Topic 5 - The Terms of the Contract.docx

Topic 5 – The Terms of the Contract In the last three topics we have considered the basic elements necessary to form an enforceable contract: offer and acceptance (Topic 2), consideration (Topic 3) and certainty and intention (Topic 4). We will now examine the content, or terms, of the resulting contract to ascertain the extent of the obligations undertaken. What are the parties to the contract obliged to do or not 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 topic deals with three areas concerning the content of the contract. These are: 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 (and equivalent obligations) 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. (Mini Lecture 1) The general area we're going to look at now is contract terms. We've moved on from looking at the three legal obligations which must be satisfied to create a contract, and we're now looking at the terms or the content of the contract if you'd like. The particular topic we're going to look at today is how to distinguish a statement made in negotiations, which does not become a term of the contract, which we might call a mere representation, and a statement which does become a term of the contract. The purpose and the objective here is to convey an understanding of the distinctions between a mere representation and a term. Really not only the functional understanding, not only to know what each is, but also to know how it is that the courts distinguish them. What tests to the courts apply? A few preliminary points here, what we're going to be doing is we're going to look at the content of a contract. The overall topic here is the content of a contract, and we're going to look at this one aspect. I need to introduce here the idea of a collateral contract because parties might enter into what we will call the contract, their main contract. We should be aware that there may be other contracts between these parties. There may be a main contract and there may be a contract that is subsidiary or somehow secondary. We call those collateral contracts because they run collaterally, meaning by the side of the main contract. You might remember when we looked at the case called The Eurymedon. We looked at a complicated contractual situation, where a goods owner contracted with a shipper who shipped his goods, and the shipper contracted with stevedores to unload those goods. There was clearly a contract of carriage between the goods owner and the shipper, and then there was a contract to unload the goods between the shipper and the stevedores. You will recall that there was another contract and this contract we looked at in the doctrine of consideration because there was a contract between the goods owner and stevedores, whereby the stevedore made a promise to exempt the stevedore from liability for any damage they caused to the goods in exchange for the stevedore assisting in the movement of those goods. That was a collateral contract because it sat beside the other two main contracts. It was something more than just a collateral contract because it was a contract where a promise was made in exchange for an act. The goods owner promised the stevedore that the stevedore would not be liable for any damage the stevedore caused to the goods in exchange for an act, the stevedore assisting in the movement of the goods. The contract was collateral because it sat beside the main contracts, but because it was a promise given in exchange for an act, it was also unilateral. That was a case where we had a collateral-unilateral contract. The third bullet point on this slide is a concept which we need to have in our mind between terms which are ‘express’, by which we mean terms which were spoken or written by the parties, and terms which are ‘implied’ into the contract, on the basis that it is something that parties meant to include. We'll define what we mean exactly by implied terms later, but at the present, we mean terms which are not express, their origin is not in what the parties actually said or wrote. The main distinction we're going to look at here is between a ‘representation’ and a ‘term’. Many things will be said when parties are negotiating a contract. Only some of those things will become the terms of the contract. Things ‘said in negotiation’ are ‘representations’. Things said which never become a term of the contract, we sometimes call ‘mere representations’. We sometimes drop the mere and just say representation. The thing said which become terms of the contract are different. There's a consequence here because if I say something to you in negotiation, and that thing is untrue, then you can sue me for breach of contract only if the thing I said becomes a term of the contract. It's only if the thing said is a term, and then it turns out to be untrue, that you can sue me for breach of contract. If the thing I said in negotiation, which turns out to be untrue, never becomes a term of our contract, you cannot sue me for breach of contract. You may be able to sue me for something else, something we call misrepresentation, which is a separate topic within this module that we will examine later. The point I'm making here is just that there is a remedial consequence to classification as a representation or as a term because it is only if it's a term that someone can sue for breach of contract. How do we distinguish a term from a representation? The answer is very simple at one level because we say it depends on the intention of the parties. Did they intend it to operate as a term, or did they intend it to operate as a mere representation? I mean, how do we know what the parties intended? We can't peer inside their heads to see what they intended. The courts look at certain circumstances and make an inference from those circumstances as to what they think the parties intended. The most important of those circumstances is to look at the relative skill and knowledge of the parties. In Oscar Chess v Williams, private individual sold a car to a garage. The private individual made a representation as to what year the car was, and that representation was wrong. The reason the private individual, the owner of the car, made an untrue representation was that unknown to him, the document of title called the logbook of the car wrongly stated its year of manufacture, so this person selling the car had himself been duped and bought it on the basis that he thought it was a younger, more recent car than it was. It was held in that case, that the statement made by the seller of the car was a mere representation. Why so? Because it was said that the private individual had less skill and knowledge in relation to the age and models of cars than the representee. The representor, the person who made the untrue statement, had less skill and knowledge. The representee was the garage who had greater skill and knowledge. Now we can contrast that case with Dick Bentley v Harold Smith Motors because here someone went to a garage and the garage represented that the car they were buying, a Bentley, was well vetted. They represented that it had a particular mileage when in fact it had done a hundred thousand miles more than the mileage represented. In days that I can remember, which very few of you will ever remember, the odometers, the mileometer on cars weren't digital, but were analog. What happened is they went up to 100,000 miles and then they started again. This car had gone through the full 100,000 and then started counting again and the garage said the car was well vetted, meaning that they had checked the mileage. In this case, it was said that the statement as to the mileage was a term. It was not a mere representation. The reason was that the statement wasn't made to a garage, it was made by a garage. The person with greater skill and knowledge here was the person making the statement. We can conclude from those two cases where the representee has greater skill and knowledge, the statement is more likely to be a mere representation (Oscar Chess v Williams), But where representor has greater skill and knowledge, the statement is more likely to be considered a term, Dick Bentley v Harold Smith Motors. The second factor the courts look at is the ‘importance of the thing said’. In Bannerman v White, a brewer was buying hops from a farmer. Brewer explained to the farmer for the process of brewing, the hops must not have been treated with sulphur. They're useless to me if they've been treated with sulphur. The farmer said they had not been treated with sulphur. Turned out they had been treated with sulfur. It was held the assurance that they had not been treated with sulphur was a term of the contract because it was an important thing and the purchaser had made clear to the seller the importance. The more important the thing said, the more likely it is to be intended to be a term. We can look at two other factors here, first factor is the timing of the statement. Routledge v McKay is authority for saying the closer in time the making of the statement and the eventual conclusion of the contract, the more likely the statement is to be intended to operate as a term. Conversely, the greater the time lapse between the making of the statement and the eventual conclusion of the contract, the more likely that statement is to be a mere representation only. The next factor is something called the “verification factor”, the verification factor means that if a statement is made and is accompanied by a recommendation that the truth of the statement be verified, it is more likely to be considered a mere representation. When someone was buying a ship and the seller said, "I expect you to get the hull surveyed," and also said, "The hull was sound." The statement that it was sound was held to be a mere representation because it was accompanied by the suggestion that the truth of the statement be checked. We've now looked at four factors which the courts look to, to make an inference as to whether or not a statement was meant to operate as a term. The relative skill and knowledge of the parties, the importance of the things said, the timing of the statement, and the verification factor. Now these are