General Principles of English Law (GPEL) Contract Lecture 4: Terms and Content

Theresa Lynch (Law School: Room 118) T.Lynch@bham.ac.uk

Lecture Overview

Three parts to todays class:

Types of Terms 2. Terms of a Contract 3. Limitation and Exclusion Clauses

1.

Introduction

Mere puffs:

extravagant claims for thing being sold pre-contractual statements statements that are incorporated into the contract

Representation:

Terms:

Introduction

Mere puffs: Representation:

no legal effects if the statement is factually untrue, then the injured party may be able to rescind the contract and claim damages. Note: if the misrepresentation was innocent then the injured party cannot claim damages. legal effects depend on the type of term that is breached

Terms:

1. Types of terms
a)

Conditions

b)
c)

Warranties
Innominate terms

a) Conditions

A term that is vital, or fundamental to the contract Failure to perform a condition would render contract meaningless Breach of a condition would allow the injured party to repudiate the contract and claim damages

Poussard v Spiers and Pond (1876) 1 QBD 410

An actress took up position a week after the opening night despite a term in her contracting stating when she would be required to take up her position.

Poussard v Spiers and Pond (1876) 1 QBD 410

Held: Her employers could terminate the contract because her presence on the opening night was vital to the contract it was a condition of the contract.

b) Warranties

A term that is less vital to the contract

Failure to perform does not fundamentally affect the contract Breach of a warranty does not give the injured party a right to terminate the contract completely, though they may claim damages

Bettini v Gye (1876) 1 QBD 183

The New Covenant Garden Theatre. A Singer did not turn up for some of the rehearsals.

Bettini v Gye (1876) 1 QBD 183

Held: given the length of the contract and the fact that no performances were missed, the actions of the singer were only a minor breach, and the employer was not entitled to repudiate the contract.

c) Innominate Terms

Terms that are worded so broadly that it is not easy to tell whether it is a condition or a warranty Terms that cover a range of possible breaches, of varying importance

Hong Kong Fir Shipping Co. v. Kawasaki Kisen Kaisha [1962] 2 WLR 474, Court of Appeal.

The term in the contract stated that the Ship would be in every way fitted for cargo service.

Hong Kong Fir Shipping Co. v. Kawasaki Kisen Kaisha [1962] 2 WLR 474, Court of Appeal. The engine of the ship malfunctioned and the defendants lost 20 weeks usage of the ship, and so abandoned the contract. Q: Had the claimants breached the contract by providing a ship not fitted for cargo service?

Hong Kong Fir Shipping Co. v. Kawasaki Kisen Kaisha [1962] 2 WLR 474, Court of Appeal.

Held: the importance of the term must be judged according to the actual damage that results from it. The ship was still available for 18 months of the 2-year hire period, and so the breach was not that serious, and so the contract could not be terminated by the defendants.

Innominate terms: The Damage Test

The damage test:

The legal consequences that flow from the breach of an innominate term depends on the damage caused.

Cehave NV v. Bremer Handelgesellschaft (The Hansa Nord) [1975] 3 All ER 739

How to determine whether a term (which is innominate), is a condition or a warranty in any particular case:
a. b.

c.

d. e.

The express intention of the parties. The words condition and warranty are only of evidential value. (see Schuler v. Wickman Machine Tool Sales [1974] AC 235) If a party has a statutory right to terminate the contract if a particular term is breached, then the term is a condition. Status can also be determined by historical or established practice. The damage test is a last resort.

2. Terms of a contract
Express terms: Specifically communicated by the offeror; spelt out/expressed by the parties. b) Implied terms: Terms which are read into the contract and automatically part of the contract without the need for the parties to mention them. There are three types of implied terms: i. By statute ii. By custom or practice iii. By the courts
a)

i.

Terms Implied by Statute

The Sales of Goods Act 1979 (as amended by the Sale & Supply of Goods Act 1994)

s12: implicit that the owner has the authority to sell the goods. (Rowland v. Divall [1923] 2 KB 500). s13: where goods are sold by description there is an implied condition that the goods correspond with that description. s14(2): where the seller sells in the course of a business the goods must be of satisfactory quality, unless the defect is drawn to the attention of the buyer or any examination the buyer made should have revealed it. s14(3): where the seller sells in the course of business & the buyer makes known a purpose for which she wants the goods, there is an implied condition that the goods are reasonably fit for such a purpose.

ii. Terms implied by custom

In some businesses, it is traditional, or customary, for certain practices to arise out of a contract. Note, though, that custom cannot override the express terms of a contract.

iii. Terms implied by the court

The principle of business efficacy.

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

C, hired docking space at the defendants wharf the state of the river bed by the docking space caused damage to the ship.

The Moorcock (1889) 14 PD 64 and [1886-90] All ER rep 530 Held: The courts decision was that C was entitled to assume that the river bed would not be in such a bad state.
Bowen LJ:

I think if they let out their jetty for

use they imply that they have taken reasonable care to see whether the berth, which is the essential part of the use of the jetty, is safe, and if it is not safe, and if they have not taken such reasonable care, it is their duty to warn persons with whom they have dealings that they have not done so.

Pre-contractual Verbal Terms: Can these be introduced in order to contradict the written terms of a contract?

Put quite simply, No. And this is known as: The Parol Evidence Rule.

The parol evidence rule is a principle that presumes that a written contract embodies the complete agreement between the parties involved.
If all the terms of a contract are in writing, then there is a strong presumption that no evidence supporting a different oral agreement will be permitted to vary those terms.

