Terms of the Contract

The terms of a contract describe the duties and obligations that each party assumes
under their agreement. As well as the contractual terms laid down by the parties
themselves, called express terms, the courts may find that a contract contains
implied terms.

Express Terms
Express terms can divided into oral statements and written terms.

Oral statements- representations and terms

In all but the simplest of transactions, there will be some negotiations before a
contract is made. Companies making a deal for one to supply the other may hold
detailed discussions about price, quality control and delivery; when hiring a firm to
put tile your floor you might ask how long the job will take, what the price includes
etc, in this cases oral statements will be made.
Problems can arise when, although both parties agree that a certain
statement was made, they disagree on whether that statement was part
of the contract and therefore intended to be binding.
In looking at such questions, statements made during negotiations are classified by
the courts as either representations or terms.
A representation is a statement which may have encouraged one party to make
the contract but is not itself part of that contract, while a term is a promise or
undertaking that is part of the contract.
Whether a statement is a representation or a terms is largely a question of parties
intention. If the parties have indicated that a particular statement is a term of the
contract, the court will carry out that intention, in other cases, the following
guidelines may be used.

1. Importance of the statement

A statement is likely to be seen as a term if the injured party has made the other
party award that if it had not been for that statement, they would not have entered
into the contract.
Bannerman vs White
White was considering buying hops from Bannerman, and asked whether they had
been treated with Sulphur, adding that if they had, he would not even bother to ask
the price. Bannerman said that there had been no such treatment (believing this to
be the truth) and, after negotiations a contract of sale was made. Later though, it
was discovered that Sulphur had been used on some of the hops- 5 acres out of
300- and when Bannerman sued for the price, White claimed that Bannermans
statement had been a term of the contract, and Bannerman had breached that
contract, so he was justified in refusing to pay. The court agreed that the statement
about the Sulphur was indeed a term of the contract.

2. Special knowledge and skill

Where a statement is made by someone who has expert knowledge or skill that is
relevant to the subject in hand, the courts will be more willing to deem that
statement a term than if the same words were used by an amateur with no special
expertise on the matter. The principle is illustrated by two cases involving the sale
of cars
Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd
The claimant had said that they were looking for well-vetted Bentley car. The defendant, a
car dealer, stated that the car he had for sale had had its engine and gearbox completely
replaced, and had done only 20,000 miles since then. After the claimant bought the car,
problems emerged, and it transpired that the car had in fact done almost 100,000 miles
since the replacements. The Court of Appeal held that the dealers statement was a term of
the contract.

Oscar Chess vs Williams

The defendant, a private individual, wanted to trade in his old car and buy a new one. The
price allowed for the old car depended on its age, and the defendant stated that it was 1948
model, which was the year given in the registration book. On this basis the claimant allowed
$290 off the price of the new car. Later they discovered that the registration book had been
altered, presumably by a past owner: the car was in fact a 1939 model, which was worth
only $175.
The car dealer therefore sued the defendant for the difference in price between the two
valuations. on the grounds that his assertion that the car was a 1948 model was a term of
the contract, and he was therefore in breach. The court of Appeal rejected their claim,
pointing out that the seller was a private individual who had innocently trusted the
registration book, but the buyers were experience car dealers and should have been able to
spot the age of the car. The defendants statement was not therefore considered to be a
contractual term.

3. Timing of the statement

In general, the more time that elapses between the statement being made and the
contract being concluded, the less likely the courts will be to regard the statement
as a term, though the cases show that this can only be an approximate guideline.
Routledge vs Mackay- sale of a motorbike. Statement regarding the date of
manufacture was made one week before the contract was written. Contract didnt refer to
date. Held that statement made a week earlier was not a term of the contract.

Schawel vs Reade
The claimant began to examine a horse that he was thinking of buying. The seller told him:
you need not look for anything, the horse is perfectly sound so the claimant did not make
any further checks, and the sale was concluded three weeks later. When the horse in fact
proved unsatisfactory, the HoL held the strength and importance of the sellers statement
meant that it was a contractual term, despite the length of time between the statement
being made and the contract being concluded.