pointers. The courts will look at these to say, "Oh, from these, we think the parties must have intended it to operate as a term or as a mere representation." Sometimes they can point in opposite directions. In that case, looking at the cases, we can say the most important of those factors is probably the relative skill and knowledge of the parties. Just to finish this topic, I want to mention something called the “Parole Evidence Rule”. This is the weak presumption that when parties reduce their negotiations to a written document, there is a weak presumption that that document, that written document, expresses the totality of their bargain. There is a weak presumption that things said which are not reproduced in the document are not intended to operate as a term. 5.1 Is a statement or assurance a term of the contract? Contracts in practice are never as straightforward as the examples explained in legal textbooks. Textbooks leave the reader with the impression that the contractual process is an orderly process commencing with an invitation to treat, followed by an offer and a corresponding acceptance. The reality of many situations, however, is one of statements forming lengthy, sometimes contradictory, exchanges and negotiations prior to the formation of a contract. In this topic we determine which of these statements form a part of the contract and which do not. This determination 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 Topic 12 ‘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. Someone who suffers loss as a result of their reliance upon a mere representation will not be able to sue for breach of contract but will have other remedies available. These remedies for misrepresentation (a misrepresentation is an untrue representation) are examined in Topic 9. When you study misrepresentation it is important to link your reading of that topic to this section of Topic 5. The range of remedies for misrepresentation is introduced in Section 5.1.1. A brief observation on 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). Use of the term ‘warranty’ has been avoided here because it confuses the discussion set out in Section 5.3: ‘The classification of terms into minor and major undertakings’, in which the term ‘warranty’ is used to mean something slightly different. 5.1.1 False representations 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 AC 465, a misrepresentation had to be fraudulent in order for the injured party to receive damages and the proof of fraud was very difficult. Because of this, the older cases are concerned with attempts by the injured party to establish that the statement was a contractual term (for which damages were available) rather than a representation. Lord Denning MR described these attempts in Esso Petroleum Co Ltd v Mardon QB 801. 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. A point examined further in Topic 9. Examination advice We have just seen that a finding that a statement made in negotiations is not a term is not now so serious for the party who relied upon it because the victim of a misrepresentation now has a greater range of remedies available than in the past. Nonetheless, the proper classification of the statement made in negotiations is of great importance when answering problem type questions. If in your answer you wrongly classify a statement made in negotiations as a term when it is a mere representation this will lead you to write about the remedies available for breach of contract which are not relevant and so you will gain little or no credit. The criterion of relevance is applied strictly by markers. There are no ‘charity marks’ for a discussion of an area of law, no matter how well written and supported by cases, if it is not relevant to the question asked. It is a feature of many legal problems that a piece of initial analysis is a ‘signpost’ that directs the rest of your answer in a particular direction. Any such ‘signpost’ must be identified and conclusions reached after careful application of the relevant principles. Finding the intention of the parties If, then, 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 is this ascertained? At one level the answer is simple, it all depends on the intention (objectively ascertained of course) of the parties. Do their words and conduct indicate to a reasonable person that the statement was intended to be mere representation or, alternatively, that it was intended to be a contractual term? Difficulty arises in the application, as opposed to the statement, of this test. The courts have utilised a small number of factors or ‘rules of thumb’ to assist them. It is important to emphasise that these are factors, not rules. If one of these factors applies it inclines to a conclusion that the statement was intended to be either a mere representation or a term. They are not rules which would dictate a certain conclusion. When applied to a set of facts one factor might suggest the statement was intended to be a term, another that it was a mere representation. In such cases the competing factors must be weighed one against the other to see which, on the facts, is the stronger. The factors referred to by the courts include the following. The cases suggest that the first factor may be the most important. Whether the statement maker has special knowledge of the matter in question – where the representor has greater knowledge of the matter than the other, this is indicative that the statement is intended to be a term – Dick Bentley v Harold Smith Motors 2 All ER 65; where the representee has greater knowledge of the matter than the other, this is indicative that the statement is intended to be a mere representation – Oscar Chess Ltd v Williams 1 All ER 325. Whether the maker of the statement accepted responsibility for the soundness of the statement – where such responsibility is assumed, this indicates that the statement was intended to be a term (Shawel v Reade 2 IR 64). The importance attached to the statement – the more important the matter, the greater the likelihood that the parties intended the statement to be a term (Bannerman v White 142 ER 685). Where the statement is accompanied by a recommendation that its truth be verified – the statement is more likely to be a mere representation (Ecay v Godfrey 80 LI L Rep 286). Where one party clearly relied upon the other, this is indicative that the statement was intended to be a term (Esso Petroleum Co Ltd v Mardon QB 801). Again, it is important to recognise, as Lord Moulton observed in Heilbut, Symons & Co v Buckleton AC 30, that none of these factors are decisive tests. The presence or absence of these factors is not conclusive of the intention of the parties: the intention of the parties is deduced from the totality of the evidence. The Parol Evidence Rule If the parties have chosen to place their contract in a written document, courts have held, as a general rule, that they cannot provide extrinsic evidence to add to, vary or contradict the written document; the document is the sole source of the terms of the contract. This is known as ‘the parol evidence rule’ (see, e.g. Jacobs v Batavia & General Plantations Trust Ltd 2 Ch 329). While the rule is intended to promote certainty, it has the potential to produce injustice in some instances. To minimise these injustices a number of exceptions to the rule exist. First, where the written document was not intended to cover the whole of the agreement the rule does not apply: Allen v Pink 150 ER 1376. Second, parol evidence is admissible to prove terms or a custom which must be implied into the agreement. Third, parol evidence may be admitted to show that the contract is void by reason of a misrepresentation, mistake, fraud, or non est factum (see Topics 8 and 9). Fourth, parol evidence may also be admitted to show that a contract has not yet come into operation or has ceased to operate. Fifth, parol evidence may be admitted to prove the existence of a collateral contract. The parol evidence rule is said to promote certainty (AIB Group plc v Martin UKHL 63 at ). Evidence to support the benefit of such certainty is provided by the fact that many commercial contracts incorporate an express clause to similar effect called ‘an entire obligation clause’. This is a contractual term which expressly provides that the written contract records the totality of their legally enforceable agreement. Such a provision is valuable in preventing parties from ‘threshing through the undergrowth [for] some…remark or statement (often long forgotten…) upon which to found a claim’ (Inntrepeneur Pub Co v East Crown Ltd 3 EGLR 31 per Lightman J). In Axa Sun Life Services v Campbell Martin EWCA Civ 549 the Court of Appeal applied this dictum emphasising that such clauses will help reduce litigation and associated costs. 