Terms of the Contract - Notes

1. TERMS OF THE CONTRACT
1a. THE PAROL EVIDENCE RULE
The parol evidence rule is that where the record of a transaction is embodied in a document,
extrinsic evidence is not generally admissible to vary or interpret the document or as a substitute
for it.
According to GH Treitel, The Law of Contract, 9th ed. p176, there are obvious grounds of
convenience for the application of the parol evidence rule to contracts: certainty is promoted by
holding that parties who have reduced a contract to writing should be bound by the writing and
by the writing alone. On the other hand, the parol evidence rule will commonly be invoked
where a dispute arises after the time of contracting as to what was actually said at that time; and
in such cases one of the parties could feel aggrieved if evidence on the point were excluded
merely because the disputed term was not set out in the contractual document. Evidence extrinsic
to the document is therefore admitted in a number of situations which fall outside the scope of
the rule.
1b. EXCEPTIONS TO THE PAROL EVIDENCE RULE:
(A) WRITTEN AGREEMENT NOT THE WHOLE AGREEMENT
If the written agreement was not intended to be the whole contract on which the parties had
actually agreed, parol evidence is admissible. See:
Evans v Andrea Merzario [1976] 2 All ER 930.
(B) VALIDITY
Parol evidence may be given about the validity of the contract, eg to establish the presence or
absence of consideration or of contractual intention, or some invalidating cause such as
incapacity, misrepresentation, mistake or non est factum.
(C) IMPLIED TERMS
Where the contract is silent on a matter on which a term is normally implied by law, parol
evidence may be given to support, or to rebut, the usual implication. See:
Burges v Wickham (1836) 3 B & S 669
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2. (D) OPERATION OF THE CONTRACT
Parol evidence can be used to show that the contract does not yet operate, or that it has ceased to
operate. See:
Pym v Campbell (1856) 6 E & B 370.
(E) EVIDENCE AS TO PARTIES
Parol evidence can be used to show in what capacities the parties contracted, eg where a person
contracts ostensibly as principal, evidence is admissible to prove that he really acted as another's
agent so as to entitle the latter to sue (Humfrey v Dale (1857) 7 E & B 266).
(F) AID TO CONSTRUCTION
Where the words of the contract are clear, parol evidence cannot be used to explain their
meaning, unless they have a special meaning by custom. Parol evidence can, on the other hand,
be used to explain words or phrases which are ambiguous, or which, if taken literally, make no
sense, as well as technical terms.
(G) TO PROVE CUSTOM
Evidence of custom is admissible "to annex incidents to written contracts in matters with respect
to which they are silent." (Hutton v Warren (1836). Custom can also be used as an aid to
construction, eg in Smith v Wilson (1832) evidence was admitted of a local custom to show that
"1,000 rabbits" meant "1,200 rabbits."
(H) RECTIFICATION
A document may fail in accurately recording the true agreement. Equity allows such a written
contract to be rectified by parol evidence. (See handout on Mistake)
(I) COLLATERAL CONTRACT
Even though parol evidence cannot be used to vary or add to the terms of a written contract, it
may be possible to show that the parties made two related contracts, one written and the other
oral, ie a collateral contract. See:
City & Westminster Properties v Mudd [1959] Ch 129.
The Law Commission (1976) recommended that the rule should be abolished, but by 1986
concluded that it did not stop the courts accepting parol evidence if this was consistent with the
intention of the parties.
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3. 2a. REPRESENTATIONS AND TERMS
The first step in determining the terms of a contract is to establish what the parties said or wrote.
Statements made during the course of negotiations may traditionally be classed as
representations or terms and if one turns out to be wrong, the plaintiff's remedy will depend on
how the statement is classified:
A representation is a statement of fact made by one party which induces the other to enter into
the contract. If it turns out to be incorrect the innocent party may sue for misrepresentation.
Breach of a term of the contract entitles the injured party to claim damages and, if he has been
deprived substantially what he bargained for, he will also be able to repudiate the contract.
If a statement is not a term of the principal contract, it is possible that it may be enforced as a
collateral contract (which has developed rapidly in the twentieth century as a significant means
by which the difficulties of fixing a statement with contractual force may be circumvented).
How can the courts decide whether a statement is a term or a mere representation? It was
established in Heilbut, Symons & Co v Buckleton [1913] AC 30, that intention is the overall
guide as to whether a statement is a term of the contract. In seeking to implement the parties'
intentions and decide whether a statement is a term or a mere representation, the courts will
consider the following four factors:
(A) TIMING
The court will consider the lapse of time between the making of the statement and the contract's
conclusion: if the interval is short the statement is more likely to be a term. See:
Routledge v McKay [1954] 1 WLR 615
Schawel v Reade [1913] 2 IR 64.
