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Part II Content of a contract and regulation of terms 5 The terms of the contract

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.

We will now examine each of these areas in turn.

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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5.1 Is a statement or assurance a term of the contract?


Essential reading

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.

5.1.1 False representations


If a representation is simply false, there is no action for a breach of contract. Any possible action would only be available if the representation is a misrepresentation (and meets separate criteria for actionability discussed in Chapter 9). Prior to the enactment of the Misrepresentation Act 1967 and the development of the tort of negligent misstatement in Hedley Byrne & Co Ltd v Heller & Partners Ltd (1964), the misrepresentation had to be fraudulent in order for the injured party to receive damages. The effect of this is that the older cases are concerned with attempts by the injured party to establish the statement as a term rather than as a representation. In these older cases, if the statement was not established as a term of the contract, it was unlikely that the injured party would receive any remedies at all. These attempts are described by Lord Denning MR in Esso Petroleum Co Ltd v Mardon (1976). At present, however, the matter is not so clear-cut. In many circumstances it is now advantageous for a party to establish that the statement is a representation and actionable as a misrepresentation under the Misrepresentation Act 1967. This point will be examined further in Chapter 9 of the subject guide.

Finding the intention of the parties


What you should realise from the above discussion is that it is of critical importance to establish if the statement is a term of the contract or a mere representation which is not a part of the contract. How do lawyers establish which statement is a term and

See Chapter 9, Misrepresentation, section 9.1.1 Misrepresentation and contractual terms and section 9.2 Remedies for misrepresentation.

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which a representation? The basic criterion is the intention of the parties. This is set out by the House of Lords in the case of Heilbut, Symons & Co v Buckleton (1913). In this case, Lord Moulton stated that for the statement to be a term of the contract, it must be made with the intention that it be a term of a contract. The requisite intention is an objective not a subjective intention. The test of this is not whether or not those particular parties intended the statement to be a term but whether intention is exhibited by their words and conduct. This is discussed by Lord Denning in Oscar Chess Ltd v Williams [1957] 1 WLR 370 where he stated that If an intelligent bystander would reasonably infer that a warranty was intended that will suffice(at 375). In Heilbut, Symons & Co v Buckleton (1913), Lord Moulton set out various criteria that helped to ascertain whether or not this intention was present. These criteria are: 1. the importance of the statement the more important the matter, the greater the likelihood that the parties intended the statement to be a term

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).

5.1.2 Terms of collateral contracts


One last point to bear in mind is that we have thus far distinguished between contractual terms and representations on the basis that if the statement was a contractual term then it was a term of that particular contract. It is also possible that the statement is a term of a separate contract a contract collateral to the main contract. For example, it may be that I contract to sell you my antiquarian bookshop. I provide you with figures demonstrating past sales. This statement is not included in the contract of sale; however, it was made with contractual intent and it forms the basis of a collateral contract. If the figures are incorrect, if I have improperly warranted the past sales, this is actionable as a breach of the collateral contract. You can see this process in Heilbut, Symons & Co v Buckleton (1913) and Esso Petroleum Co Ltd v Mardon (1976). When the parties to a contract decide to commit their contract to writing, it is said that they cannot later seek to establish that there are terms of the contract which are outside the written agreement. They cannot, in other words, seek to show by evidence that there are other terms to the contract. This is described as the parole evidence rule. The difficulty with this rule is that it can lead to injustice where, for example, a critical term is omitted from the written agreement. For this reason, there are many exceptions to the rule.

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.

Reminder of learning outcomes


By this stage, 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.

Useful further reading

Anson, pp.127132.

5.2 The use of implied terms


Essential reading

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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To give effect to an unexpressed intention of the parties. By operation of statute.

We will examine these in turn.

5.2.1 Implied terms in common law


Trade usage
The courts may imply terms into the contract where an established trade usage can be demonstrated. This is particularly common in commercial and mercantile contracts. Here, the standardised implied term functions as a kind of default rule. An example of such a situation would be that the vendors of a certain type of good always paid the brokers commission with regard to the sale; absent a term to the contrary, courts will imply such a term into this type of contract.

The nature of the relationship


Similarly, some terms will be implied because of the nature of the relationship between the parties: landlord and tenant or employer and employee are two such instances. An illustration of this can be seen in Malik v BCCI (1997) where it was held that there was an implied obligation upon an employer not to conduct his business in a manner likely to destroy or seriously damage the relationship of confidence and trust between employer and employee. In Maliks case, the bank had operated corruptly. See also Liverpool City Council v Irwin (1976) and Equitable Life Assurance Society v Hyman (2002).