5.1.2 Terms of Collateral Contracts 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 (i.e. running beside) 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. See Heilbut, Symons & Co v Buckleton AC 30 and Esso Petroleum Co Ltd v Mardon QB 801. Study task 1 Think of the circumstances in which a purchaser will rely upon a seller’s expertise as to the good being sold. In what situations will a purchaser rely upon a seller? Show feedback A purchaser will typically rely upon a seller where she has great experience of, or expertise in, a particular area: see Esso Petroleum Co Ltd v Mardon. A purchaser is also likely to rely upon a seller where the seller has knowledge of matters that it is highly unlikely the purchaser would. A seller of a car, for example, is much more likely to know how the car has been driven than the purchaser. Something to bear in mind in considering a purchaser’s reliance upon the seller is that the purchaser may be protected by legislation – particularly if the purchaser is a consumer. See, for example, the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999. Study task 2 Is it relevant to ask, as Lord Denning does in cases such as Dick Bentley Productions v Harold Smith (Motors) Ltd 1 WLR 623, 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? Show feedback Lord Denning uses the term ‘innocent of fault’ in the making of a statement as an aid to the determination of whether to impose contractual liability for the statement. The process he engages in is to determine whether the maker of the statement should have, or could have, known more about the statement. In Dick Bentley Productions v Harold Smith (Motors) (1947), the defendants could have checked the accuracy of their statement rather than simply relying upon what was obvious. Their fault becomes even more glaring because the circumstances are such that a purchaser would assume that they had checked the accuracy of the statement. ‘Fault’, however, means something in the nature of negligence rather than fraud or deception. For this reason, an inquiry into fault as such is misleading. It might be more productive to consider whether there is reliance upon the statement and the maker of the statement has assumed responsibility for the accuracy of the statement. What this examination of fault does reveal is the process by which the judges are apportioning liability when the reasonable expectations of the parties are not met. The party who is at ‘fault’ will bear the responsibility for the failure. Study task 3 Apply the relevant factors to determine whether the statement made by the private seller of a car to a private buyer that it is a ‘[Triumph] Herald convertible, white 1961’ would be classified as a term or a mere representation when it later transpires that the car is not a 1961 model? Show feedback The following factors suggest that the statement would be a term: Between a private buyer and a private seller one would expect the seller who has had possession of the goods and associated document for some time to have greater skill and knowledge in relation to its age and model year (Dick Bentley v Harold Smith Motors (1965) cf. Oscar Chess Ltd v Williams (1967)). A statement as to a car’s age goes directly to its value and so is important. Applying Bannerman v White this would suggest it was a term. It is likely that the buyer clearly relied upon the seller thereby also suggesting it was a term. All three factors point to the conclusion that the statement as to the car’s age would be regarded as a term. These are the facts of Beale v Taylor (1967) where the court reached the same conclusion in respect of the car which was an example of what has become known as a ‘cut and shut job’ where the front of a car that has had a rear end collision is welded to the back of a car that has suffered a front end crash. Half the car was in fact a 1961 Triumph Herald but the other half was not! Study task 4 What is the ‘parol evidence rule’? Is it still important? If not, why not? Show feedback In practice, the parol evidence rule amounts to no more than a rebuttable presumption that the written contract is the whole contract. The exceptions to the rule are so numerous that its status as a ‘rule’ is highly questionable. These exceptions include evidence to establish that a contract is void or voidable on the grounds of mistake, misrepresentation or fraud; to indicate an implied term or custom; or to prove the existence of a collateral agreement. Because the rule can be circumvented so easily, it is not really a rule. What is useful about the ‘rule’ is that it operates as a guide that the written terms of the contract are, at a minimum, the starting point for the determination of the contract’s terms. When the Law Commission in a Working Paper (No 76, 1976) examined the parol evidence rule they pointed out that one exception to the rule is wider than the rule itself, thereby negating it. The exception established in Allen v Pink (1838) was that a party can rely upon parol evidence where the written document does not record the whole of the agreement. However, the only circumstance when a party would ever want to rely upon parol evidence would be where the written document does not record the whole of the agreement, thus the exception has consumed the rule! Although the Law Commission said this reduced the rule to ‘no more than a circular statement’ in their full report (No 154, 1980) they pulled back from their earlier recommendation that the rule be abolished. Therefore, it survives as a rebuttable presumption that the terms of any written contract should not be contradicted by other evidence (HIH Casualty and General Insurance Ltd v New Hampshire Insurance Co (2001)). Its usefulness is probably confirmed by the fact that a stronger, express version, known as ‘an entire agreement clause’ is often inserted in commercial contracts (Inntrepreneur Pub Co v East Crown Ltd (2000) and Axa Sun Life Services v Campbell Martin (2011)). Summary It is important to determine whether a statement or assurance is a term of the contract or a representation because this 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. (Mini Lecture 2) Implied terms at common law. In the first mini-lecture on this topic of the terms of a contract, we looked at express terms, that is terms which have their origins in things said by the parties, but terms in a contract will consist not only of the things parties said but also things which are implied into the contract by statute or by the common law. In the last lecture, we looked at express terms. In the next couple of lectures, we are going to look at implied terms. In this lecture, we're looking at the way terms are implied by the common law. What are our objectives. Well, our objectives are to understand the difference between two broad processes of implication, which we call implication in fact and implication in law. Secondly, we want to understand the tests which are used by the courts when implying terms at common law. “Implication in fact” are terms implied into contracts, and the justification for implying them is that the courts are merely putting into contracts terms based upon the presumed but unexpressed intention of the parties, things which the parties would have wanted, had they thought about it, but simply failed to think about it. There were two tests which are sometimes used by the courts to ascertain, to find out what the presumed, what unexpressed intention of the parties is. The First Test is called the ‘business efficacy test’. By efficacy, we mean effectiveness. Terms are implied into contract in order to give them business effectiveness to make them meaningful as commercial arrangements. The test is associated with a case called The Moorcock. Like many shipping cases, the case takes its name from the ship involved and the very test itself has sometimes been called The Moorcock test. What happened in The Moorcock was that a ship was due to dock at a tidal wharf, a tidal port, one of these places where the ship would come in at high tide, the tide would go out, and the ship would rest in the mud of the river. In such a situation, it's obviously important to the ship owner that he knows that when the ship rests in the mud, there is nothing there that would cause damage to the vessel. Of course, what happened is that our ship came in, it settled as the tide went out, and there was something underneath which caused damage to the ship's hull. It was said that in the contract of mooring, contract of mooring against the dock or wharf, there was an implied term that the wharf owner, the dock owner, had ascertained that there was no obstruction underneath and would've warned the ship owner had there been any such obstruction. It was meaningless to have a contract where the ship owner would come along, moor his ship if there was any danger to the ship. To give commercial effectiveness, business efficacy to the contract, some term had to be implied, which put a duty upon the dock owner to check that there were no obstructions where the ship would settle. There's a second test that is sometimes used. Again, this is another test, but it's just used to ascertain to find out what was the presumed but unexpressed intention of the parties, and this is called the “Officious Bystander Test”. It requires us to imagine a hypothetical person, someone standing beside the parties at the moment they were contracting such that we can hypothetically say if that person standing beside them said, "Do you mean to intend to include in your contract a term to this effect?" If we can hypothesize conjecture that the parties would've replied, "Oh, yes, of course, we did," then such a term can be implied. In slightly old-fashioned language, it was expressed by Mr. Justice MacKinnon in Shirlaw v Southern Foundries. In this way, it refers to something so obvious that it goes without saying so that if while the parties were making their bargain, and an officious bystander were to suggest some express provision, they would testily suppress him with a common, "Oh, of course." There are limits to this process of implication, because it is said that reasonableness is not alone a sufficient ground for implication. In the case of Marks & Spencer v BNP Paribus, a case before the Supreme Court, under a lease, Marks & Spencer paid their rent to their defendant landlord in advance. They terminated the lease under a termination provision, and they then asked for rent, which they paid in advance to be returned to them. They claimed to be entitled to the return of rent under an implied term whereby rent already paid must be returned for the unexpired part of any lease. Now, the Supreme Court declined, refused to imply such a term. They said, "Look, even if such a term would be a reasonable thing, it is not our job to impose on the parties a reasonable contract when that might not have been what they negotiated." Of course, retrospectively it seemed reasonable to Marks & Spencer to get such a refund, but if the parties had wanted such a provision, they should have expressly included it. The court was unable to conclude that they intended to include such a clause but merely failed to do so. In contrast to implication, in fact, which as I've described, is this search for the presumed but unexpressed intention of the parties, implication in law is a different process because implication in law refers, at its bluntest, to the courts imposing a clause into a contract. If you can imagine, the courts are very reluctant to impose clauses in this way because contract law is seen as this facilitative mechanism, this