Why do we have a Parol Evidence Rule? A. If the oral term was expressly agreed to, why was it not in the original document? It is probably because it was not part of the final deal. B. To allow such terms would be to introduce uncertainty. Parties may not remember what was negotiated orally. How do we prove what was negotiated orally?
NB. The parole evidence rule is only a presumption and can be rebutted. Oral evidence can be introduced if it is shown that the document was not intended to set out all the terms agreed on by the parties.

Problems with the Parole Evidence Rule

It is sometimes difficult to figure out what the written document (that is the contract) is. For example: Jacobs v Batavia and General Plantations Trusts [1924] 1 Ch 287.
Facts: There were a series of deposit notes issued to the plaintiff (P). There was also a prospectus which P relied upon when he bought the notes. There was a term which was not on the deposit notes. The case resolved around whether the term was expressly written into the contract.

Held: The deposit notes do not contain the whole contract. They have to be read in conjunction with the prospectus. Therefore the term was expressly included.

3. Limitation and Exclusion clauses

Limitation Clauses = these clauses limit liability in the case that the party does not or cannot fulfil its side of the bargain. E.g. If you book a train ticket the train company might limit its liability for delays, and say that it will only pay a fixed rate of compensation. Exclusion Clauses = these clauses seek to exclude liability altogether. E.g. Think about the signs that appear in clubs, bars or restaurants: The owners of this establishment do not accept liability for any damage or loss to items left here.

Criteria for Limitation and Exclusion Clauses

These clauses must meet the following criteria: The clause must be incorporated into the contract The clause must be clear and unambiguous The clause must not be overridden by statute

a)

b) c)

a) Incorporation
There are three key ways in which limitation or, exclusion clauses can be incorporated into a contract. These are:
i. ii. iii.

Through signature Through notice Through Custom

i.

Through Signature

We are bound by contracts that we sign, whether or not we have read the contract. So, if the exclusion clause is written in the contract and we sign it, then we have accepted it.

Curtis v. Chemical Cleaning & Dyeing Co. [1951] 1 All ER 631

Facts: The Claimant left her wedding dress for dry cleaning, signed a form exempting drycleaners from liability for damage to the dress. She queried the exclusion clause, and was told it was just to protect the company if any beads or sequins fall off. The dress came back stained. Held: Exclusion clause was not effective because C had been misled about the scope of the clause.

ii. Through Notice

Through notice (eg, a sign or a poster). This must be displayed in such a way that it gives the other party sufficient notice of the clause, so that they still want to go ahead with the contract. That is, there must be sufficient notice of the exclusion clause, and it must be brought to the customers attention before the contract has been Concluded.

Olly v Malborough Court Hotel [1949] 1 KB 532

In this case there was a notice in hotel room that the hotel does not accept liability for theft of guests belongings. Jewellery was stolen from Mrs. Olleys room.

Was the hotel liable? Yes: the contract was concluded at reception, when Mrs. Olley checked in. Therefore, the exclusion notice did not form part of the original contract.

iii. By Custom

In business contracts, if the parties have contracted with each other before, then it might be assumed that the parties are aware of limitation/exclusion clauses.
For example see: Kendall v. Lillico [1968] 3 WLR 110 Parties had contracted several times over 3 years for delivery of goods. Each time an exemption clause accompanied the transaction. On one occasion, the delivery was defective but there was no exemption clause. Held: Buyer had notice of exemption clause because such a clause had been consistently applied over 3 years.

b) Must be Clear and Unambiguous

Ordinary and usual meaning is given to the words in a contract. Application of the contra proferentem rule: If the words are unclear, they will be construed in a manner that is least favourable to the party that put the limitation/exclusion clause in.

b) Clear & Unambiguous Contd. Contra Proferentem Rule

Contra Proferentum = the clause is construed contra (against), proferentem (the party that offered it)

Andrew Bros. (Bournemouth) Ltd. v Singer & Co. [1933] All ER 479
Express term that new cars would be delivered. Exclusion clause: no liability for breaches of any condition or warranty implied by statute. Second hand car was delivered.

Held: breach of an express term the exclusion clause only related to implied terms.

The Main Purpose rule: If the exclusion clause is contrary to the main purpose of the contract, it will usually have no effect. Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 FACTS: Securicor employee intentionally set fire to the claimants property while he was on duty to look after the property E.C. that said no liability unless Securicor was negligent clearly a fundamental breach was the E.C. effective / valid? Held: E.C. was valid as it was reasonable to leave the risk of fire damage to the claimant, who would have been the most appropriate party to take out insurance against fire damage.

c) The Exclusion Clause Must Not be Contrary to Statute

Unfair Contract Terms Act 1977 This applies to businessrelated contracts and seeks to limit the scope of exclusion and limitation clauses. Businesses cannot exclude liability for death or personal injury. Reasonableness A party cannot seek to exclude liability for a breach of contract if that party is entering into a contract that is made on the other partys standard terms. Reasonableness defined as fair and reasonable having regard to the circumstances.

s.2:

s.3:

s.11:

c) Not Contrary to a Statute Contd.

Unfair Terms in Consumer Contracts Regulations 1999 This statute only applies to consumer contracts. Aim: to control exclusion clauses when there has been no negotiation Reg. 5(1): If, contrary to the requirement of good faith, it causes a significant imbalance in the parties rights and obligations arising under the contract, to the detriment of the consumer. The unfair term does not necessarily destroy the contract: the unfair term will not be binding on the consumer. But, contract will still bind parties if capable of continuing without term. Reg. 8: Unfair term does not necessarily destroy the whole contract: parties still bound by the rest of the contract if it is capable of continuing without the disputed term.

Next Lecture:

Contract Lecture (5): Week 10 (wk/b 28th November 2011): Vitiating Factors

Either: Tuesday (10-12: AW WG5); or, Friday (4-6: Howarth 101).