implied terms raise questions of reasonableness, fairness and the balancing of competing policy considerations. Courts will imply terms into contracts in the following situations, the first three where the term is implied by operation of the common law.
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Express terms: nothing to do with speed, but meaning clearly indicated or explicitly stated.
Where there is an established trade usage. Because of the relationship between the parties.
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Activity 5.4
Why did the House of Lords reject the variety of implication that the law implies a term on the basis that it is reasonable to do so, favoured by Lord Denning MR? (The rejection is made by Lord Wilberforce in Liverpool City Council v Irwin (1977))
Activity 5.5
A contracts with B to assemble bicycles to Bs specifications. One of these specifications is that the bicycles will be fitted with a unique gear system. B manufactures these gear systems. Is there an implied term that B will supply A with this gear system in sufficient quantities to manufacture the requisite number of bicycles?
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Slater v Finning [1996] 3 All ER 398 (camshaft was fit for its purpose, although it did not work properly in the buyers vessel: the problem arose from an abnormal feature of the vessel of which neither party was aware).
For an example of the implied terms under the Supply of Goods and Services Act 1982, where the 1994 Act makes corresponding amendments introducing the concept of satisfactory quality in the case of goods supplied, see:
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Wilson v Best Travel (1993) (obligation of tour operator with regard to safety of holiday accommodation).
The Sale of Goods Act 1979 also implies terms as to title (s.12), terms governing the sale of goods by description (s.13) and terms regarding the sale of goods by sample (s.15).
Anson, pp.150156.
For further discussion of the topic of sale of goods, it is necessary to refer to a specialist work on the sale of goods:
Atiyah, P.S. The Sale of Goods. (London: Longman, 2005) eleventh edition [ISBN 9780582894082].
Self-assessment questions
1. Place the circumstances in which terms will be implied into a contract into two categories first, those implied by law and secondly, those implied by fact. If necessary, refer to McKendrick, Chapter 9, section 9.8 Implied terms. 2. On which party is the onus of proving the existence of an implied term? 3. How is satisfactory quality determined for the purposes of the Sale of Goods Act 1979? 4. Does the implication of terms into a contract resolve problems or create them?
Summary
Courts will, in certain circumstances, imply terms into a contract. The terms will be implied either by operation of the common law or by statute. Once the terms are implied, they are effective as a contractual term.
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explain why and when courts will imply terms into contracts provide an explanation as to the limits upon courts in implying terms into contracts.
Anson, pp.145160.
5.3 The classification of terms into minor undertakings and major undertakings
Essential reading
McKendrick, Chapter 10: The classification of contractual terms, pp.168178. McKendrick, Chapter 19: Breach of contract 19.6 The right to terminate performance of the contract to 19.8 The right of election, pp.312314. Poole, Chapter 6: Content of the contract and principles of interpretation Section 5 Classification of terms, pp.262279.
We began this chapter by examining how statements and exchanges become terms of contracts. We conclude by examining how these terms are classified. In general, terms will be classified into minor and major undertakings (or obligations). To understand the discussion of the classification of contractual terms it is necessary to start with the remedies for breach. A contractual term is a primary obligation. Every breach of a primary obligation gives rise to a secondary obligation to pay damages for the loss caused. In some cases this is the only remedy, but in others there is the further remedy of terminating (ending or rescinding) the contract. That is to say, some breaches of contract provide the injured party with an option. He or she can either (a) terminate the contract and claim damages or (b) affirm the contract (accept the breach and insist on continued performance of the contract) and claim damages. The classification of terms is important because the injured party is only given this option when the term breached is a condition or there is a sufficiently serious breach of an innominate term (see 5.3.2 below). The injured party is not given the right to terminate the contract for breach of a term that is a warranty. We will return to these concepts in Chapter 14 where we examine the performance and breach of contracts. Before examining what the terms condition, innominate term and warranty mean, it is important to consider the different concepts of rescission. The words rescind and rescission have different meanings in different contexts. Rescinding for breach means that the injured party is entitled, if he so wishes, to treat the contract as discharged (i.e. brought to an end) and to refuse to make further performance of his own obligations or to receive further performance of the other partys obligations. This is different from rescission (rescinding) for misrepresentation, which means that the contract is cancelled from the very beginning. Termination for breach is a drastic remedy. The severity of the situation may be exacerbated when an injured party uses his right to rescind simply to escape from what has become a bad bargain. For example, a person who has arranged delivery of coal at a time when coal is scarce and prices are consequently high may later find that coal has become more plentiful and prices are lower. Such a person may seek to use a technical breach of contract (that is to say, a breach which does not really harm him) to end the contract.