way in which the parties give legal force to agreements that they arrive at themselves, not agreements which are imposed on them. This is a very narrow power, but the courts have felt that in relation to certain types of contract, it is necessary to imply terms. The processes described there as a search based upon wider considerations for a term which the law will imply as a necessary ingredient of a definable category of contractual relationship. One of two relationships really attract a number of these terms, the relationship of landlord and tenant, and the relationship of employer and employee. Where a landlord lets properties to multiple occupants, a term will be implied that the shared parts of that property, so in a block of flats, the hallways, the landings, the stairways, the lifts, there will be an implied term that the landlord should keep those common parts, as they are called, in good repair. Similarly, in employment contracts, terms of implied impose upon employers duties to look out for the health and safety of their employees (Mini Lecture 3) We started to look at implied terms, that is terms which do not find their origin in things that the parties said or wrote, which instead are implied into their agreement. We're going to look today at terms which are implied into contracts by statute. They're legislative provisions that say that these terms are implied into contracts. Distinction between contracts which are between two businesses and contracts between a business and a consumer because this distinction has implications and importance in statutory implied terms. We need to then engage a little with a little detail of the different statutory provisions. B2B versus B2C. B2B contracts are contracts made between one business and another business. A B2C contract is a contract made between a business and a consumer. Now, there are always going to be some challenges as to the borders between these two. Now, there's going to be some point at which we have some discussion as to whether a contractor was acting in the business or a consumer capacity, but despite the boundary problems, there is a distinction between the two. I think you can instinctively get the idea that the courts will take a more protective stance towards consumers than they tend to towards businesses. They tend to think of businesses as big enough and ugly enough to look after their own self-interest. Now, there's a practical importance here that we need to emphasize, and it's something I'll come back to several times because, in the real world, these statutory implied terms are very important, because the basis upon which people choose to bring actions will often be on the basis of the statutory implied terms. Now, I'm going to explain why this is at several points as we go through this lecture, but one of them is simply that when you're suing for breach of an expressed term, someone selling you a car told you that it is a particular model, you will then have to prove that that thing was said. Easier if it was written, but if it was spoken, you'll have to prove it. The sellers' first reaction is often simply to deny they made assurance. Statutory implied terms, to some extent, operate simply because the court imposes such a term and they operate independently of things said by the parties. There is an ease of proof, which is one of the reasons why actions based on statutory implied terms are very popular. In B2B contracts, we have a summary here of the statutory implied terms. Be a bit careful because you can see we've got to Section 13s there. We've got Section 13 of the Supply of Goods and Services Act as well as Section 13 of the Sale of Goods Act. Section 13 of the Sale of Goods Act implies a term that the goods sold must conform to their description. Section 14 contains two implied terms, an implied term that the goods sold with satisfactory quality and an implied term that they are fit for any particular purpose. Supply of Goods and Services Act Section 13, effectively, imposes a term that a service, not a good, a service is of a reasonable quality. In the Sale of Goods Act 1979, this refers to B2B contracts. Where there was a contract for the sale of goods by description, there was an implied term, the goods will correspond to that description. In Section 14(2), where the seller sells goods in the course of a business, there's an implied term that the goods supplied under the contract are of satisfactory quality. Section 14(2) is the most powerful of these implied terms because it is the one that operate independently of anything being said. If you sell goods in the course of a business, that is an obligation on you to supply goods of satisfactory quality, that arises independent of anything said. Section 13 is less powerful because you have to prove that a particular description has been given and there was then an implied term that the goods conform to that description, but you must prove that that description has been given. Section 14(3), the other part of Section 14, says that where the seller sells goods in the course of a business and the buyer makes known any particular purpose for which the goods are being bought, there's an implied term, the good supplied under the contract are reasonably fit for that purpose. If I'm buying in a department store a dining set, a set of plates, and I ask the seller, "Can I put these plates in the dishwasher?" The seller says, "Of course, they're dishwasher-proof." That comes within 14(3) because I have made known a particular purpose for which I am purchasing the goods to be washed in my dishwasher and I've been assured that they're fit for that purpose. Less powerful than 14(2), of course, because it depends upon the proof that you made known that purpose. Then the Supply of Goods and Services Act Section 13 says that in the contract for the supply of a service in the course of a business, there's an implied term that the supplier will carry out the service with reasonable care and skill. What I've said to now about implied terms, is, of course, about terms in B2B contracts. There are equivalent terms implied in B2C contracts, but they're not found in the Sale of Goods Act 1979 and the Supply of Goods and Services Act 1982. They are found in equivalent sections of the Consumer Rights Act 2015. The second bullet point there has some significance because I told you that these statutory implied terms are important, not least because at least the term in Section 14(2) doesn't depend upon the proof of anything said. One of the reasons these are very important in B2C contracts is, as I said at the onset, courts are more protective towards consumers than they are towards businesses. When we look at exemption clauses, you'll see the courts make it more difficult for the parties to exclude liabilities towards consumers than they would towards business. 5.2 The Use of Implied Terms 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 – terms the parties have explicitly agreed upon. These express terms, however, do not necessarily form the entirety of the contract between the shopkeeper and me. In certain circumstances, a court will imply terms into a contract. Thus, in the example above, the courts will use the Consumer Rights Act 2015 to imply a duty, as between a business and consumer to provide goods of a satisfactory quality (s.9(1)), only that the roller skates were fit for purpose. In this section we will consider the circumstances in which courts will imply duties and terms into a contract. In examining 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 EWCA Civ 293 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 employee’s economic well-being. 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 either by operation of the common law or by statute law. These situations include the following: where there is an established trade usage because of the relationship between the parties 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 broker’s 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: they are ‘general default rules’ arising from ‘particular forms of contracts’ according to Lord Steyn in Equitable Life Assurance Society v Hyman 1 AC 408. Two relationships have been particularly productive here: landlord and tenant and employer and employee. In Liverpool City Council v Irwin AC 239 the House of Lords implied a duty to take reasonable care of the so-called common parts (stairs, hallways and lifts, etc.) on the landlord (here a local authority) of premises with multiple occupants. Terms have been implied into contracts of employment to the effect that an employer should not: overwork its staff in a way that damages their health (Johnstone v Bloomsbury Health Authority QB 333); Conduct business fraudulently (Malik v Bank of Credit and Commerce International SA (In Liquidation) 3 WLR 95); Go back on an earlier promise to provide a large ‘bonus pool’ (Attrill v Dresdner Kleinwort Ltd EWHC 1468) in a manner likely to destroy or seriously damage the relationship of confidence and trust between employer and employee. In this area the courts are sensitive to the point that the law of contract is generally understood to be about enforcing contracts which the parties, not the courts, have fashioned for them. To minimise any necessary usurpation of the parties’ general right to create their own contract, a narrowly framed contract term is more likely to be implied by law than an overly broad one. In Scally v Southern Health Board 1 AC 294 a term was implied that the employer was obliged to alert employees to a particular ‘trap’ in their pension scheme whereby, if they did not act promptly, they would fail to secure a large benefit. In contrast in Crossley v Faithful & Gould Holdings Ltd (2004) the Court of Appeal declined to impose a term on the basis of a more general duty on employers to look out for their employees’ financial wellbeing. 