BUSINESS LAW

Law of Contract
Chapter 3.5 - Contents of a Contract
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Learning Outcome
• Able to understand the significance and importance of
terms
• What are conditions and warranties?
• What are exemption clauses?
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Introduction
• CA 1950 does not contain any provision which
deals specifically with the contents of a contract
• Contents of a contract are TERMS
• The terms of a contract are its contents and it is
these that spell out the rights and obligations of
the parties under the contract
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CONTENTS OF A CONTRACT
L-4-010

THE RIGHTS & OBLIGATIONS OF

THE PARTIES ARE
DETERMINED BY THE TERMS
OF THE CONTRACT
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Express Terms
• A term is express if it has been specifically agreed upon
by parties to a contract, and it may be either oral or in
writing or of both
• Identification of express terms is relatively straightforward
• If no documents exist, it becomes necessary to look back
at the negotiations conducted by the parties and
determine which oral statements were intended by the
parties to operate as terms
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Express Terms
• The express terms of a contract are those provisions
specifically agreed to by the parties
• They may relate to matters such as price, quantity, quality,
size, colour or delivery date
• These specifications may be agreed to wholly by word of
mouth, they may be set forth entirely in a written
document or they may be found in a combination of an
oral agreement and a writing
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Implied Terms
An implied term is a term that the parties have
not specifically included in the contract or even
discussed in the negotiations leading up to that
contract

Terms may be implied by:

• Custom and usage pertaining to a particular type of
transaction
• Statutory provisions; and
• The courts, based on the intention of the parties
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Implied Terms
 Examples of statutes which provide that
certain terms are to be implied into particular
contracts are: -
 The Sale of Goods Act 1957
 The Hire-Purchase Act 1967
 National Land Code 1965
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SOME IMPLIED STATUTORY TERMS

GOODS OF MERCHANTABLE
QUALITY

IMPLIED
SELLER
GOODS FIT HAS TITLE
TERMS IN
FOR PURPOSE TO THE
SOGA
GOODS

GOODS CORRESPOND TO THEIR

DESCRIPTION
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Implied Terms
 The court will imply a term in a contract when the
implied term appears to be inconsistent with the
intention of the parties
 The courts will imply terms into a contract for a
number of reasons: -
 The courts are only too aware that many contracts are drafted
in haste with insufficient attention to detail
 There is the public policy interest in upholding and supporting
commercial contracts generally, which has made the courts
willing to imply terms into contracts so as to give life to the
presumed intention of the parties. The courts have been
willing to imply a term into a contract where it is necessary to
give business efficacy to the contract and where the term
implied represents the obvious, but unexpressed, intention of
the parties
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Conditions and Warranties

• the def can be found in the Sale of Good Act 1957
• Sect 12(2) “A condition is a stipulation essential to the
main purpose of the contract, the breach of which give
rises to a right to treat the contract as repudiated”
• S12 (3) SOGA - a warranty is a stipulation collateral to
the main purpose of the contract, the breach of which
give rise to a claim for damages but not a right to reject
the goods and treat the contract as repudiated
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CONDITION WARRANTY

VITAL TERM OF THE LESSER TERM OF

CONTRACT THE CONTRACT

BREACH - BREACH - CONTRACT

CONTRACT MAY BE MAY NOT BE
REPUDIATED REPUDIATED

AND/OR SUE FOR ONLY SUE FOR

DAMAGES DAMAGES
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Conditions and Warranties

 Poussard v Spiers (1876)

Madam Poussard agreed to sing in an opera for
the opening and subsequent days. D hired an
alternative where upon Madam Poussad sued D
for breach of contract when she missed the
opening night
Held: Failure to sing for the opening night
amounted to a breach of a condition of the
contract which entitled D to treat the contract as
discharged.
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Conditions and Warranties

 Bettini v Gye (1876)
An opera singer was engaged for a series of
performances under a contract by which he had to
be in London for rehearsals 6 days before the
opening. He arrived 3 days before the opening due
to illness. D hired an alternative and treated the
contract as discharged.
Held: The rehearsals were merely subsidiary to the
main contract which was the singing for the opening.
It was a warranty breach of which entitled D to
damages only. D had wrongfully repudiated the
contract and was therefore in breach of the contact
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Conditions and Warranties

 Tests to distinguish a condition from a warranty: -
 Whether or not a term goes to the root of a contract
 The relative importance of the term to a party
 A party would not have entered into the contract unless assured of
strict compliance with the term and the party in breach was aware of
this, it would be considered a condition
 Whether consequences of breach are serious – innominate terms
 This third test involves a consideration of all the relevant factors
including the consequences of the breach
 This test recognises that the pre-classification of a term as either a
condition or warranty may, in certain circumstances, be inappropriate
 For example, if a term is regarded as a condition, it will upon any
breach give rise to a right to rescind the contract regardless of the
fact that the innocent party may have suffered little or no damage as
a result of the breach (Hong Kong Fir Shipping Co Ltd v Kawasake
Kisen Kaisha Ltd)
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SOMETIMES IT’S NOT POSSIBLE TO DECIDE AT THE

