Understanding Contractual Terms: Pre-contract Representations vs. Terms, Lecture notes of Administrative Law

Download Understanding Contractual Terms: Pre-contract Representations vs. Terms and more Lecture notes Administrative Law in PDF only on Docsity! Are statements made pre-contract terms or representations? The first point to address is in relation to statements made at the pre-contractual stage, which are not in the written contract. The difficulty with these statements is that they are often made orally. Do these statements form part of the agreement or not? Generally, the courts will take an objective approach to consider the intentions of the parties. There are a number of guidelines which the courts use in order to ascertain the intentions of parties. Pre-contractual statements can be categorised as one of the following: Puffs Terms Representations A puff A puff is a statement which cannot give rise to legal consequences, as they are never meant to be taken literally and there is no intention to be legally bound. As example of a puff would be an advertisement for a theme park which stated “you will have the time of your life at our theme park”, what if you didn’t have “the time of your life”, would you be able to sue for breach of contract? Evidently, this is a statement not meant to be taken literally, and is an advertising gimmick. The advertisement in Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 was argued to be a puff unsuccessfully. Term or representation? Why does it matter? Both terms and representations provide a remedy for the aggrieved party, therefore, why does it matter which of the two a statement is? The significance is the form of remedy, as the remedies are different for the two. First, it is helpful to define the two. Term: A promise as to the truth of a statement Representation: There is no promise, but the statement induces the making of the contract The ability to claim damages Term: On a breach of a term, there is automatically a right to claim for damages Misrepresentation: A misrepresentation only allows a claim for damages if it can be proven that the statement was made fraudulently or negligently, an innocent representation will not result in a claim for damages (unless there is an exception under Section 2(2) of the Misrepresentation Act 1967, see the misrepresentation chapter for more information). The measure of damages Term: Damages will be based on an expectation measure - the claimant will be put into the position they would have been in had the contract been properly performed Misrepresentation: Damages will be limited - the claimant will be put into the position they were in before the contract was made. It is clear from this that the measure of damages is favourable in the event of a term breaching a contract, as opposed to misrepresentation. However, the ability to recover for damages is slightly different. Term: Damages will be recoverable based on the remoteness rule from Hadley v Baxendale(1854) 9 Exch 341 (see chapter on damages for more information). This test requires that the loss suffered by the claimant was ‘reasonably contemplated’ by the parties Representation: Fraudulent misrepresentation will allow for a claim for all direct loss by the claimant, irrespective of forseeability. In contrast to the right to claim for damages, a representation is much more favourable, as the damage need not be in contemplation of the parties. Therefore, it becomes clear that it is extremely important to the outcome of the case whether a statement is classed as a term or representation, it could be the difference between thousands of pounds in damages. The difference between a term and a representation This section will examine the key differences between a term and a representation, and how the courts will make a decision on the matter. Some presumptions and guiding factors which the courts will consider will be examined, these are as follows: Is the statement in writing? If the individual relying on the statement makes it clear that the statement was of such importance that they would unlikely have contracted without that guarantee, the presumption is that the statement will be a term. This is a two-part test. Is the statement so important that the party would not have entered into the contract but for the statement? Is the above importance clear to the statement maker at the time this statement is made, either by an express statement or it would be clear from the contractual circumstances The case of Bannerman v White(1861) 10 CB NS 844 Party A asked whether sulphur was used in the product he was buying, explicitly stating he was not interested if they included sulphur. He was assured by Party B that there was no sulphur included. This is an example of expressly confirming the importance of a term, therefore, when there was sulphur included, the defendant could rely on this term to claim for breach of contract. The case of Pritchard v Cook & Red Ltd unreported, 4 June 1998 provided a test to determine importance. The question to ask is if whether the statement maker is taking personal responsibility for the statement. How long was the lapse of time between the statement being made and the formation of the contract? The first presumption relating to a lapse of time is that if a party makes a statement, and soon after, the contract is reduced to writing without inclusion of the statement in writing, that statement would not form a term of the contract, and would only be a representation - Heilbut, Symons and Co. v Buckleton [1913] AC 30. In Inntrepreneur Pub Co v East Crown Ltd [2000] 2 Lloyd’s Rep 611, it was stated that the longer the interval between the statement and the contract, there is a greater presumption that the statement is not a term. These presumptions can be rebutted if the parties’ intentions are clear through another means. Could the party relying on the statement have verified it? There are two presumptions which fall under this heading. First, if a statement maker accepts responsibility for the truth of a statement, the statement will be a term. This was seen in Schawel v Reade [1913] 2 IR 81, where Party A were examining a horse, and Party B stated the quality of the horse was fine and they did not need to inspect it. This statement was held to be a term. The second presumption is that where a statement is made, but that party advises or tells the other party to verify that statement, the statement will be a representation, not a term. This is because the statement maker suggests