4. Agreements in writing

Where the parties put their eventual contract in writing, any statement that appears
in the written contract will usually be regarded as a term. A statement made before
the written contract but not included it is likely to be regarded as a representation.
Duffy v Newcastle Football Co Ltd
In 1994 the club offered its season ticket holders the opportunity to buy what was described
as a bond for $500. This bond guaranteed a designated seat for ten years, and the
bondholder was entitled to have their name on the seat. Under the written terms and
conditions of the bond, condition 9 (b) stated:
NUFC may determine at any time at its discretion that the Designated Seat shall
no longer be available to the Bondholder, whereupon NUFC shall provide the
Bondholder with an alternative seat in the stadium and the Bondholders benefits
shall apply in relation to such alternative seat
Relying on this condition, the club sought to change the allocated seats to some of the
bondholders. Many bondholders object to this saying that the promotional material and
media statements that accompanied the issue of the bonds, said they would be guaranteed
their seat for ten years. The written terms of the bonds had however stated that
The following Conditions should be read carefully and fully understood before
you offer to purchase a United Bond from Newcastle Football Company Limited.
In offering to purchase a United Bond your offer will be deemed to incorporate all
the Conditions listed herein and you will be required to sign an application form
which acknowledges this fact.
The Court of Appeal held that the accompanying promotional material and media
comments did not constitute terms of the contract: they were merely representations.

5. Strength of the inducement

The more emphatically a statement is made, the more likely the courts will be to
regard it as a term.
Ecay v Godfrey
The seller of a boat told the buyer that it was sound, but suggested that nevertheless, the
prospective buyer should have it surveyed. The court held that this suggested that the
statement was never intended to be taken as a term of the contract.

Written Terms
Written terms can be incorporated into a contract in three ways; by signature, by
reasonable notice and b a previous course of dealing.

The parol evidence rule

Under this rule, where there is a written contract, extrinsic/external (parol) evidence
cannot change the express terms laid down in that document.
Henderson v Arthur
The claimant and the Defendant were parties to a lease, which contained a covenant (a
promise under seal) for the payment of rent quarterly in advance, although before the lease
was drawn up, the parties had agreed that the rent could in fact be paid in arrears. When the
tenant was sued for not making the payments in advance, he referred to the prior oral
agreement, but the court held that the term of prior oral agreement could not be substituted
for the terms of a later formal contract. The written document effectively destroyed the
previous oral agreement about the rent.

Exceptions to the Parol Evidence rule

There are however certain exceptions to the parol evidence rule, which are as
follows:
1. Rectification
Where a document is intended to record a previous oral agreement but fails to do
that accurately, evidence of the oral agreement will be admitted.
2. Partially written agreements
Where there is a written document, but the parties clearly intended it to be qualified
by other written or oral statements, the parol evidence rule is again displaced.
Couchman v Hill
The defendants heifer was up for auction. The sale catalogue described her as unserved,
and also stated that the sale was subject to the auctioneers usual conditions and that the
auctioneers took no responsibility for mistakes in the catalogue. The usual conditions on
display at the auction, contained a clause that the lots were sold with all faults,
imperfections and errors of description.
Before making a bid, the claimant asked both the auctioneer and the defendant to confirm
that the heifer was unserved, which they both did. On this understanding, the claimant
successfully bid for the cow. The animal was later discovered to be in calf and because it was
too young to bear a calf, it eventually died. On these facts the court of appeal found that the
claimant could recover damages for breach of contract. It held that the document (the
catalogue and the usual conditions) were only part of the contract and the oral statement
could be placed alongside them, so that together they formed one binding transaction.

3. Implied terms
The parol evidence rule only applies where a party seeks to use extrinsic evidence
to alter the express terms of a contract. Where a contract is of a type that is usually
subject to terms implied by law, parol evidence may be given to support, or to rebut
the usual implication.
4. Operation of the contract
The parol evidence rule does not apply to extrinsic evidence which shows that the
written contract was intended to come into operation or to cease to operate, in the
event of a particular circumstance.
5. Evidence about the parties
Extrinsic evidence can be used to show the capacities in which the parties were
acting when they made their contract.
6. Proving custom
Where it is suggested that a term should be read in the light of local or trade
custom, evidence of that custom is admissible to add to or explain a written
agreement, though not to contradict it.