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 term is necessarily implied to give ‘business efficacy’ (i.e. effectiveness) to the contract. On this basis in The Moorcock 14 PD 64 a term was implied into a contract for the use of a tidal dock that the owner of the facility had taken reasonable steps to check that the river bottom was safe for a ship to settle on after the tide had gone out. Consequently, the ‘business efficacy’ test is sometimes also known as the Moorcock test. Re Force India Formula One Team Ltd EWHC 933 is an application of this principle. Force India, who owned a Formula One team, entered a five-year merchandising contract. The High Court held that it was an implied term of that agreement that Force India would continue to operate the F1 team. The disposal of the F1 team by Force India robbed the merchandising agreement of its entire commercial purpose. However, if a contract ‘works’ without the implication of a term, then one cannot be justified by reference to the business efficacy test (Yoo Design Services v Iliv Realty EWCA Civ 560. A different test was proposed in the much-quoted judgment of MacKinnon LJ in Shirlaw v Southern Foundries (1926) Ltd 2 KB 206: 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’. 2 KB 206, 227. In an important judgment in Attorney General of Belize v Belize Telecom Ltd 1 WLR 1988, Lord Hoffmann sought to re-state the law relating to the implication of terms at common law. The implication of a term is an exercise in the construction of the contract as a whole. Previous cases establish not a series of independent tests to be met ‘but rather… a collection of different ways in which judges have tried to express the central idea that the proposed implied term must spell out what the contract actually means’. A term may be implied to give effect to the overall purpose of the document as understood by a reasonable person. However, that reasonableness alone is not a sufficient basis for implication was reaffirmed by the Supreme Court in Marks and Spencer plc v BNP Paribas Securities Services Trust Company UKSC 72. In this case, Marks and Spencer (M&S) had paid rent to BNP, its landlord, in advance. Subsequently, M&S exercised a termination clause, which brought the lease to an end before the period covered by the advance payment. M&S sued, based upon an implied term entitling them to a refund of rent for the unexpired period of the lease. The Supreme Court refused to imply such a term: there was no ground to justify such implication even if it could be said to be reasonable to do so. It is difficult to assess the impact of Lord Hoffmann’s restatement of the proper way to approach the issue of the implication of terms into contracts. It is perhaps inconsistent with the longstanding usage of the ‘officious bystander’ test in commercial contracts. Despite the broader approach urged it is unlikely to change the courts’ general refusal to interfere with detailed written documents that express a negotiated compromise between commercial parties with opposed objectives (Philips Electronique Grand Public SA v British Sky Broadcasting Ltd EMLR 472 and Mediterranean Salvage & Towage Ltd v Seamar Trading & Commerce Inc (The Reborn) EWCA Civ 531). In Marks and Spencer plc v BNP Paribas Securities Services Trust Company UKSC 72 the Supreme Court emphasised the correctness of the traditional restrictive approach to the implication of terms and so rejected any expansive interpretation of Lord Hoffmann’s comments. Lord Neuberger said: I accept that both (i) construing the words which the parties have used in their contract and (ii) implying terms into the contract, involve determining the scope and meaning of the contract. However, Lord Hoffmann’s analysis in the Belize Telecom case could obscure the fact that construing the words used and implying additional words are different processes governed by different rules. The situation is different where the written document is less expansive. In Yam Seng Pte Ltd v International Trade Corp EWHC 111 Leggatt J said that terms will be more easily implied into an agreement which itself is ‘skeletal’, arguing for the implication into all commercial agreements of a general duty to perform the contract in good faith. Predictably, the general disinclination to interfere with commercial dealings has been re-asserted and the broader general duty suggested by Leggatt J has been denied (Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd EWCA Civ 200 and MSC Mediterranean Shipping Company SA v Cottonex Anstalt EWCA Civ 789) or at least limited to long term contracts where there is considerable interdependence of the parties, called ‘relational contracts’ (Hamsard 3147 Ltd (t/a Mini Mode Childrenswear) v Boots UK Ltd EWHC 3251). Leggatt J’s attempt to resurrect and reinvigorate a general doctrine of good faith in Sheikh Tahnoon Bin Saeed Shakhboot Al Nehayan v Ioannis Kent EWHC 333 (Comm) is discussed at Section 9.1.2. Study task 5 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).) Show feedback The main reason that this variety of implication is rejected is undoubtedly because, if terms were implied into contracts on the basis that it was reasonable to do so, the contract would, inexorably, become what the judges thought was a reasonable contract. In these circumstances, the courts are not so much interpreting the contract as creating the contract. This is a role they have consistently refused. In addition, it may often become difficult to determine what term is reasonable in the circumstances of the case. Study task 6 A contracts with B to assemble bicycles to B’s 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? Show feedback The answer to this question depends upon whether or not a term can be implied by operation of the common law. It may be possible to establish that the commercial practice in such a situation requires B to supply the gear system. A court would require convincing evidence of such an invariable practice and this may not exist. A second argument rests upon necessity – that the parties, by necessity, intended such a term to be within their contract: see MacKinnon LJ’s officious bystander. A possible weakness in such an argument is that it may be that while B is the only manufacturer of such a gearing system, B may not be the only supplier of such a system. If it can be obtained elsewhere, there may be no necessity to imply the term. 5.2.2 Implied Term of Good Faith The concept of good faith is referred to at several places in this guide, including: Section 1.4.2 where the origins of the concept in the civilian (i.e. continental) systems of law is discussed. Section 4.3 where its application to the situation where parties are negotiating a contract that has not yet come into existence is discussed. Section 5.2.1 where the possibility of implying a term obliging the parties to perform a contract in good faith is discussed. Section 9.1.2 where it is related to the duty to disclose arising from the older concept of a contract ‘of the utmost good faith’ such as an insurance contract. In this section some of the controversy aroused by the concept of an implied duty to perform a contract in good faith will be explored. At the outset, it should be noted that the implication of such a duty to regulate the dealings of the parties after they have entered into a contract is perhaps less startling than the proposition that parties who are at an earlier stage of contracting owe each other a duty of good faith (see Section 4.3). Bates v Post Office (No 3) EWHC 606 (QB) involved a high-profile dispute between the Post Office and a number of sub-postmasters involving alleged defects in an electronic accounting system that reported shortfalls for which the sub-postmasters were said to be liable. In preliminary litigation involving 550 claimants (mostly sub-postmasters), the High Court held that their contracts with the Post Office were ‘relational contracts’ in which there was an implied obligation of good faith. The court (at para 725 – it is a long case!) offered a non-exhaustive list of characteristics that were relevant to categorising a contract as a ‘relational’ one: No express term excluding a duty of good faith. A long-term contract. Intention for the faithful performance of duties with integrity. Commitment to collaboration between the parties. The spirit of the agreement was incapable of full written expression. Parties had mutual trust and confidence. Contract required high degree of communication and collaboration with expectations of loyalty. Significant investment by both parties. Exclusivity of the relationship. The first characteristic identified above that – there must be consistency between the express terms of the contract and any implied duties – is an important one and was the reason why a duty of good faith was denied in SDI Retail Services v Rangers FC EWHC 207 (Comm). The Bates case contains a lengthy and sympathetic discussion of so called ‘relational contracts’. The case also illustrates that an ‘elation’ contract does not ‘bind’ the parties together indefinitely. In New Balance v Liverpool FC EWHC 2837, Liverpool FC were able to terminate a contract with New Balance, their previous football shirt supplier, and enter into a new £70 million per year one with Nike. The club’s previous contract with New Balance, a US firm, gave them the right to ‘match’ any offer from a new potential contractor such as Nike. The High Court held that New Balance’s attempt to match Nike’s offer (Nike’s offer included the use of three ‘non-football global superstar athletes and influencers of the calibre of…Serena Williams’) was tendered in good faith but on the facts did not match that of Nike, leaving Liverpool FC free to enter a new contract with Nike. In a third case (UTB LLC v Sheffield United EWHC 914 (Ch)) before the High Court involving a dispute between two shareholders in a football club, it was held that there was no implied term in the contract between them that required the two shareholders to deal with each other in good faith. This case illustrates a different judicial approach because the concept of a relational contract and the characteristics identified in Bates above were not utilised. The question of whether such a duty arose was treated as a question of fact rather than following from legal categorisation as a relational contract, and the conclusion was that no such duty arose. 