See also, Chapter 14, Performance and breach.
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Conditions: breach of which gave the right to refuse further performance. Warranties: for breach of which damages were the only remedy.
Note that a party rescinding for breach need not show that the breach of condition has actually caused any loss. See Bowes v Shand (1877) and Re Moore and Landauer (1921). This classification into conditions and warranties was extensively used by the drafters of the Sale of Goods Act 1979, where the principle is that the most important terms are conditions and the less important ones are warranties. (Condition is another word used in several senses: the present sense is highly artificial, but more important for our purposes than the natural meaning of a suspensive condition.) At common law, however, it is clear that the ultimate test is the parties intention: if the intention is clearly expressed, a term will be a condition, however unimportant it is. However if the intention is not clearly expressed, the court will again have to draw the proper inference. See Behn v Burness (1868); Bettini v Gye (1876) and Poussard v Spiers (1876).
Lombard North Central v Butterworth (1987): punctual payment was made a condition. Note that the hirer was also liable in damages for the entire loss caused to the plaintiffs by the rescission of the contract. Union Eagle v Golden Achievement [1997] 2 All ER 215: a 10-minute delay was too much. Time was of the essence: as the time for performance had passed, so too had the right to performance.
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Activity 5.6
Why was the unseaworthiness of a chartered ship (in Hong Kong Fir) considered less important than the owners estimate of when she would be ready to load the charterers cargo?
Activity 5.7
If the time charterer is late in redelivering the ship, what are the practical consequences for the owner?
Activity 5.8
What more could Schuler (in L Schuler v Wickman Machine Tool Sales) have done to achieve the effect of making the visits genuinely a condition of the contract?
Activity 5.9
Compare the decision in Schuler with that in Lombard. How are they different?
Summary
Contractual terms are categorised as conditions, warranties or innominate (or intermediate) terms. The categorisation is important because it determines whether or not the wronged party is entitled to terminate the contract upon breach. Only the breach of a condition or a sufficiently serious innominate term justifies the termination of the contract. The principal difficulty posed with this area of the law is one of certainty: it is often hard to ascertain whether or not there has been a sufficiently serious breach of an innominate term as to justify termination.
establish the different categories of contractual undertakings (terms) explain how to determine which category a particular term should be placed within understand the consequences attendant upon a breach of each of these different categories of undertakings.
Anson, pp.134145.
Examination advice
The matters considered in this chapter are unlikely to appear as separate issues in examination questions. However, the material considered in this chapter is very important and virtually all examination papers on the law of contract contain questions on the incorporation of terms in a contract or the classification of terms and the consequences of breaching different terms. It is of prime importance in any situation to establish what the terms of a contract are. Without establishing the terms of the contract it is impossible to ascertain what the parties are obliged to do and whether or not they have performed the contract. Consequently, you will find that a careful study of this area of the law is important. A review of past examination papers indicates that the Examiners have frequently combined an issue involving the terms of the contract with other issues. While this advice is not exhaustive, these other areas have often been the regulation of terms, issues involving the performance and breach of the contract and the issue of damages. The scope for combining an issue of terms with other issues is very wide. Because of this breadth, three different questions involving terms have been provided below. You will not, at this point, be able to answer Question 2 or 3 (below) fully: they are provided simply to show you how an issue involving terms can be combined with other issues. You should return to these questions when you have completed these other areas and review the questions again.
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If you ticked need to revise first, which sections of the chapter are you going to revise? Must Revision revise done 5.1 Is a statement or assurance a term of the contract? The use of implied terms The classification of terms into minor undertakings and major undertakings
5.2 5.3