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Birmingham Law School General Principles of English Law Contract Law Lecture 4 Terms & Content

LECTURE HANDOUT Please read this handout in conjunction with your own lecture notes and the PowerPoint slides from the lecture. Readings for terms and contents of a contract: Marson, J (2011) Business Law, second edition, OUP: Chapter 10 and 11. Adams, A (2010) Law for Business Students, sixth edition, Pearson: Harlow, Chapter 6 (pp.100-123) Lecture Overview In this lecture we are going to look at what is actually in a contract. Were going to look at the terms of a contract and the content of a contract. This lecture will be split into three parts: 1. Types of Terms 2. Terms in a Contract 3. Limitation and Exclusion Clauses Learning Objectives Following this lecture you should be able to: Discuss the varying contractual terms and their legal effect. Recognise the difference between express and implied terms. Be able to assess whether limitation/exclusion have a valid place in a given contract.

PART 1: OVERVIEW TYPES OF TERMS When parties are making or negotiating a contract they are likely to make a number of statements. Mere puffs extravagant claims for the thing being sold; this tastes sensational. Representations pre-contractual statements intended to persuade the other party to enter the contract. Terms statements incorporated into the contract

2 Legal effect of these statements Mere puffs NO legal effect. Representations if untrue then the injured party will be able to rescind contract and possibly claim damages. But NOT if misrepresentation was innocent. Terms person breaking it will be in breach of contract. It depends on what kind of term it is as to what the injured party will receive.

TERMS a) A condition a term which is vital or fundamental to the performance of the contract. Failure to perform a condition renders contract meaningless. A breach of a condition allows injured party to repudiate contract & claim damages.

SEE: Poussard v Spiers and Pond (1876) 1 QBD 410 b) A warranty terms which are less vital; minor terms. Failure to perform a warranty does not affect contract fundamentally. Breach of a warranty is not repudiatory: innocent party must carry on with contract but may claim damages for loss resulting from the other partys breach.

SEE: Bettini v Gye (1876) 1 QBD 183

c) Innominate terms intermediate terms. These terms are broadly worded to cover a variety of possible breaches. Court has to decide whether the term will be treated as a condition or warranty. Remedy not prescribed in advance simply by whether the term breached is a condition or warranty, but depends on circumstances of the breach. SEE: Hong Kong Fir Shipping Co. v. Kawasaki Kisen Kaisha (1962) Court of Appeal; and Cehave NV v. Bremer Handelgesellschaft (The Hansa Nord) (1975) All three of the above terms can be found in a contract. However, its important to distinguish between two ways in which these terms might be found in a contract. The terms might be expressed, or they might be implied. PART 2: OVERVIEW CONTENTS OF A CONTRACT Terms can be express or implied Express terms: specifically communicated by the offeror; spelt out/expressed by the parties.

3 Implied terms: terms which are read into the contract & automatically part of contract without need for parties to mention them. Terms may be implied by: i. ii. iii. STATUTE CUSTOM COURTS


Terms implied by statute

The Sales of Goods Act 1979 (as amended by the Sale & Supply of Goods Act 1994) s13: where goods are sold by description there is an implied condition that the goods correspond with that description; s14(2): where the seller sells in the course of a business the goods must be of satisfactory quality, unless the defect is drawn to the attention of the buyer or any examination the buyer made should have revealed it; s14(3): where the seller sells in the course of business & the buyer makes known a purpose for which she wants the goods, there is an implied condition that the goods are reasonably fit for such a purpose.


Terms implied by custom

In many trades it is customary for certain practices to prevail in performance of a contract.

N.B. custom cannot override express terms of a contract.

iii. Terms implied by the courts On occasions the courts will presume the parties intended to include a term not expressly stated. The courts will imply such a term to give business efficacy to the contract.

SEE: The Moorcock (1889) 14 PD 64 and [1886-90] All ER rep 530 Bowen LJ: I think if they let out their jetty for use they imply that they have taken reasonable care to see whether the berth, which is the essential part of the use of the jetty, is safe, and if it is not safe, and if they have not taken such reasonable care, it is their duty to warn persons with whom they have dealings that they have not done so. Parol Evidence Rule If all the terms of a contract are in writing, then there is a strong presumption that no evidence supporting a different oral agreement will be permitted to vary those terms. SEE: Jacobs v. Batavia and General Plantations Trust Ltd [1924] 2 Ch. 329

But the parol evidence rule is only a presumption and can be REBUTTED. Oral evidence can be introduced if it is shown that the document was not intended to set out all the terms agreed on by the parties.