BEGINNING OF A CONTRACT HOW IMPORTANT A
TERM IS - THAT MAY ONLY BE SEEN FROM THE
CONSEQUENCES OF THE BREACH OF THAT TERM

CONDITION WARRANTY

INNOMINATE TERM
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CONDITION WARRANTY

IF THERE IS A IF BREACH IS
MATERIAL BREACH - IMMATERIAL-
REMEDIES THE SAME REMEDIES THE SAME
AS FOR A CONDITION AS FOR A WARRANTY

INNOMINATE TERM
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INNOMINATE TERM
HONG KONG FIR SHIPPING CO. LTD. v KAWASAKI
KISEN KAISHA LTD. L-4-095

FACTS: P SHIPOWNERS CHARTERED A SHIP TO D

FOR 2 YEARS STATING IT WAS SEAWORTHY - IT
WASN’T & SPENT 20 OF FIRST 30 WEEKS UNDER
REPAIRS - D REPUDIATED CONTRACT

HELD: D NOT ENTITLED TO REPUDIATE CONTRACT

AS THE EFFECT OF THE BREACH WAS IMMATERIAL
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EXEMPTION CLAUSES

LIABILITIES
RIGHTS

CUT SOME OF
THE LIABILITIES
OUT OF THE
CONTRACT
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Exemption Clauses

 Exemption clauses are terms in a contract by

which a party inserting them seeks to exclude or
limit all or some of his liability for the breach of
the contract or for some tort
 A party may, for instance in a sale of goods
contract, seek to exclude all implied warranties
or, in a services contract, limit liability for
negligence
 Exemption clauses come in two forms: -
 Exclusion (excluding) clauses
 Limiting clauses
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Types of Exemption Clauses

 An exclusion clause seeks to exclude liability

for breach of contract or other duty
completely, e.g. “The company shall not be
liable for any damage to or loss whatsoever
and howsoever arising of goods left with us
for cleaning.”
 By accepting the clause, the innocent party
effectively gives up the right to claim
damages
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Types of Exemption Clauses

 A limiting clause differs from an exclusion

clause in that it does not exclude liability
entirely; it merely limits the liability of a party
for breach of a contract or for a tort to a
specified monetary sum, e.g. “In the event of
damage to or loss of the articles left with us for
cleaning, our liability shall not exceed RM500
per article.”
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Standard Form Contracts

• The party seeking to impose the limitations

on liability is often in a superior position such
that it may be able to dictate the terms of the
agreement
• This is particularly evident in the use of
“standard form contracts”
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Standard Form Contracts

 Standard form contracts are documents drafted, usually with legal advice,
by the party in the superior bargaining position and contain the terms on
which it is prepared to deal
 If the other party is not willing to deal on those terms, the stronger party will
not deal with it at all
 Very often an entire industry adopts similar standard form contracts that
seek to exclude or limit various types of liability
 Consumers in such instances are often either unaware that they are to bear
the risk limited or excluded by the exemption clauses or they are simply in
no position to object to such agreements
 Malaysia has no specific legislation governing the use of exemption clauses
 The result is that, generally, the courts apply the common law in dealing
with exemption clauses
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Judicial Approaches to EC
 The courts have tried to address some of the imbalances
that flow from the use of EC in situations of unequal
bargaining power
 Rules of construction have been adopted requiring that
clauses seeking to exclude or limit liability be set forth in
clear and unequivocal terms
 Further, the legal effect given to such clauses has
served to narrow the scope of their application
 Thus, in examining EC, careful attention must be given
to: -
 Whether the EC was effectively made part of the contract and
 Construction
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Incorporation of EC into a Contract

 Incorporation into the contract by

signature
 Where the exclusion clause is contained in a
document which has been signed, it will
automatically form part of the contract.
 The signer is presumed to have read and
understood the significance of all the terms
contained in the document.
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Incorporation of EC into a Contract

L'Estrange v Graucob (1934)

The defendant sold to the claimant, a shopkeeper, a vending
machine under conditions which excluded the claimant's normal
rights under the Sale of Goods Act 1893. The claimant signed
the document without reading a clause which excluded the
normal conditions and warranties as to the machine's fitness.
The machine was defective.