The unexpressed intention of the parties and the officious bystander


The courts may imply terms into the contract to give effect to what appears to be the unexpressed intention of the parties. In some circumstances, the contract will not function unless the term is implied. The implication is made as a matter of necessity. See, for example, The Moorcock (1889). A much quoted description of this process is that of MacKinnon LJ in Shirlaw v Southern Foundries (1926) Ltd (1939):
Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes 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. [1939] 2 KB 206, 227.

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?

5.2.2 Terms implied by operation of statute


The above three instances are circumstances where the term is implied by operation of the common law. Terms may also be implied into contracts by operation of legislation. In these instances, the terms are implied because Parliament legislates that the term will be in the contract. To a certain extent, this is to provide a standardisation of terms in certain kinds of contracts. It also provides a measure of protection for certain categories of parties, such as consumers.

Elements of the law of contract 5 The terms of the contract


We will consider, briefly, contracts for the sale of goods as an example of this process. Contracts for the sale of goods are everyday occurrences. Parties, however, give little thought to the terms of their contract. To give effect to their reasonable expectations, certain terms are implied into their contract by operation of statute law (see Anson, pp.150156). The relevant provision for our purposes is that of s.14 of the Sale of Goods Act 1979 (as amended by the Sale and Supply of Goods Act 1994), that goods sold by a seller in the course of his business shall be of satisfactory quality (not merchantable quality). Careful attention should be given to the definition of satisfactory quality in the new s.14(2A), the aspects of quality listed in s.14(2B) and the provisions with regard to defects which were disclosed by the seller or which the buyers examination ought to have revealed (s.14(2C)). Note also the restriction on the buyers right to reject for breach of the statutory conditions introduced by s.4(1) of the 1994 Act where the buyer is not a consumer and the breach is so slight that it would be unreasonable to reject. You should keep in mind the fact that these terms are only implied by the statute law: it is open to the parties to defeat this implication, either by their course of dealing or by their express agreement. There are, however, limits to which the parties can defeat terms implied by statute law. The limits are set, principally, by the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999. See Chapter 6: The regulation of the terms of the contract for a discussion of these two pieces of legislation. For an interesting example of the application of s.14(3) see:
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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).

Useful further reading

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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Reminder of learning outcomes


By this stage, you should be able to:
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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.

Useful further reading

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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5.3.1 The distinction between conditions and warranties


For this reason it is most important to define the breaches which will give the injured party the right to refuse further performance. A solution to this was found in the nineteenth century by classifying the terms of a contract into the two following types.
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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).

5.3.2 Innominate terms


It was implicit in the nineteenth century approach that a breach of a contractual term that was not classified as a condition gave no right to refuse further performance, however serious the consequences for the injured party. This assumption was rejected in the Hong Kong Fir case in 1962, where the Court of Appeal recognised a new category of terms that are neither conditions nor warranties. Such unclassified terms are usually referred to as innominate or intermediate terms. For breach of such terms the court will decide whether the injured party has the right to rescind in the light of the seriousness of the consequences of the breach. See also Cehave v Bremer HG (The Hansa Nord) (1976), where this analysis was applied to a term in a contract for sale of goods which did not fall within the statutory conditions. The Hong Kong Fir approach may make it less easy for a contract to be rescinded for breach on a mere technicality but it inevitably introduces greater uncertainty into the law. In some cases the need for certainty must prevail. See The Mihalis Angelos (1970); Bunge v Tradax (1981); The Naxos (1990) and Barber v NWS Bank (1996). But contrast Torvald Klaveness v Arni Maritime Corp (The Gregos) (1994) where the House of Lords held that the obligation to re-deliver a time-chartered ship on the due date was probably not a condition. It is important to note that the Hong Kong Fir case has not changed the law on the question of what is a condition. It does, however, seem to have had a knock-on effect on the application of that law by the courts. See also Reardon Smith v Hansen-Tangen (1976) where words identifying the yard where the ship was to be built were held not part of the description so as to amount to a condition of the charter party. A similar reluctance to permit rescission on a technicality may have influenced the approach of the House of Lords to the construction of the express condition in L. Schuler v Wickman Machine Tool Sales (1974). Contrast the more traditional approach in the following cases.
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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.

Reminder of learning outcomes


By this stage, you should be able to:
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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.

Useful further reading

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.