the statement may not be true and he would advise it is confirmed. Ecay v Godfrey(1947) 80 Lloyd’s Rep 286 is good authority for this point. Incorporation of terms Once a statement has been identified as a term of a contract, it is not the case that this will always be binding on the parties; the term must have been successfully incorporated into the contract. Only following incorporation will that term become a part of the contractual obligations. There are three main ways by which this may be done: Signature Notice Previous course of dealings Signature The case of L’Estrange v E. Graucob Ltd [1934] 2 KB 394 outlines the importance of a signature to the contractual document. It is held that if a party signs a document containing contractual terms, they are wholly bound. The terms are incorporated, and it is immaterial whether or not they read the document. This presumption is limited in that the signature will not bind if it is fraudulently obtained or is subject to a misrepresentation, as shown in Curtis v Chemical Cleaning and Dyeing Co [1951] 1 KB 805, where the receipt for a dress excluded all liability for damage. The customer only signed the receipt because the assistant misrepresented the terms as applying to damage to the beads and sequins on the dress. Exam consideration: Aren’t the two decisions in L’Estrange v E. Graucob Ltd and Curtis v Chemical Cleaning and Dyeing Co [1951] 1 KB 805 conflicting? Surely the customer in Curtis should have been bound no matter what as per L’estrange. Consider the commercial difficulties if the Curtis exception did not operate. Notice In order for a term to be incorporated into the contract, the party who it confers obligations upon must be or ought to be aware of its existence. In light of this, there are two requirements. The term must be included in a document in which contractual terms would normally be found There has been reasonable notice of the existence of these terms before or at the time of contracting Documents The most famous case on this matter is Chapelton v Barry Urban District Council [1940] 1 KB 532. In this case, Party A hired deckchairs from Party B. The ticket he was given contained a term exempting the council for liability for any injury in relation to the hiring of those chairs. It was held that the term was not incorporated into the contract, as a ticket was a receipt, and not a contractual document. Here are the two main factors to consider when assessing a document to decide whether it is contractual: What the document is called is not conclusive - the document does not have to be specifically identified as a contract This document must be delivered before the contract or at the time of the contract Grogan v Robin Meredith Plant Hire [1996] CLC 1127 confirms that invoices, time sheets and statements of accounts are not documents of contractual intent. However, if one of these documents was part of the offer to contract, they would be held to be a contractual document. Reasonable Notice Reasonable notice is an objective consideration of whether the party subject to the terms are aware of the terms. There is no requirement that the party must be privy to the actual contents of the terms, the need only be aware of the fact that they exist. Parker v South Eastern Railway (1877) 2 CPD 416 ruled that if the document received is one that would normally contain contractual terms in, and it would be common knowledge that this would be so, the party receiving the document would be assumed to have notice. This objective consideration is highlighted particularly in Thompson v London, Midland and Scottish Railway [1903] 1 KB 41, where it was held to be irrelevant that the individual was illiterate if this fact is not known by the party supplying the document with the terms. If it was, for example, plainly obvious that the individual was blind, the term would not be incorporated. Terms can also be incorporated by referring the party to a different document which has the terms in. Thompson v London, Midland and Scottish Railway highlights this, the ticket stated “subject to McCutheon v David MacBrayne Ltd [1964] 1 WLR 125 was a case in which the consistency in the dealings was not sufficient. In the past course of dealings, there was inconsistency in whether one party was required to sign a “risk note” which included an exclusion clause. In the particular dealing where the other party attempted to rely on this clause, the risk note was not signed. The court could not incorporate the term due to the inconsistency of the dealings, as the dealings only sometimes required the risk note to be signed. Nature of terms - express or implied? A term may be incorporated into the contract either expressly or impliedly. Express terms are those which have been explicitly communicated between the parties orally or in writing. The intention of the parties is clear and there is little discussion to be had of these. Implied terms are those terms which fill the gaps in the contract. For example, take a contract in which an individual goes to a restaurant for a meal. The express contractual terms will be for the exchange of an amount of money for the food. However, there will be implied terms as to the quality of the food; for example, it will be implied that the food will be cooked correctly. If for each and every contract each term needed to be expressed, it would be very tedious and inefficient. Therefore, terms can be implied in the following ways: Custom Law Fact Terms implied by custom There is potential for terms to be implied based on established custom or usage in the relevant field. An example of this can be found in Hutton v Warren(1836) 1 M & W 466, in relation to an agricultural lease. In this case, a term was implied by custom that the tenants were entitled to an allowance for seed and labour. This was usual and custom in agricultural leases. The main three requirements are The term is clearly established and ‘notorious’ in that trade context The term is not inconsistent with any of the express terms Both parties must be involved in the trade context in such a way that they would be expected to be aware of the term being custom in that context An example which satisfied this test was in British Crane Hire Corporation Ltd v Ipswich Plant Hire Ltd [1975] QB 303, in which the ‘Contractors’ Plant Association’ terms were implied, as they were custom in the business context and both parties were involved in the plant hire business. Terms implied by law Terms in law can be implied irrespective of