Construction of Express Terms

The courts sometimes have to determine the meaning of a contractual term. In
doing this, the judges try to discover what the parties appeared to intend the
contract to mean. The task of ascertaining the intention of the parties has to be
approached objectively. The starting point is the contractual document itself. Where
possible, the words of the contract will be given their natural and ordinary meaning.
But Lord Hoffman has warned against taking this rule too far.
Because of the parol evidence rule, the courts have traditionally been limited to
looking at the contract itself, and could not look at extrinsic evidence to determine
the intention of the parties. Exceptions existed allowing such evidence to be
considered where the terms were technical, ambiguous or absurd. Lord Wilberforce
suggested in Prenn v Simmonds that is such situations extrinsic evidence would
be admissible to show the background knowledge of the parties at the time of
making the contract, so as to find out the purpose of the contract. The
circumstances surrounding the making of the contract was described as the matrix
of fact. The law continues, however, to exclude the pre-contractual negotiation
from the admissible background information.
Chartbrook v Persimmon Homes (2009)
Persimmon homes were property developers who had agreed to buy land for development
from Chartbrook. The price to be paid for the land included an Additional Residential
Payment. A dispute arose as to how the Additional Residential Payment was supposed to be
calculated under the contract. Under a literal interpretation of the contract this would
amount to almost $5 million. The House of Lords concluded that a literal interpretation was
not appropriate on the facts because it made no commercial sense. Instead the House was
entitled to correct a mistake in the contract by construction so that the amount payable was
less than 1 million.
To correct a mistake by construction two conditions had to be satisfied. First, there had to
be a clear mistake on the fae of the contract. Secondly, it must be obvious what
correction should be made in order to cure the mistake. Where these conditions are
satisfied the courts are entitled to significantly rewrite the contract. The courts are thereby
trying to interpret the agreement in context to get as close as possible to its intended
meaning. Lord Hoffman concluded:
All that is required is that it should be clear that something has gone wrong with the
language and that it should be clear that a reasonable person would have understood the
parties to have meant.

Implied Terms
Implied terms may be divided into four categories: terms implied in fact, terms
implied in law, terms implied by custom and terms implied by trade usage.

1. Terms implied in fact

These are terms which are not laid down in the contract, but which it assumes both
parties would have intended to include if they had thought about it. In order to
decide what the intention of the parties was, the courts have developed overlapping
tests:

a. The officious bystander test

Shirlaw v Southern Foundries
Held that which in any contract is left to 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 by stander were to suggest some express provision for
it in the agreement, they would testily suppress him with a common of course!

b. the business efficacy test

The Moorcock
The defendants owned a wharf and a jetty on the river Thames which people could pay
to use to load and unload their boats. The defendants contracted with the claimants for
the unloading of the claimants boat called the Moorcock, at their wharf. Both parties
knew that the water level at the wharf was low and that the boat would have to rest on
the river bed when the tide was down. This would be all right if the river bed was soft
mud, but would damage the boat if it was hard ground. In fact, the boat was damaged
when it hit a ridge of ground at low tide. The contract did not expressly state that the
boat would be moored safely.
The claimants brought an action for compensation for the damage to boat on the basis
that there had been a breach of contract. The Court of Appeal implied a term into the
contract that the boat would be moored safely at jetty. Such a term was necessary to
give the contract business efficacy. Otherwise the boat owner would simply be buying an
opportunity of danger. The term had been breached and the action for damages for
breach of contract was therefore successful.

For the Business Efficacy test to apply however, the term to be implied must be
obvious and can only be implied if the contract will not work without it. It cannot
be implied simply because it makes the contract more sensible, fairer or better
in any other way.
Both tests are subjective: they ask what the parties in the case would have agreed,
and not what a reasonable person in their position would have agreed.

2. Terms implied in law

These are terms which the law dictate must be present in certain types of contractin some cases, regardless of whether or not the parties want them.
Liverpool City Council vs Irwin
The defendants lived in a council maisonette, which was part of a high-rise block in
Liverpool. The whole building was in an extremely unpleasant condition, with unlit stairs, lifts
that seldom worked and rubbish chutes that were frequently blocked, all owing largely to
persistent vandalism. The defendants (and other in the block) protested against the
conditions by withholding their rent and, when the case went to court, claimed that the
Council were in breach of an implied term in the contract of tenancy that communal areas
should be kept in repair and properly lit. The Council argued that there was no such implied
term. When they took up their tenancy, the Irwin family had been given a copy of the
Council rules for tenants, which contained a list of tenants obligation; but there was no
written document containing the Councils obligations as landlord.