(B) IMPORTANCE OF THE STATEMENT
The court will consider the importance of the truth of the statement as a pivotal factor in
finalising the contract. The statement may be of such importance that if it had not been made the
injured party would not have entered into the contract at all. See:
Bannerman v White (1861) CB(NS) 844
Couchman v Hill [1947] 1 All ER 103.
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4. (C) REDUCTION OF TERMS TO WRITING
The court will consider whether the statement was omitted in a later, formal contract in writing.
If the written contract does not incorporate the statement, this would suggest that the parties did
not intend the statement to be a contractual term. See:
Routledge v McKay [1954] 1 WLR 615
Birch v Paramount Estates (1956) 167.
(D) SPECIAL KNOWLEDGE/SKILLS
The court will consider whether the maker of the statement had specialist knowledge or was in a
better position than the other party to verify the statement's accuracy. See:
Harling v Eddy [1951] 2 KB 739
Oscar Chess v Williams [1957] 1 All ER 325
Dick Bentley Productions v Harold Smith Motors [1965] 2 All ER 65.
2b. CONDITIONS AND WARRANTIES
Traditionally terms have been divided into two categories: conditions and warranties.
(A) CONDITIONS
A condition is a major term which is vital to the main purpose of the contract. A breach of
condition will entitle the injured party to repudiate the contract and claim damages. The injured
party may also choose to go on with the contract, despite the breach, and recover damages
instead. See:
Poussard v Spiers (1876) 1 QBD 410
(Note: The word 'condition' also has another meaning. It may mean a stipulation that a contract
should not be enforceable except on the happening of a given event, or should be brought to an
end on the happening of a given event. The condition is then properly called a 'condition
precedent', or a 'condition subsequent' respectively. See Cheshire &Fifoot, p153-4).
(B) WARRANTIES
A warranty is a less important term: it does not go to the root of the contract. A breach of
warranty will only give the injured party the right to claim damages; he cannot repudiate the
contract. See:
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5. Bettini v Gye (1876) 1 QBD 183.
(C) INTERMEDIATE TERMS
It may be impossible to classify a term neatly in advance as either a condition or a warranty.
Some undertakings may occupy an intermediate position, in that the term can be assessed only in
the light of the consequences of a breach. If a breach of the term results in severe loss and
damage, the injured party will be entitled to repudiate the contract; where the breach involves
minor loss, the injured party's remedies will be restricted to damages. These intermediate terms
have also become known as innominate terms. See:
Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha [1962] 1 All ER 474
The MihalisAngelos [1971] 1 QB 164
The Hansa Nord [1976] QB 44
Reardon Smith Line v Hansen-Tangen [1976] 3 All ER 570
Bunge Corporation v Tradax Export [1981] 2 All ER 513.
(D) NOTE
If the term is described in the contract as a 'condition' that will not be conclusive. See:
Schuler v Wickman Machine Tools [1974] AC 235.
3. IMPLIED TERMS
In most contracts the primary obligations of the parties are contained in express terms. In
addition there are various circumstances in which extra terms may be implied into the agreement.
A) TERMS IMPLIED BY CUSTOM
The terms of a contract may have been negotiated against the background of the customs of a
particular locality or trade. The parties automatically assume that their contract will be subject to
such customs and so do not deal specifically with the matter in their contract. See:
Hutton v Warren (1836) 1 M&W 466.
B) TERMS IMPLIED BY THE COURT
(i) Intention of the Parties/Terms Implied as Fact
The courts will be prepared to imply a term into a contract in order to give effect to the obvious
intentions of the parties. Sometimes the point at issue has been overlooked or the parties have
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6. failed to express their intention clearly. In these circumstances, the court will supply a term in the
interests of 'business efficacy' so that the contract makes commercial sense. See:
The Moorcock (1889) 14 PD 64.
A more recent test is the 'officious bystander test' used to incorporate implied obvious terms
(Shirlaw v Southern Foundries [1940] AC 701). If while the parties were making their contract,
an officious bystander were to suggest some express provision, they would both reply, "oh, of
course." See, eg:
Wilson v Best Travel [1993] 1 All ER 353.
(ii) Relationship Between the Parties/Terms Implied by Law
In certain relationships and contracts the law seeks to impose a model or standardised set of
terms as a form of regulation. Such terms arising from the relationship between the parties will
be implied as of law. See:
Liverpool City Council v Irwin [1976] 2 All ER 39.
