What are Terms of the Contract?-Terms or Representations
Once a court has decided as matter of evidence, what statements (oral or in writing) were made by the parties, the next step is to decide what is the legal effect of each statement. In deciding this question the courts ask whether the statement is part of the contract (and therefore binding) or are they outside the contract. To be contractually binding they need to be promissory in nature in which case they are called terms of the contract. Otherwise the statement while designed to induce or encourage the other party to enter the contract, does not form part of the contract and are not legally binding. These statements are called representations or ‘mere’ representations.Say for example, A sells his business to B. The price, what stock, is included in the price, when B is to take over the business are all terms of the contract. Suppose though that in the course of the negotiations A said to B ‘I’ve been in this business for 10 years’ then it is highly likely that such a statement will only be regarded as a representation, if it was relevant at all. The difference between a term and a representation is reasonably clear in this case but frequently the business line is quite blurred. What if, in the example above A said to B that the turnover of the business next year ‘will be X’, assuming that X is higher then the current figure. Would that be a term of the contract? For a case example of the difference between a term and a mere representation see Oscar Chess Ltd v Williams.
Test and Indicative Factors To decide between a term and a representation, the courts apply an objective test of the intention of the parties. The test is whether a reasonable person in the position of the parties would have understood that the statement in question would be enforceable. The test is similar to that encountered in the area of intention to create legal relations. As mentioned above, the dividing line between the term and the mere representation is often quite unclear. To assist here there are a number of indicative factors developed by the courts which are useful, however it goes without saying that these factors are not elements. They are:
- How closer in time to the formation of the contract was the statement made? The closer in time the more likely that the statement was a term.
- If the statement was oral was it then included in the subsequent written contract if there was one? A failure to do so will be taken as evidence that the intention was against an intention to regard the matter as a term. Of course if the contract was wholly written then the law of audience would exclude the oral term so this factor will only be relevant where the contract is partly written and partly oral.
- Did one party have special knowledge or skill relevant to the contract and on which the other party was entitled to rely? This could apply to our example above of A selling his business to B. The seller is likely to have a much greater knowledge of the particular business than the buyer.
- Does one party indicate that the statement was of importance to them. In one case a person buying a car made repeated requests of the seller to assure him that the car was roadworthy. These requests were interpreted by the court to indicate that the roadworthiness of the car was critical to the buyer and in the circumstances was regarded as a term of the contract.
Misrepresentation
If a statement made by a party is a representation not a term this does not mean that the other party has no legal recourse. If the representation is false and it induces the innocent person to enter the contract then that person has remedy in misrepresentation. This area is examined in detail in the next module. For the moment it should be realized that while a remedy might be available for misrepresentation, the right to sue does not arise out of breach of contract because the representation is not part of the contract. Contrast the situation where a person fails to fulfill a term of the contract, then the other party sues on the contract.Puffs
At this point a further distinction needs to be made. You will recall in the previous module that a puff was distinguished from an offer. A puff was an exaggerated statement not regarded as having any legal consequences. So even if the statement is wrong the person making the statement will not be liable. In the sale of the business by A to B, a puff would be statement for A ‘You would have to go to Bourke to get better value for your money’ In the present context a puff is distinguished from a representation which, if false could give rise to a legal remedy.Implied Terms
So far we have been discussing the legal effect of statements which have been made by the parties, some of which are classified as terms. Such terms are called express terms. However there are terms which are not spoken of by the parties at all but are still present in the contract. They are implied terms. An example of implied terms would be in a lease where the parties discuss the rental period of the lease and a few other basic details but that is all. Later on there may be a question of who is to pay for the repairs to the premises – a matter which was not spoken of at the outset. This issue is likely to be dealt with by a court implying a term which covers the problem. In this instance the court draws on what is the custom or accepted position within a trade, or, in this case the well known legal relationship of landlord and tenant.Implied terms are likely to be read into a contract by the court in these circumstances:
(a) because of prior dealings between the parties, see Hillas v Arsoc (1932) 147 LT 503:The appellant company had agreed to buy from Arcos Ltd, ’22,000 standard of softwood goods of fair specification over the season 930’. This agreement was in writing and included a term giving the appellant an option to buy a further 100,000 standard during the season, 1931. The question for the court was whether this option agreement was enforceable. The Court of Appeal held that it was not, as it regarded the alleged option as nothing more than an agreement to make an agreement, which is not an enforceable agreement. This view was based on the number of things left undetermined: kinds, sizes and quantities of goods, times and ports and manner of shipment. On appeal however, the House of Lords, in a significant shift in attitude, rejected the view of the Court of Appeal. That view would have excluded the possibility of big forward contracts being made because of the impossibility of specifying in advance the complicated details associated with such commercial contracts. The House of Lords approached the interpretation of the option agreement by reference to the previous year’s dealings between the parties. The house reaffirmed the view that the parties, being business men, ought to be left to decide with what degree of precision it is essential to express their contracts, if no legal principle is violated.
(Source: Vermeesch & Lindgren 1995. p 202)
(b) on the basis of custom or trade usage, so long as the custom is certain, well known and reasonable. An example of custom could be the lease situation mentioned above. When we say well
known, this does not mean that it must be known to the parties – it must be well known within the trade.
(c) To give the agreement some business efficacy, see The Moorcock (1889) 14 PD 64.
(d) Statute may also imply terms, to ‘flesh out’ the terms expressed by the parties. The Sale of Goods Act of 1893 important such statute. (See the statutory interpretation problem in the introductory book for an example of implied terms.) Other statutes may also imply terms into specific types of contract, for example hire purchase agreements or residential tenancy agreements.