The House of Lords held that a landlord who let property containing several homes in one
building must be under some implied obligation in law to provide proper access to the
individual dwellings. They stated that the appropriate implied term in this case was that the
landlord should take reasonable care to keep the common parts of the block in a reasonable
state of repair and in fact had done so, and could not be constantly expected to repair
damage done by vandals and the tenants themselves.

Malik v Bank of Credit and Commerce International (BCCI)

BCCI engaged in a number of dishonest activities and collapsed. The claimants were
employees. At the collapse of the bank, they sought to be paid stigma compensation, as
they said they would not easily find employment. The HoL ruled that BCCI had breached an
implied term in the contract by engaging in dishonest activities.

Terms implied by Statute

Certain statutes imply terms into particular types of contract, and in some casesgenerally consumer contracts- these terms must be read into the contract
regardless of either partys intention
1. The Sale of Goods Act 1979
The following terms are implied in any
contract regarding the sale of goods
S.12(1)- the seller has the right to sell the
goods and is able to pass title to the buyer
S.13 (1)- where there is a contract for the
sale of goods by description the goods must correspond to the description
In Re Moore & Co Ltd and Landauer & Co- Held that a seller was entitled to
reject goods which did not comply with the description even though that fact
cause him no hardship and there was no defect in the goods.
S.14 (2)- goods sold in the course of a business should be of satisfactory quality

satisfactory standards may vary according to the price.

Clegg v Anderson- The claimant had bought a Yacht for $36,000. The Yachts keel
was heavier than expected. He rejected the boat and sought the return of his money
on the basis that the boat was not of satisfactory quality. The Court of Appeal allowed
his claim because it was not sufficient that the boat was fit for its purpose (it could still
sail); it was not of a satisfactory quality given the price that had been paid. A
purchaser of expensive goods was entitled to expect a satisfactory quality, free from
even minor defects.

The requirement of satisfactory quality will not apply where any defect or
other matter is specifically drawn to the buyers attention before the contract
is made, or which ought to have been revealed by the buyers own
examination of the goods. (Though there is no requirement that the buyer
examine goods) Bramhill v Edwards

S.14 (3) - Goods must be fit for their purpose

where the seller sells goods in the course of business and the buyer,
expressly or by implication, makes knownto the sellerany
particular purpose for which the goods are being bought, there is an
implied condition that the goods supplied under the contract are
reasonably fit for that purpose, whether or not that is a purpose for
which goods are commonly supplied, except where the circumstances
show that the buyer does not rely, or that it reasonable for him to rely
on the skill or judgment of the seller.
This subsection basically means that if a buyer tells the seller that the goods
are required for a particular purpose (however odd it may be), and the seller
sells it for that purpose it must be fit for the purpose.
Griffiths vs Peter Conway Ltd- A woman with abnormally sensitive skin
developed dermatitis as a result of wearing a tweed coat. Sued saying not fit
for purpose. Held that she could not claim as the seller did not know of her
condition.
Section 15- Goods must correspond with sample, buyer must have reasonable
opportunity to compare and the goods must be free from any defect, rendering
them unsatisfactory, which would not be apparent on reasonable examination of
the sample
2. The Supply of Goods and Services Act 1982
Covers contracts in which a service is performed and goods are sold at the same
time, also called work and materials contracts.
Section 13- where the supplier is acting in the course of business, there is an
implied terms that supplier will carry out the service with reasonable care and
skill
Section 14 (1) supplier must carry out the service within a reasonable time
Section 15 (1) where the parties have not fixed a price there is an implied term
that the party contracting with the supplier will pay a reasonable price.

3. Terms implied by Custom

Terms can be implied into a contract made by parties involved in a particular trade
or business, such a term may be implied by the courts.

4. Terms implied by trade usage

Where a term would routinely be part of a contract made by parties involved in a
particular trade or business, such a term may be implied by the courts.