(C) TERMS IMPLIED BY STATUTE
SALE OF GOODS ACT 1979
Implied terms about title -
Section 12 provides:
(1) In a contract of sale … there is an implied term on the part of the seller that in the case of a
sale he has a right to sell the goods, and in the case of an agreement to sell he will have such a
right at the time when the property is to pass.
(2) In a contract of sale … there is also an implied term that-
(a) the goods are free, and will remain free until the time when the property is to pass, from any
charge or encumbrance not disclosed or known to the buyer before the contract is made, and
(b) the buyer will enjoy quiet possession of the goods except so far as it may be disturbed by the
owner of or other person entitled to the benefit of any charge or encumbrance so disclosed or
known.
The term implied by s12(1) is a condition and the term implied by s12(2) is a warranty: s12(5A).
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7. Sale by description -
Section 13 provides:
(1) Where there is a contract for the sale of goods by description, there is an implied term that the
goods will correspond with the description.
(1A) … the term implied by subsection (1) above is a condition.
(2) If the sale is by sample as well as by description it is not sufficient that the bulk of the goods
corresponds with the sample if the goods do not also correspond with the description.
Implied terms about quality or fitness -
Section 14 provides:
(2) Where the seller sells goods in the course of a business, there is an implied term that the
goods supplied under the contract are of satisfactory quality.
(2A) … goods are of satisfactory quality if they meet the standard that a reasonable person would
regard as satisfactory, taking account of any description of the goods, the price (if relevant) and
all other relevant circumstances.
(2B) … the quality of goods includes their state and condition and the following (among others)
are in appropriate cases aspects of the quality of goods -
(a) fitness for the purposes for which goods of the kind in question are commonly supplied,
(b) appearance and finish,
(c) freedom from minor defects,
(d) safety, and
(e) durability.
(2C) The term implied by subsection (2) above does not extend to any matter making the quality
of goods unsatisfactory -
(a) which is specifically drawn to the buyer's attention before the contract is made,
(b) where the buyer examines the goods before the contract is made, which that examination
ought to reveal, or
(c) in the case of a contract for sale by sample, which would have been apparent on a reasonable
examination of the sample.
(3) Where the seller sells goods in the course of a business and the buyer, expressly or by
implication, makes known -
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8. (a) to the seller …
any particular purpose for which the goods are being bought, there is an implied term that the
goods supplied under the contract are reasonably fit for that purpose, whether or not that is a
purpose for which such goods are commonly supplied, except where the circumstances show that
the buyer does not rely, or that it is unreasonable for him to rely, on the skill or judgment of the
seller …
The terms implied by sections 14(2) and (3) are conditions: s14(6)
Sale by sample -
Section 15 provides:
(2) In the case of a contract for sale by sample there is an implied term -
(a) that the bulk will correspond with the sample in quality;
(c) that the goods will be free from any defect, making their quality unsatisfactory, which would
not be apparent on reasonable examination of the sample.
The term implied by s15(2) is a condition: s15(3).
Modification of remedies for breach of condition in non-consumer cases -
Section 15A provides:
(1) Where in the case of a contract of sale -
(a) the buyer would, apart from this subsection, have the right to reject goods by reason of a
breach on the part of the seller of a term implied by sections 13, 14 or 15 above, but
(b) the breach is so slight that it would be unreasonable for him to reject them,then, if the buyer
does not deal as a consumer, the breach is not to be treated as a breach of condition but may be
treated as a breach of warranty.
(2) This section applies unless a contrary intention appears in, or is to be implied from, the
contract.
(3) It is for the seller to show that a breach fell within subsection (1)(b) above.
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9. SUPPLY OF GOODS AND SERVICES ACT 1982
Implied term about care and skill -
Section 13 provides:
In a contract for the supply of a service where the supplier is acting in the course of a business,
there is an implied term that the supplier will carry out the service with reasonable care and skill.
Implied term about time for performance -
Section 14 provides:
(1) Where, under a contract for the supply of a service by a supplier acting in the course of a
business, the time for the service to be carried out is not fixed by the contract, left to be fixed in a
manner agreed by the contract or determined by the course of dealing between the parties, there
is an implied term that the supplier will carry out the service within a reasonable time.
(2) What is reasonable time is a question of fact.
Implied term about consideration -
Section 15 provides:
(1) Where, under a contract for the supply of a service, the consideration for the service is not
determined by the contract, left to be determined in a manner agreed by the contract or
determined by the course of dealing between the parties, there is an implied term that the party
contracting with the supplier will pay a reasonable charge.
(2) What is a reasonable charge is a question of fact.
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