5.2.3 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, or equivalent duties imposed, in contracts by operation of legislation. In these instances, the terms are implied or duties imposed 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. Prior to the passing of the Consumer Rights Act 2015, the key legislative provisions were applicable (though to different extents) to contracts between two businesses (so called B2B contracts) and also to contracts between businesses and consumers (so called B2C contracts). Since the Consumer Rights Act 2015 came into force in October 2015 B2B and B2C contracts will be subject to separate statutory regimes. B2B contracts As between a business and another business the earlier legislation of Sale of Goods Act 1979 (SGA) and Supply of Goods and Services Act 1982 (SGSA) will apply. In a contract for the sale of goods the following terms are implied: s.12 SGA – an implied term that the seller has the right to sell the goods. s.13 SGA – an implied term that the goods will conform to any description given. In a number of older cases the courts required the strict and exact fulfilment of any description used by the seller. Although ‘microscopic variations’ would be disregarded it was said that ‘A ton does not mean about a ton’ (Arcos v EA Ronaasen & Son AC 470). Subsequent cases suggest that words of description fall within s.3. Rather the section only applies if they constitute ‘a substantial ingredient of the “identity” of the thing sold’ Reardon Smith Line Ltd v Hansen-Tangen (The Diana Prosperity) 1 WLR 989. s.14(2) SGA – an implied term that the goods are of satisfactory quality. According to s.14(2A) and 14(2B) in assessing whether the goods are of satisfactory quality the court should take account of any description use which might serve to increase (e.g. ‘first class’) or decrease (e.g. ‘seconds’) the standard expected. The courts are also instructed to take account of ‘the price (if relevant)’. The word ‘if’ was possibly used to prevent a seller arguing that sale goods could be of a lower quality than non-sale goods. Goods are required to be fit for all the purposes for which goods of that kind are commonly supplied and account may be taken of the goods’ appearance and finish as well as their safety and durability. s.14(3) SGA – an implied term that the goods are reasonably fit for any particular purpose which the buyer made known to the seller. If clothing was bought and the buyer asked and was assured that it could be washed in a washing machine then a term to that effect will be implied. IMPORTANT: The terms implied by s.14(2) and 14(3) (and also that implied by s.13 of the Sale of Goods and Services Act 1982 below) only arise where the sale is in the course of a business. A sale may still be made in the course of a business where it is an infrequent dealing such as the sale of a fishing boat by a fisherman in Stevenson v Rogers QB 1028. Where goods are supplied in the course of a business the requirement that they be of satisfactory quality does not extend to defects brought to the buyer’s attention, or more importantly, defects which a pre-purchase inspection that was undertaken should have revealed (Bramhill v Edwards EWCA Civ 403). In a contract for the provision of a service the following term is implied: s.13 SGSA – an implied term that any service provider will carry out the service with reasonable care and skill. This term will only be implied where the service is provided in the course of a business. B2C contracts The CRA 2015 imposes duties upon traders contracting with consumers that correspond to the implied terms described above for B2B contracts. The CRA 2015 uses the language of duties rather than implied terms but the substance of the obligation should be the same. The duties are: s.11(1) CRA – a duty on the trader to supply goods that conform to any description given. s.9(1) CRA – a duty on the trader to supply goods of satisfactory quality. Satisfactory quality is to be assessed by reference to a non-exhaustive list of factors set out in s.9(2)–(7). s.10(1) CRA – a duty to supply goods that are reasonably fit for any purpose made known to the trader by the consumer. s.49(1) CRA – a duty on the trader to perform any service with reasonable care and skill. The CRA itself limits the extent to which these duties can be excluded. This is discussed further in Section 6.2.1. Self-assessment questions 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’. On which party is the onus of proving the existence of an implied term? 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. (Mini Lecture 4) Understanding the classification of contractual terms by reference to their remedial effect. Understanding how to identify two classes of term conditions and warranties and understanding the different consequences of a breach of each term. There are our definitions, a condition is a term of the contract, any breach of which entitles the innocent party to terminate the contract. In contrast, a warranty is a term any breach of which entitles the innocent party to recover damages only. There's a hierarchy of importance here if you like. Conditions are the more important terms of the contract because if a condition is breached, the innocent party can end the contract, can sue for damages as in respect of any losses, but is entitled by virtue of the breach of a condition to terminate the contract. If the breaches of this more minor term are called a warranty, then the innocent party is not entitled to terminate the contract but instead is entitled to recover damages only. That is the distinction between conditions and warranties. The clue there is in the third word of each definition, any. Any breach of a condition gives rise to a right to terminate. Any breach of a warranty gives rise to a right to damages only. An innominate term sometimes also called an intermediate term is a term which may or may not entitle the innocent party to terminate the contract. We can't tell in advance, what we have to do if the term is an innominate term is we have to wait and see how significant the breach is, and then we decide whether or not the innocent party is entitled to terminate. If a contract is comprised only of conditions and warranties, then the contractor will know in advance what are the consequences of breach. If clauses one to five are conditions and clauses six to ten in the contract are warranties, the parties know that if there's a breach of clauses one to five, then the innocent party will be entitled to terminate, our book will know that if there's a breach of clause six to ten, the innocent party will only be entitled to damages. If the contract comprises entirely of innominate terms, you cannot say in advance whether or not the innocent party is entitled to terminate. You have to wait, let the breach happen and see how serious the consequences of breach are. An important point here is that conditions and warranties bring certainty and predictability to contracting innominate terms might be more fair, but they are more uncertain. Sometimes terms are classified as a condition of a warranty by statute. Where the term has its origin in a statute, as we've already seen some terms do. That statute will likely also say whether or that term is a condition. The terms which we have seen implied by Sections 13 and 14 of the Sale of Goods Act, the implied term as to conformity to description in Section 13 and the two implied terms in Section 14, the implied term as to satisfactory quality, and the implied term fitness for a particular purpose. These of course are terms implied into B2B contracts. Those terms are conditions because the statute says so. If there is a breach of those terms, then the purchaser is entitled to terminate the contract. In the case of a sale of goods contract, termination is rejecting the goods and getting your purchase price back. In B2C contracts, we've seen previously that there were equivalent duties to the Sale of Goods Act 1979, implied into contracts between a trader and a consumer. The origin is a different statute, the Consumer Rights Act. Strictly these terms are not called conditions, but this is the important point. They function like them. The breach of these terms gives rise to a right to terminate. It is as if they are conditions. Now we have talked to now about the classification of terms by statute. The statute will simply say it's a condition or it's a warranty, but the parties themselves may seek to classify an express term and they may do that in one of three ways. They may, when they're drafting their contract, use the word condition. It is a condition of this contract that, or it is only a warranty of this contract that, and the use of the word condition is highly persuasive, but not conclusive evidence that the parties intended it to operate as a condition. In Schuler v Wickman, there was a clause in a distributorship. A party was entitled to distribute certain tools on behalf of the manufacturer, and it was said to be a condition of the contract that Wickman would send a named representative to visit six major UK manufacturers every week in order to sell these tools. The House of Lords said, "That clause could not have been intended to operate as a condition." They inferred that from the fact that no provision was made for the circumstance if the named representatives were ill or the named representatives left the employment of this person. They said someone could not have intended to give the other party a right to terminate simply if in one week of a four-year contract, one person of the six named was ill. Even though the word condition was used, and even though that is highly persuasive authority, the term was intended to operate as a condition, it is not conclusive. The parties might convey their intention that something is to operate as condition in a different way. In Lombard v Butterworth, there was a contract for the hire of computers and it was said that time was of the essence. This is a phrase that's often used in contracts and it is sufficient to convey that the prompt payment of hire was a-- The parties wanted the prompt payment of hire to be a condition of the contract so that if the hire was not paid promptly, it gave rise to a right to terminate from the owners of the