Entire agreement
Some contracts contain entire agreement clauses which state that the written
contract contains the entire agreement. The aim of such clauses is to prevent one
party from arguing later than an earlier written or oral statement is also part of the
contractual agreement. It excludes terms implied by custom or trade usage as well
but will not exclude those implied by law.

The Relative Importance of Contractual Terms

There are three types of contractual terms: Conditions, Warranties and Innominate
Terms. There are different remedies for breach of different types of terms.

Conditions
A term which is clearly an important one will usually be regarded by the courts as a
condition. Where a condition is breached, the innocent party is entitled to regard
the contract as repudiated, and so need not tender further performance and can
also sue for damages.
Bunge Corp v Tradax Export SA
A seller had contracted to ship 5,000 tons of US soya bean meal by the end of June 1975,
with the buyer taking responsibility for arranging for the ship to transport the goods. The
buyer was supposed to give at least 15 consecutive days notice of probable readiness of
the vessel but in fact only gave notice on 17 June. The seller might have been able to load
in 13 days rather than 15. However the HoL held that it clear that sellers obligation to ship
the produce before the end of the month was a condition, so that the buyers obligation to
give notice was a condition, because in a contract of this kind it would be unfair to deprive
sellers of their full period of notice.

The Mihalis Angelos

The owners of a ship hired it out by a charterparty (the name for a contract document in
such a case). The document contained the clause expected ready to load under this charter
about 1 July 1965. In fact the ship could not have been ready by this time, and in the event
was not ready until 23 July. The owners were obviously in breach, but the Charterers could
only terminate if the term was a condition and not a warranty. The HoL held that it was a
conditions. The Court held that in commercial agreement, made by companies that bargain
as equals, predictability and certainty are vital ingredients, and parties need to know the
likely outcome of breaching any term before they can commit to it .

Warranties
The word warranty usually describes a contractual term which can be broken
without highly important consequences, if a warranty is breached the innocent party
can sue for damages but if not entitled to terminate the contract.
The difference between conditions and warranties is set out clearly in the following
two cases
Poussard v Spiers and Pond
An Opera singer was contracted to sing on the 28th of Nov. She was sick and did not turn up
until the 4th of December, by that time her role was given to someone else. The court held
that the promise to start on 28th November was a condition and the defendant was entitled
to consider the contract as terminated.

Bettini v Gye
The facts were similar to Poussard , but the singer was only 2 days late for a day rehearsal
period which was before the opening of the opera. The rehearsal clause was held to be a
warranty because it was not a vital condition of the contract.

Innominate terms
Innominate terms can be broken with either important or trivial consequences
depending on the nature of the breach, if the effects of the breach are serious the
term will be seen as a condition, if not they will act as warranty.
Hong Kong Fir Shipping Co Ltd v Kawasaki Ltd
The defendants had chartered a ship from the claimants for two years. Elderly engines and
an inadequate and incompetent staff resulted in a total of 20 weeks of the charter being lost
to breakdowns and repairs. The agreement contained a clause stating that the ship was in
every way fitted for ordinary cargo service, so there was no doubt that the defendants were
entitled to bring an action for damages for breach, but instead of doing so they decided to
terminate the contract.
The claimants then brought an action for wrongful repudiation, claiming that their breach did
not entitle the defendants to terminate, only to claim damages. The Court of Appeal agreed,
stating that the question to be asked was whether the result of the breach had been to
deprive the defendants of the whole of the benefit to which they were entitled under the
contract. As this was not the case termination was unjustified. Lord Diplock stated that
The problem in this case, is in my view, nether solved not soluble by debating whether the
shiponwers express or implied undertaking to tender a seaworthy ship is a condition or a
warranty. The correct approach was to look at what happened as a result of the breach and
then decide if the charterers had been deprived substantially of the whole benefit which it
was the intention of the parties they should obtain
Cehave v Bremer
A dispute arose over a contract to ship 12,000 tons of citrus pellets in good condition.
Some of the cargo became damaged although apparently not seriously. It was argued that a
contract for the sale of goods was governed by the Sale of Goods Act, and since it was from
this act that the distinction between conditions and warranties was derived, there could be
innominate terms. The court of Appeal rejected this argument, holding that the clause was
indeed an innominate term and because the breach was not serious, the buyers were not
entitled to repudiate the contract.