Held: the exclusion clauses were binding on the claimant since

she had signed them. It was not material that the defendant had
given her no information of their terms nor called her attention to
them.
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SOME BASIC RULES ON EXCLUSION CLAUSES

MUST BE A TERM OF THE CONTRACT

RULE 1

EXCLUSION CLAUSES IN A
SIGNED DOCUMENT - BINDING
ON SIGNATORY IRRELEVANT THAT THE
RULE 2 SIGNATORY HAS NOT READ
(DOCUMENT NEED NOT BE THE TERMS OF THE
COMPLETE RECORD OF THE DOCUMENT
CONTRACT)

NOT APPLICABLE IF DOCUMENT

APPARENTLY NON-
Murray
CONTRACTUAL OR SIGNATURE
OBTAINED THROUGH FRAUD
OR MISREPRESENTATION
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Incorporation of EC into a Contract

 Exception to the rule that a signature binds

 Exemption clause obtained through duress or
undue influence
 Unreasonable restrictive exemption clauses
 Misrepresentation about the scope of an
exemption clause
 Non est factum
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Misrepresentation about the scope

of an exemption clause
 If the party relying on the exclusion clause
misleads the other as to the effect of the
clause, the exclusion clause is invalid
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Misrepresentation about the scope

of an exemption clause
Curtis v Chemical Cleaning & Dyeing Co (1951)
Mrs. Curtis took a wedding dress to be cleaned by the
defendants. She signed a piece of paper headed
'Receipt' after being told by the assistant that it
excludes the cleaners from liability for damage to
beads & sequins. The 'Receipt' in fact contained a
clause excluding liability 'for any damage howsoever
arising'. When the dress was returned it was badly
stained. It was held that the cleaners could not escape
liability for damage to the material of the dress by
relying on the exclusion clause because they had
mislead Mrs. Curtis as to the extent of the disclaimer.
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Non est factum

 Meant to protect the illiterate and the blind

 Requirements: -
 The individual signing was under some permanent or
temporary disability;
 He took all reasonable precautions to ensure that he
was signing what he thought he was signing; and
 There was a radical difference between what he
signed and what he thought he was signing
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SOME BASIC RULES ON EXCLUSION CLAUSES

IF THE EXCLUSION CLAUSE IS IN AN

RULE 3
UNSIGNED DOCUMENT, IT IS NOT
EFFECTIVE UNLESS THE DOCUMENT
IS CONTRACTUAL OR SUFFICIENT
NOTICE OF THE CLAUSE HAS BEEN
GIVEN TO THE OTHER PARTY

VOUCHERS, RECEIPTS & TICKETS

HAVE GENERALLY BEEN REGARDED
AS NON-CONTRACTUAL
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Incorporation of EC into a Contract

 Incorporation by notice
 The clause must be sufficiently communicated
 This means that notice must be clearly printed
 It also means that the document on which it is
stated must be one which an ordinary person
would read for an exclusion clauses
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Incorporation by notice
Chapelton v Barry UDC
Mr. Chapelton hired 2 deck chairs for 3 hours from the defendant
council. He received 2 tickets which he put into his pocket
unread. Each ticket contained a clause excluding the defendants
from liability for 'any accident or damage arising from the hire of
the chair'. Mr. Chapelton was injured when the chair he sat on
collapsed. He successfully sued the council. The Court of Appeal
held that a reasonable man would assume that the ticket was a
mere receipt & not a contractual document which might contain
conditions. The defendants had not succeeded in incorporating
the exclusion into their contract with Mr. Chapelton.
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Incorporation by notice
 Even if the document may be regarded as contractual,
the person seeking to rely on the exclusion clause must
show that reasonable steps have been taken to give
notice of the clause to the other contracting party. What
amounts to reasonably sufficient notice will vary
according to the nature of the clause. As Denning LJ
commented in Spurling v Bradshaw, ' the more
unreasonable a clause is, the greater the notice which
must be given. Some clauses would need to be printed
in red ink with read hand pointing before the notice could
be held to be sufficient'.
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SOME BASIC RULES ON EXCLUSION CLAUSES

NOTICE OF EXCLUSION CLAUSES

RULE 4
MUST BE GIVEN AT OR BEFORE
THE TIME THE CONTRACT IS
MADE (NOT AFTER)
L-4-220
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Incorporation by notice

 An exclusion clause must be stated before the

acceptance. If it comes after then it is invalid.

Olley V Marlborough Court Ltd.(1949)

A couple hired a room in a hotel and later in the room
they saw a notice excluding liability for loss of baggage
by the Hotel. The luggage was stolen.
Held: The acceptance came when the hotel accepted the
offer to hire the room. The exclusion clause was invalid
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Incorporation by notice
Thorton v Shoe Lane Parking (1971)
The plaintiff wanted to park his car in a car park. He saw a sign
'Car Park' & a notice board with an exclusion clause excluding
liability for personal injuries. The notice board was obstructed by
some trees. Later he drove in & received a ticket from an
automatic machine. The ticket contained similar exclusion clause
which he did not read. Later he was badly injured in the car park
because his car had been stacked.