Elements of the law of contract 5 The terms of the contract


In attempting a problem question, you should carefully study the facts provided and determine what terms are incorporated into a contract. If the statement is not a term of the contract, is it possible that it may be a misrepresentation? In examining the terms of a contract, you should bear in mind the possibility that terms might be implied into the contract if this is the case, what effect do these terms have? Lastly, with regard to the classification of terms, you will need to consider the importance of the term. A review of past examination papers reveals that essay questions have often been a variation on the theme, Why is certainty so important in commercial contracts?. It is most important to have thought, before the examination, about such issues as whether the essentially flexible concept of innominate terms does not introduce an undesirable degree of certainty into the law.

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Sample examination questions


Question 1 Alban is a surveyor. Four months ago he bought a nine-month-old Landmaster car from Brendas Garage Ltd for use in his practice. He paid 12,500 for the car and was given a written guarantee in the following terms. Brendas Garage Ltd guarantees that, for three months from the date of purchase, it will put right free of charge any defects in the vehicle which cannot be discovered on proper examination at the time of purchase. Thereafter all work and materials will be charged to the customer. The sales manager recommended to Alban that he should take out the special extended warranty under which, for payment of 350, the car would have been guaranteed in respect of all defects for a further two years, but Alban declined. Last week the engine and gearbox seized up. The repairs will cost 2,000. Advise Alban. Would your answer differ if he also used the car to take his wife shopping on Saturdays? Question 2 The present legal rules allowing an innocent party to bring a contract to an end for breach are unclear and in need of reform. Fortunately, the rules concerning measure of damages for breach are clear. Discuss. Question 3 John, a builder, advertised in a trade journal for plaster which he might require in the year 2012. After receiving a number of tenders John entered into a contract with Keith under which Keith agreed to supply John with up to 300 tonnes of plaster at 5,000 a tonne during the year 2012 as and when required. The agreement contained the following provisions. (6) It is agreed between the parties that in return for executing this agreement John will not buy plaster from any other plaster supplier during the year 2012. (7) It is agreed that no undertaking as to quality or fitness for purpose is given by Keith and no compensation shall be payable in respect of the suitability or otherwise of the plaster. John ordered four loads of plaster of 20 tonnes each. The first three were satisfactory and paid for. The fourth load proved to be unsatisfactory as it contained lumps. John said to Keith that he would not be wanting any more plaster and that he would be buying his plaster in future from Fred, who had indicated that he would supply the plaster at 4,500 a tonne. Keith seeks an injunction to prevent John buying plaster elsewhere, payment for the fourth load and damages for the loss of profit on the 220 tonnes John would not be ordering. Advise John.

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Advice on answering the questions


Question 1 You should begin this problem by considering the facts given. Note that at the end of the problem, a variant on the facts is provided. The variant involves the personal use of the car this is likely to give rise to issues about the legal treatment of consumers by statute law. The first question to establish is whether or not there has been a breach of contract when the engine and gearbox seized up. To establish this, it is necessary to determine what the terms of the contract are. An express term is that Brendas garage will put right any problem which occurs within three months. This term is of no use to Alban because his problem has occurred outside the three months. The issue then becomes, in the absence of any other express term, whether or not a term can be implied into the contract. This contract is for the sale of a good and you must consider the Sale of Goods Act 1979. Section 14(2) provides that where the seller sells in the course of a business, there is an implied term that the goods supplied under the contract are of satisfactory quality. You need to consider whether or not satisfactory quality is established here (by applying ss.14(2A), (2B) and (2C) of the Act). You need to consider whether or not the statutorily implied term is negatived or varied by the express agreement between the parties. If this is a consumer sale (as per the variant), the statutorily implied terms are compulsory and cannot be varied or excluded by the parties (s.6 Unfair Contract Terms Act 1977 covered in Chapter 6). If this is not a consumer contract, the statutorily implied term can be excluded to the extent that it is reasonable to do so. If this is not a consumer sale and the term is implied (and not negated by the presence of the express terms) then the buyer, Alban, cannot reject the goods where the breach of a condition implied by s.14 is so slight that it would be unreasonable to reject them (by reason of s.15A of the Sale of Goods Act). With regard to the variant to the question, you need to consider whether or not the use of the car to take his wife to the market on Saturdays removes the contract from one made in the course of a business. Question 2 This question calls for an examination of when an innocent party can end a contract and the rules for ascertaining the measure of damages (a topic you have yet to consider in this guide). The question invites a comparison between the apparent lack of clarity an innocent party faces in knowing when he or she is able to end the contract (the warranty/condition approach or the Hong Kong Fir approach) and the clarity in the rules surrounding the calculation of damages. The principal challenge in answering this question lies in clearly synthesising and analysing a wealth of case law. You will need to examine and compare two areas of law (terms and damages). A good answer to this question provides some analysis as to why there is a lack of clarity in ascertaining when a contract can be terminated you could, for example, discuss whether this apparent lack of clarity provides courts with the flexibility to reach a just result by preventing parties from terminating a contract for what is actually a trivial breach. With regard to the area of damages, it is by no means certain what an appropriate measure of damages will be in many cases. As you will see when you reach this topic, recent case law has, in some ways, rendered this issue more confusing. Question 3 The question involves an evaluation of what terms exist in the contract between John and Keith and what, if any, effect these terms have. This question involves a number of issues which you have yet to cover namely a possible restraint of trade issue, an issue regarding remedies and the existence of an exemption clause. All of these issues are yet to be covered the reason for including this question is to allow you to see how an issue involving terms can be combined with other issues. When you have covered the material in Chapter 13 (restraint of trade), Chapters 16 and 17 (dealing with remedies), and Chapter 6 (the regulation of the terms of the contract), you will have a better grasp of the other issues involved in this question. An express term of the contract is that Keith will be Johns exclusive plaster supplier for a year. This is a solus agreement: is it also a contract in restraint of trade? Applying Esso Petroleum v Harpers Garage and Alec Lobb v Total Oil, it is possible to construe