PART 3: OVERVIEW LIMITATION AND EXCLUSION CLAUSES When we look at the content of most, if not all, contracts, we tend to find some terms that are known as limitation clauses. These are terms that limit liability in the case that the party does not or cannot fulfil its side of the bargain. So, for example, if you book a train ticket the train company might limit its liability for delays, and say that it will only pay a fixed rate of compensation. Alternatively to limitation clauses, we have exclusion clauses. These are clauses that seek to exclude liability altogether. An obvious example is the phrase found in cloakrooms in clubs or bars or restaurants: the owners of this establishment do not accept liability for any damage or loss to items left here. Before looking at the content of limitation clauses, though, we need to be clear about when limitation clauses and exclusion clauses can be invoked. They have to satisfy certain criteria before they can be effective. Exclusion clause must meet 3 criteria: a) must be incorporated in the contract; b) must be clear and unambiguous; c) Statutory control of exemption clauses.

a) Exclusion clause (E.C.)must be incorporated into the contract E.C. must be properly put into contract before or at time of contract.


Incorporation by signature: a person is bound by what they sign, whether or not they have read the document or understood it. Incorporation by notice (e.g. sign or poster): Document bearing E.C. must be integral part of contract; Notice must effectively be brought to attention of other party; Other party must be given sufficient notice of E.C before contract is made so can decide if still want to make a deal.


SEE: Olley v Malborough Court Hotel [1949] 1 KB 532.

Sufficiency of notice is a matter of fact BUT the more onerous the exclusion, the greater the degree of notice required. SEE: Interfoto Picture Library v Stiletto Programmes Ltd [1988] QB 433


Incorporation by custom: where parties have had previous dealings using E.C., that clause may be used in later contracts. But it has to be shown that other party knew of previous E.C.

b) E.C. must be clear & unambiguous Words of exclusion must be clear & explicit. Courts will give words their ordinary & usual meaning strictly interpreted. Contra proferentum rule: if there is any ambiguity as to meaning of exclusion clause, courts will construe it in a way unfavourable to the person who put it in the contract. Clause is construed contra (against) proferentum (the party who offered it).

SEE: Andrew Bros. (Bournemouth) Ltd. v Singer & Co. [1933] All ER 479

Repugnancy OR Main Purpose rule: if E.C. is in direct contradiction to the main purpose of the contract it will have NO effect because it undermines the very core of the contract and will be struck out.

BUT despite these limitations, it doesnt mean that an E.C. that is onerous or repugnant may never be used. In such circumstances even clauses that try & exclude liability for a fundamental breach of contract may NOT be invalid. SEE: Photo Production Ltd v Securicor Transport Ltd [1980] AC 827

c) Statutory control of E.C. Unfair Contract Terms Act 1977: (really targets unfair exclusion clauses rather than general unfair contract terms) Negligence: cant make clauses to exclude liability for death or injury resulting from negligence (ss2 & 5) E.C. relating to other damage caused by negligence will only be enforced if satisfy a reasonableness test.

Contract: statute applies to consumer & non-consumer transactions BUT only applies to business activity. Business activity broadly defined in s14. E.C. which seeks to avoid liability for breach of contract only valid if meets reasonableness test. Implied terms in contracts for sale or hire of goods CANNOT be excluded in a consumer contract [s6(2)] and in a non-consumer contract, any restriction on these implied terms must meet reasonableness test [s6(3)] Reasonableness: fair & reasonable having regard to the circumstances s11 & schedule 2.

The Unfair Terms in Consumer Contracts Regulations 1999.

Only applies to consumer contracts not to business contracts. Aim: to control inclusion of unfair terms into contracts where terms havent been individually negotiated. Unfair term: If, contrary to the requirement of good faith, it causes a significant imbalance in the parties rights and obligations arising under the contract, to the detriment of the consumer. Regulation 5 (1) Unfair term not necessarily destroy contract: unfair term not be binding on consumer but contract will still bind parties if it is capable of continuing without the unfair term. Reg. 8.

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

Either: Tuesday (10-12: AW WG 5) or Friday (4-6: Howarth 101).