the intentions of the parties, they relate to legal obligations imposed either by the courts or by statute. Terms implied by the courts The basic requirements for a term to be implied by courts are: The term is implied in all contracts of that type, as a policy matter The term must be necessary The term must be reasonable to imply The case of Liverpool City council v Irwin [1977] AC 239 is the leading authority here. In this case, the council let some flats to tenants. The communal areas of the flats were not maintained, meaning the tenants could not use the stairs and lifts. The contract was quiet as to the obligations of the council the repair any of these communal areas. The tenants refused to repair these, and the council attempting to evict them. The contract did give the tenants an explicit right to use the stairways and lifts, therefore, incidental to this, the House of Lords implied a term which required the council to keep these areas in repair, so that the tenants could use them. Therefore, it can be seen that the implied term was a necessity in order for the tenants to be granted other rights in the contract. The implied term must be incidental to the granted rights, and cannot be entirely separated. In Spring v Guardian Assurance plc [1995] 2 AC 296 this approach was clarified. Lord Woolf explained that it was also based on what ‘normal practice’ would be in the context. In Liverpool City Council v Irwin, as ‘normal practice’ would be for the council to maintain the communal areas, this term was able to be implied. Terms implied by statute Where it has been deemed necessary by the legislature, certain terms have been implied into contracts by statute. The most obvious example of this relates to the sale or supply of goods. The Sale of Goods Act 1979 imposes a variety of obligations on sellers and confers various rights to buyers. Here is a quick overview of some of the more implied terms Section 14(2) implied that in the sale of goods in the course of a business, there is an implied term that the goods will be of satisfactory quality Section 14(3) implies that the goods sold will be fit for the required purpose if the buyer has made this purpose clear Section 13(1) implies that where goods have been sold by description, the goods will correspond with this description Terms implied by fact Some contracts will include terms which are implied by the facts surrounding the contract, on the basis of the parties’ intentions. This is a strange implication, as the courts have always wished to focus on giving effect to the parties’ intention, surely if they intended something to be a term of the contract, they would have expressed this wish and it would not have to be implied? The starting position, therefore, is that the courts should not interfere and imply terms - Attorney-General of Belize v Belize Telecom Ltd [2009] UKPC 10 However, it is sometimes necessary to imply facts in order fill the gaps in the contract where the parties had not expressly set out certain terms. This can only be where the court entirely satisfied that the contract actually meant to include the terms implied at fact. There are two methods of implication at fact: The ‘officious bystander’ test The ‘business efficacy’ test The ‘officious bystander’ test This test was created in Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206. Essentially, it would be a term implied because it would be so obvious that it would go without saying. The test, as explained by MacKinnon LJ is: “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!’” This standard is rather strict and subsequently it becomes difficult to imply terms using it. The difficulty is that is requires a theoretical unquestionable assent by both parties to the implied term. The ‘business efficacy’ test lack of importance to the contract, to treat it as a condition was unreasonable. This brings us to the final way of categorising a term. Importance of the term to the contract In the absence of statutory or party intention, a holistic overview of the contract will be required in order to ascertain the importance of the term to the contract. The presumption being the more important the term is to the contract, the more likely the term will be a condition. Subsequently, if a term is less important to the contract, it will more than likely be a warranty. The two contrasting cases of Poussard v Spiders(1875) LR 1 QBD 410 and Bettini v Gye(1875) LR 1 QBD give an excellent illustration of this. Both contracts involved similar facts in which there was a singer who was contracted to perform in a show. Both had terms in the contract that they must attend rehearsals and that they must perform in the show. In Poussard, the singer failed to perform on the opening night of the show. This was held to be a condition. In Bettini, the singer failed to show up to rehearsals, this was held to be a warranty. Clearly, the performance in the show was of more importance in the contract, and could therefore be classified as a condition, whereas the term to show up for rehearsal in Bettini could only be a warranty due to its lack of importance to the contract as a whole. Innominate terms An innominate term is one which strikes a middle ground between a condition and a warranty, and it would be unfair to classify the term as either. The result of such a term is that the courts will classify the term upon breach of it. Once the term has been breached, the court can clearly see the consequences and seriousness of the breach, and are able to make a fully informed judgement on whether it should be a condition or warranty. An example of such a term comes in Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 in a contract for the lease of a ship. The term is question was that the ship must “be in every way fitted for ordinary cargo service”. This term was breached when the ship was not kept in adequate repair, which resulted in the ship only being at sea for six months of the contract. This breach was considered to be a breach of warranty, due to the less serious nature of the breach. The same term could have been breached by the ship not being seaworthy and actually sinking, destroying the subject of the contract, therefore in such a case the breach would have been serious and would likely be classified as a condition. The question the courts ask it: Will the breach deprive the innocent party of a substantial part of their bargain? If yes, the term is likely to be a condition, if no, the term is likely to be a warranty. Share this: Facebook