While the different legal results are clear enough, separating conditions from warranties at the outset is not always easy. In this course you are only expected to know the fundamental distinction between them and the different results that flow. However you should be aware of two cases that bring out the distinction. These are Bettini v Gye and Associated Newspapers v Bancks.
One may ask why do we have to go through this tortuous path of the common law analysis when construing a contract? These are two reasons:
Step 1; Decide whether the contract is oral, written or a combination of the two.
Step 2; If it is wholly written then apply the personal evidence rule. A good indication that the rule is relevant is a clause in the contract which state that the parties agree that no oral statements will make the written terms.
Step 3;Apply the exceptions to the PER. Would the parol evidence: Explain a custom or trade usage; Identify a party to the contract or the subjected matter of the contract; Reveal that entry into the written contract was subject to a condition yet to be fulfilled; Show a collateral; or Prove that the written part was not the full contract.
Step 4 'Check whether there is collateral contract in existence. While this possibility is covered in the exceptions to the PER, it is necessary to consider the issue on its own. Remember that the courts will not readily find a collateral contract and there are three prerequisites: The statement which forms the collateral contract must be promise and otherwise fulfill the requirements of a contract. The party to whom the statement is made must rely upon the statement in entering the main contract. The best guide to a collateral is where one party hesitates before signing a written contract but eventually does so on the basis of a promise made by the other. The collateral contract must be consistent with the main contract.
Step 5; Categories the statements that are in dispute in three ways:Puffs, (which can be rejected as having no legal significance)
1. timing;
2. oral statement followed by writing;
3. special skill or knowledge of one party; and importance of the statement. At this point in your answer you should mention that a representation will only give rise to liability if it induces the contract and is false.
Step 6; Assuming that the statement in question is a term, apply the condition/warranty distinction. Remember a condition, if breached, allows the innocent party to rescind the contract and sue for damages, however an unfulfilled warranty only means damages.
Step 7; Check to see if there are any implied terms. In this course you are only expected to recognize, in a problem situation, terms that might be implied through prior dealing between the parties. You need only to be aware that in theory, terms can be implied through custom, to give business efficacy and in some instances by statute.
known, this does not mean that it must be known to the parties – it must be well known within the trade.
(c) To give the agreement some business efficacy, see The Moorcock (1889) 14 PD 64.
(d) Statute may also imply terms, to ‘flesh out’ the terms expressed by the parties. The Sale of Goods Act of 1893 important such statute. (See the statutory interpretation problem in the introductory book for an example of implied terms.) Other statutes may also imply terms into specific types of contract, for example hire purchase agreements or residential tenancy agreements.
What Weight should be given to the Terms?
Assuming that we have separated out the terms from representations, the next step is to decide what weight to give the terms. Here the law breaks terms into two types: conditions and warranties. The reason for this is that different remedies are available for these two types of terms.While the different legal results are clear enough, separating conditions from warranties at the outset is not always easy. In this course you are only expected to know the fundamental distinction between them and the different results that flow. However you should be aware of two cases that bring out the distinction. These are Bettini v Gye and Associated Newspapers v Bancks.
One may ask why do we have to go through this tortuous path of the common law analysis when construing a contract? These are two reasons:
- Parties may have been guilty of misleading or deceptive conduct not being merely a simple failure to abide by a term of a contract. For example a party might undertake to carry out a certain task in a contract as the opera singe did in Bettini v Gye. Her failure to arrive in London 6 days before the engagement was not misleading or deceptive conduct, it was simply a breach of contract. So in that case it is still necessary to traverse the term/representation/condition/warranty steps to see what remedy was available to the other party. However, let us assume that the singer while being interviewed for the position, had told the other party that she had sung in certain famous music halls in Europe which later turned out to be false. So long as the other party relied on the misrepresentation then a remedy would be granted. That remedy could be rescission and damages which is equivalent to breach of condition at common law.
Contract has its origin in common law.
Summary of Process in Construing a ContractStep 1; Decide whether the contract is oral, written or a combination of the two.
Step 2; If it is wholly written then apply the personal evidence rule. A good indication that the rule is relevant is a clause in the contract which state that the parties agree that no oral statements will make the written terms.
Step 3;Apply the exceptions to the PER. Would the parol evidence: Explain a custom or trade usage; Identify a party to the contract or the subjected matter of the contract; Reveal that entry into the written contract was subject to a condition yet to be fulfilled; Show a collateral; or Prove that the written part was not the full contract.
Step 4 'Check whether there is collateral contract in existence. While this possibility is covered in the exceptions to the PER, it is necessary to consider the issue on its own. Remember that the courts will not readily find a collateral contract and there are three prerequisites: The statement which forms the collateral contract must be promise and otherwise fulfill the requirements of a contract. The party to whom the statement is made must rely upon the statement in entering the main contract. The best guide to a collateral is where one party hesitates before signing a written contract but eventually does so on the basis of a promise made by the other. The collateral contract must be consistent with the main contract.
Step 5; Categories the statements that are in dispute in three ways:Puffs, (which can be rejected as having no legal significance)
Representations Terms
To decide between terms and representations apply the 4 indicative factors:1. timing;
2. oral statement followed by writing;
3. special skill or knowledge of one party; and importance of the statement. At this point in your answer you should mention that a representation will only give rise to liability if it induces the contract and is false.
Step 6; Assuming that the statement in question is a term, apply the condition/warranty distinction. Remember a condition, if breached, allows the innocent party to rescind the contract and sue for damages, however an unfulfilled warranty only means damages.
Step 7; Check to see if there are any implied terms. In this course you are only expected to recognize, in a problem situation, terms that might be implied through prior dealing between the parties. You need only to be aware that in theory, terms can be implied through custom, to give business efficacy and in some instances by statute.
Social Plugin