Held: The notice board was obstructed & therefore the exclusion
clause was not valid. The exclusion in the ticket came too late.
The offer was the car park sign. The acceptance was when he
drove in for which he received a ticket.
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KNOWLEDGE OF EXCLUSION CLAUSES READILY

INFERRED IF PARTIES HAVE PREVIOUSLY DEALT WITH
EACH OTHER
RULE 5
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Incorporation by notice

 Previous course of dealings. An exclusion

clause may be binding even though it has
not been included in the contract in
question, if a previous course of dealings
between the parties on the basis of such
terms can be established. This principle has
been accepted more readily in commercial
contracts than in consumer transactions.
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Incorporation by notice
J Spurling v Bradshaw (1956)
Having dealt with a company of warehousemen for many years,
the defendant gave it eight barrels of orange juice for storage. A
document he received a few days later acknowledged receipt
and contained a clause excluding liability for damage caused by
negligence. This clause had been included in the past. When he
collected the barrels they were empty and he refused to pay.

Held: Even though the exclusion clause came too late, D had
been aware of the exclusion clause in the course of previous
dealings. Since D had received similar documents on previous
occasions and he was now bound by the terms contained in
them
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Incorporation by notice
 Where the seller uses his standard forms and also accepts the
buyer's acknowledgement from which contains exclusion clauses
then the buyer's clauses are incorporated into the contract.

Butler Machine Tools v Ex-Cell-O Corp

Seller sent his form to buyer for acknowledgement and buyer
sent seller his own forms for acknowledgement. Both contained
exclusion clauses which were supposed to prevail to be accepted
against each other.
Held: The buyer's clauses were properly incorporated.
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Construction of Exemption
Clause
 Where a clause is duly incorporated into a contract, the
court will proceed to examine the words used to see if
the clause covers the breach and loss which has actually
occurred. The main rules of interpretation used by courts
are as follows: -
 Strict Interpretation
 The contra proferentum rule
 Repugnancy
 The clause must be comprehensively drafted to cover the liability
 Four Corners or Deviation Rule
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Strict Interpretation

 An exempted clause will be effective only if

it covers the kind of liability which has in fact
arisen
 A clause, for example, which excludes
liability for a breach of warranty will not
provide protection against liability for a
breach of condition. (Baldry v Marshall)
 THE AMBIGUITY (CONTRA PROFERENTUM) RULE

EXCLUSION CLAUSES ARE TO BE

INTERPRETED STRICTLY AGAINST THE
PARTY THAT HAS INSERTED THEM IN THE
CONTRACT AND IS NOW RELYING ON THEM
AGAINST THE OTHER PARTY

Hollier v Hambler Motors (1972)

A workshop had by previous course of dealings with the claimant
excluded liability for damage to vehicles by fire. However, it did not state if
this included both by accident or negligence.
Held: It did not include by negligence. Since the fire was caused by
negligence, the owner of the workshop was liable to the owner of the
damaged car.

46
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Repugnancy

 Under this rule, a court can strike out an

exclusion clause which is inconsistent with
or repugnant to the main purpose of the
contract. (J Evans & Sons (Portsmouth) Ltd.
v Andrea Merzarlo Ltd. )
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The clause must be comprehensively

drafted to cover the liability
Photo Productions v Securicor (1980)
D supplied a security guard for P's factory.
Owing to the guard's negligence, P's factory
was destroyed by fire. D had included an
exclusion clause disclaiming liability for any
negligence by its staff.
Held: The clause was valid.
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Third Parties Not Protected

 According to the doctrine of privity of contract a

person who is not a party to a contract can neither
benefit from the contract nor be made liable under
it
 So while a duly incorporated exclusion clauses
may protect a party to a contract it will not protect
his servants or agents
 They are strangers to the contract & so cannot
take advantage of an exclusion clause (Scruttons
Ltd. v Midland Silicones Ltd.)
 "FOUR CORNERS" OR "DEVIATION" RULE

EXCLUSION CLAUSES ONLY EXCLUDE LIABILITY FOR ACTS WITHIN

THE FOUR CORNERS OF THE CONTRACT

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Exemption Clause
 Can one exclude liability for loss or damage
negligently caused?
 Exclusion clauses are only controlled in a limited
way by the Consumer Protection Act 1999 (CPA)
 Under s 71 of CPA, a producer cannot exclude
liability for negligence caused wholly or partly by a
defective product
 Thus, if a defective product causes a person death
or personal injury, the producer is liable regardless
of what the contract says
 Unfortunately, the CPA only applies to consumer
contracts.
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Exemption Clause

 Admittedly, this area of law can be confusing

 A supplier can limit or exclude liability more easily in a
non-consumer contract
 While there is some control on exclusion clauses in
consumer contract, we must determine whether the
contract falls within the scope of the CPA.
 To summarize, if we assume that an exclusion
clause is incorporated into a contract and written in a
clear and unambiguous manner.
Q&A