Elements of the law of contract 5 The terms of the contract


it as such. Keith must show that there is reasonableness and fairness in protecting his commercial interests. Here, at a year, the length of the restraint is not for long. However, in assessing the fairness of the restraint, it must be examined in light of provision 7 of the agreement. The contract purports to allow Keith to deliver plaster which is unfit and unsuitable for Johns purposes. It is hard to see how this is either reasonable or fair. It is unlikely that Keith will succeed in getting an injunction to prevent John from buying his plaster elsewhere or damages for lost sales. Another express term of the contract is an exemption clause. Provision 7 states that Keith provides no undertaking as to the quality or fitness for purpose of the plaster and that no compensation shall be payable in respect of the suitability or otherwise of the plaster. The term purports to exclude the terms implied by the Sale of Goods Act 1979. Principally, these are: s.13(1) [goods sold by description will correspond with the description]; s.14(2) [an implied condition that the goods are of satisfactory quality]; s.14(3) [if the purchaser informs the seller of the purpose the goods have been bought for there is an implied condition that the goods are reasonably fit for that purpose]. The term essentially attempts to exclude recovery for a fundamental breach of the contract in that Keith could supply almost anything. The term is thus subject to challenge on two fronts. Firstly, as a matter of construction, has Keith excluded liability for breach of a fundamental term (Photo Production v Securicor (1980))? Secondly, if there has been a successful exclusion of this liability, does the term withstand scrutiny under the Unfair Contract Terms Act 1977? Two sections of the Act are relevant. Section 3(1) provides that, if Keith deals on his standard written terms, he cannot exclude or restrict liability or claim to be able to render a different performance, or no performance at all, except to the extent the term is reasonable within s.11. Section 6(3) provides that Keith can only restrict or exclude the liability arising under ss.13 and 14 of the Sale of Goods Act to the extent that the exclusion clause satisfies the requirement of reasonableness. It is unlikely that a clause which purports to completely exclude liability will be found to be reasonable in light of the statute and existing authorities. In the circumstances, it will not act as an effective defence for Keith in an action brought by John.

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University of London International Programmes

Reflect and review


Look through the points listed below. Are you ready to move on to the next chapter? Ready to move on = I am satisfied that I have sufficient understanding of the principles outlined in this chapter to enable me to go on to the next chapter. Need to revise first = There are one or two areas I am unsure about and need to revise before I go on to the next chapter. Need to study again = I found many or all of the principles outlined in this chapter very difficult and need to go over them again before I move on. Tick a box for each topic. Ready to Need to move on revise first I can explain when a statement forms a part of the contract (and when it does not). I can compare the effect of a statement which is a term and a statement which is not a term of the contract. I can explain why and when courts will imply terms into contracts. I can provide an explanation as to the limits upon courts in implying terms into contracts. I can establish the different categories of contractual undertakings (terms). I can explain how to determine within which category a particular term should be placed. I understand the consequences attendant upon a breach of each of these different categories of undertakings.

Need to study again

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