computers. The final way in which the parties may themselves indicate they want something to be classified as a condition is if that intention can be established by the importance of the thing required. If in the context of the party's contract, it is clear that a particular specified act or requirement is very important, is very key to their dealing, then that might be sufficient to demonstrate their intention that that thing was meant to operate as a condition. (Mini Lecture 5) We're now going to look at how the courts may classify a term as either a condition or a warranty. One of the common categories is where there is an established commercial usage. In contracts of charter, contracts to hire a ship, there is frequently a clause called the expected ready-to-load clause, which is the ship owner's undertaking to the new charterer as to when he expects the ship to be ready to load the new cargo. As you can imagine, charters are successive things and so the ship owner will uniquely know when his ship will be available to the new charter because he will know when the previous charter has ended, discharged its cargo, and possibly also the ship be moved from the port of discharge of the new port of loading. It's crucial to the parties to know when the ship will be ready to load so that the new charterer can get his cargo to the correct place ready for loading. Established commercial usage as recognized by the court appeal in the Mihalis Angelos is that those expected ready-to-load clauses in charters are conditions. A more general proposition about the classification by the courts is that time clauses in mercantile contracts are regarded as conditions. By mercantile contracts, we mean commercial contracts. If an obligation is to be performed by a particular date or within a particular period, and that is a commercial contract, such time clauses will be regarded as conditions. That principle comes from the case of Bunge v Tradax. We move now having looked at how terms are classified either as conditions or as warranties by the courts, we look now to these innominate terms. These are what we can sometimes refer to, please don't do this in an exam though, as a wait-and-see clause because we cannot tell in advance whether the breach of the clauses will give rise to a right to terminate. We have to wait and see. Sometimes statute says that a clause or implies that a clause is an innominate term. The clause which we have seen implied into contracts for the supply of a service in the course of a business, the term implied by the Supply of Goods and Services Act 1982, Section 13, effectively that the service will be carried out with reasonable skill is an innominate term. You cannot say in advance whether every breach of that will give rise to a right to terminate or a right to damages only. You have to wait and see how serious are the consequences of breach. The courts themselves can classify a term as an innominate term. Effectively, they will look to see if the term has been classified as a condition previously. If the term has not been classified as a condition by established commercial usage by being a time clause in a mercantile contract, it is up to them. They may then classify it as an innominate term. This possibility was recognized in what's become known as the Hong Kong Fir case. That case involved the seaworthiness clause in the charter party. When a ship is chartered by a ship owner, there is an implied term that the ship being chartered is seaworthy, but a lot of very technical law has grown up around the seaworthiness clause. Now, if the ship has a great big hole in the hull, then it is pretty obviously not seaworthy, isn't it? This technical law was built up such that there were certain things ships have to have to be considered seaworthy. They have to have a proper first aid kit on board. Now, the seaworthiness clause might be breached because the ship being chartered has a serious hole in the hull. Well, it may also be breached because some sticking plasters are missing from the full complement of the first aid kit. It would seem wrong if the latter breach gave rise to the dramatic remedy of allowing the charterer to terminate the contract. We can see that there's a spectrum of breaches that are possible, some very serious and some not. The fact that some are or some are not means that we cannot say in advance that every breach of the seaworthiness clause should give rise to a right to terminate. Rather, we will wait and see how serious that breach is. That is our statement here. There were many contractual undertakings which cannot be categorized as conditions or warranties because some breaches will and others will not deprive the party not in default of substantially the whole benefit which was intended that he should obtain. That is the Hong Kong Fir test, that if the term is an innominate term, it will only give rise to a right to terminate if the breach is such that it would deprive the party not in default, the innocent party of substantially the whole benefit which it was intended he should obtain by the contract. Just a final reflection here is that the approach based upon conditions and warranties promotes commercial certainty. An approach based upon innominate terms tries to achieve justice between the parties. We only have a small number of innominate terms because it is often said that the most important value in commercial contracts is certainty and predictability, whereas it is in consumer contracts that we tend to think of fairness as a more important criterion. 5.3 The Classification of Terms into Minor Undertakings and Major Undertakings We began this topic 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 Section 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 Topic 12 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 or terminating 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 party’s obligations. This is different from rescission (rescinding) for misrepresentation, which, when effected, means that the contract is cancelled from the very beginning. For this reason, in this context, termination is preferred as a term over rescission. 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. 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 19th century by classifying the terms of a contract into the two following types. 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 2 App Cas 455 and Re Moore and Landauer 2 KB 519. This classification into conditions and warranties was extensively used by the drafters of the Sale of Goods Act 1979 (and previously 1893), 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. This intention may be expressed in different ways. Where a term is called a condition this is highly persuasive, but not always conclusive evidence, to infer that the parties’ intention was that it should be a condition (L Schuler v Wickman Machine Tool Sales AC 235). The next most compelling means of expressing such an intention is if the parties use words that indicate the importance of a clause. Where a contract expressly provides that ‘time is of the essence’ this has been held to be a sufficient demonstration of intention to render prompt performance a condition of the contract (Lombard North Central plc v Butterworth QB 527). Topalsson v Rolls Royce EWHC 1765 confirmed the power and effect of stating in a contract in respect of the performance of any obligation that ‘time is of the essence’. The effect of such a clause is that the failure of a supplier to deliver services or goods in accordance with the stated delivery schedule will entitle the other party to terminate the contract. However, if the intention is not clearly expressed, the court will again have to draw the ‘proper inference’. See Behn v Burness 122 ER 281; Bettini v Gye 1 QBD 183 and Poussard v Spiers 1 QBD 410. 5.3.2 Innominate terms It was implicit in this 19th-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 (Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd 1 All ER 474), 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 Handels GmbH (The Hansa Nord) QB 44, 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 Maredelanto Compania Naviera SA v Bergbau-Handel GmbH (The Mihalis Angelos) 2 WLR 907; Bunge v Tradax Export SA 1 WLR 711; Cie Commerciale Sucres et Denrees v C Czarnikow Ltd (The Naxos) 1 WLR 1337 and Barber v NWS Bank 1 WLR 641. But contrast Ark Shipping v Silverburn Shipping EWCA Civ 1161 where the Court of Appeal held that a clause in a charter, which required the charterers to renew classification certificates, was an innominate term and not a condition of the charter. It is important to note that the Hong Kong Fir case has not changed the law on the question of what a condition is. It does, however, seem to have had a ‘knock-on’ effect on the application of that law by the courts. See Reardon Smith v Hansen-Tangen 1 WLR 989 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 and the express termination clause in Rice (T/A Garden Guardian) v Great Yarmouth BC TCLR 1. Contrast the more traditional approach in the following cases. Lombard North Central v Butterworth QB 527: 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 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. Study task 7 Why was the unseaworthiness of a chartered ship (in Hong Kong Fir) considered less important than the owner’s estimate of when she would be ready to load the charterer’s cargo? Show feedback The unseaworthiness of the vessel was not considered a sufficiently serious breach of an innominate term in Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd (1962) as to justify terminating the contract because the delay caused by the breakdown and the necessary repairs were not so great as to remove the commercial purpose of the charter party. The seaworthiness of the vessel was thus not a condition of the contract. The term did not meet the test set out by Diplock LJ in that case: The test of whether an event has this effect or not has been stated in a number of metaphors all of which I think amount to the same thing: does the occurrence of the event deprive the party who has further undertakings still to perform of substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing those undertakings? In the case before him, there was not a substantial deprivation of benefit. In comparison, clauses dealing with time tend to be conditions – time is a particularly important factor in commercial contracts. It is often expressed that ‘time is of the essence’. See, for example, Bunge Corporation v Tradax SA (1981). Study task 8 If the time charterer is late in redelivering the ship, what are the practical consequences for the owner? Show feedback The practical consequences for the owner if the time charterer is late in redelivering the ship is that he will probably be in breach of another contract with another party for the delivery of the ship. These consequences can be quite severe. Study task 9 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? Show feedback The difficulty that Schuler faced was that while clause 7(b) of the agreement with Wickman stipulated that it was a ‘condition of this agreement’ that the representatives of Wickman would visit the motor manufacturers at least weekly, the court found that the parties had used the word ‘condition’ in the sense of ‘term’. Consequently, the contract could not be terminated when the weekly visits were not made on a few occasions. What Schuler could have done to ensure that the visits were genuinely a ‘condition’ of the contract (breach of which entitled Schuler to terminate the contract) was to clearly indicate in the contract that a breach of this obligation entitled Schuler to terminate the contract. See Lombard North Central plc v Butterworth (1987) where Mustill LJ discusses the ability of a party to establish as a condition a matter which, at common law, would not be considered a condition in the sense of allowing the injured party to terminate the contract because the obligation stipulated was of a minor nature. It is this point which marks the difference between the majority in Schuler (as expressed in the speech of Lord Reid) and the dissent of Lord Wilberforce. Study task 10 Compare the decision in Schuler with that in Lombard. How are they different? Show feedback The critical difference between the decision in Schuler AG v Wickman Machine Tools Sales Ltd (1974) and Lombard North Central plc v Butterworth (1987) is that in the latter case, the contract clearly stipulated that the punctual payment was of the essence of the agreement (clause 2(a)) and that failure to make punctual payments entitled the plaintiffs to terminate the agreement (clause 5). 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. Examination tips Knowledge of the matters considered in this topic are unlikely to be needed to answer the entirety of a problem-type question in the examination. However, such knowledge may be required to answer a part of a problem question, which also raises other issues and in the past complete essay-type questions have been set in this area. 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 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. 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 uncertainty into the law. Sample examination question 1 Question Alban is a surveyor. Four months ago he bought a nine-month-old ‘Landmaster’ car from Brenda’s Garage Ltd for use in his practice. He paid £12,500 for the car and was given a written guarantee in the following terms. ‘Brenda’s 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? Tutor guidance Using the guidance below, think about how you would answer the question. When you are ready, read the feedback. You should begin this problem by examining the facts given. Before looking a the feedback you should consider the following: Establish whether or not there has been a breach of contract when the engine and gearbox seized up. Determine what the terms of the contract are. Will the express term help Alban? Is there an implied term and what are the implications of this if there is one or if there is not? What about the variant on the facts provided at the end of the question? Feedback 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 thing 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 Brenda’s 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 goods and is not a sale by a trader to a consumer. Therefore you must consider the Sale of Goods Act 1979 and not the Consumer Rights Act 2015. 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 subject to the Consumer Rights Act 2015. 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. Sample examination question 2 Question ‘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. Feedback 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. Sample examination question 3 Question (Tutor Feedback Activity 2022) Kingston is renovating his home and wishes to buy a floor sander for his newly-laid wooden floors. He visits Handy Sandy, a local shop, and selects a suitable model. When he arrives at the cash desk he notices a sign beside the cashier informing customers that “all terms and conditions can be found on our website, www.handysandy.co.uk”. Kingston does not own a smartphone and is therefore unable to visit the company’s website before making a purchase. He goes ahead and pays for the floor sander. Unfortunately, Johnnie, an employee at Handy Sandy, has supplied Kingston with the incorrect sanding discs. When Kingston returns home and starts to operate the floor sander it removes several layers of wood causing £4,000 worth of damage to the floor. Lucy owns a construction company and visits Handy Sandy several times a month to buy tools for her business. She needs to purchase a drill but is especially busy this week and, rather than visiting Handy Sandy to make the purchase, she concludes the contract by email. Handy Sandy forget to attach to the email their terms and conditions. Johnnie delivers the drill to Lucy later that afternoon, but when he arrives at her business premises he trips, smashing the drill into a glass door. Lucy needs to replace the glass door which costs £2,000. Both Kingston and Lucy wish to claim damages for their losses. Handy Sandy point to a term in their contract which states, ‘Handy Sandy limit their liability for all damage, whatsoever and howsoever caused to £250’. Advise Kingston and Lucy. Tutor guidance General remarks The first point to note is read the rubric, you are advising Kingston (K) and Lucy (L). Then begin by identifying the key facts for each party you are asked to advise in your plan. Then apply the relevant law to those key facts. Some of the answers were very superficial and, while it is good to be concise and precise, if you do not write enough, you cannot deal with all the facts. Other students wrote far in excess of the word count, you must follow instructions and anything over the limit is not read. To exceed significantly would indicate that you have not focused on the relevant issues that arise on the facts. Some students failed to understand the issues that were relevant on the facts. A method to avoid this is to use past examination papers and Examiners' reports to help you to identify the issues that are relevant on certain fact scenarios. Do not just read them, use it as an exercise; look at the paper to see if you can spot the issues then check on the Examiners' report to see if you are correct. Specific remarks K v HS K is a consumer, this is a consumer to business contract (reference can be made to the Consumer Rights Act 2015 (CRA)) as he is not acting in the course of business; this will be important later in your advice. Identify the breach, which here is that there has been, mistakenly or possibly negligently, provision of incorrect equipment. So you can identify the breach within the Consumer Rights Act (CRA), this is important as the law fundamentally changed with the passing of this Act and it is sad that some students don’t make this point clearly and still try to apply the Sale of Goods Act (SGA) or Supply of Goods and Services Act (SGSA) on this fact scenario. So a breach of CRA, s.49(1) to carry out business with care and skill possibly. Alternatively, it can be a breach of ss.9 or 10 CRA not being of suitable quality or fit for the purpose made known to the trader which with planning your answer may be the better option for the reasons you will explain later. Can K claim for the whole loss, which is £4,000? Handy Sandy (HS) will try to rely upon their contractual terms, here an limitation clause to cover only £250. Has this term been incorporated into the contract between K and HS? There is no issue of signature, so it is about timing and notice. Time: there is a notice at the cash desk, so before the point of sale, Olley v Marlborough Court distinguished. No evidence that he is a returning customer so the main issue is reasonableness of placing the notice at the cash desk referring to the webpage. Students who dealt at length with the other methods of incorporation were not able to show the analytical skills that are part of the marking criteria. So the fact that he did not read or access the terms may be reasonable, Parker v South Eastern Railway. There are cases where terms are available on printed timetables that were only available for a price: Thompson v London, Midland & Scottish Railway. The more onerous the term then the more steps need to be taken: Thornton v Shoe Lane Parking. This is a limitation and not total exclusion clause, so it may be reasonable but there are persuasive arguments to the alternative. Construction, very wide terms, all damage howsoever caused. Has the damage been caused by negligence? This is why you need to specify at the outset what the breach is to improve your logic in the argument and show planning of your answer. If you suggested this then you can legitimately consider Canada Steamship v R but if you did not and instead decided to deal with this in relation to a breach of the implied terms ss.9 and 10 CRA then there is no need to discuss that here. As it is a limitation clause, the courts are more flexible in applying the contra proferentem test: Aisla Craig. So it may be that the common law methods of dealing with exclusion and limitation clauses will not help K. Sadly, some s

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