In the coming months we will be publishing a series of 'module reviews', providing a brief outline of our first-year modules at Newcastle University to help students get a basic understanding of each topic. In the month of October, we will be looking at contract law, which is one of the seven required modules to obtain a qualifying law degree.
As we move into this second review, we will be looking at the content of contracts, such as the different types of term and controls over the content. Within this there is a strong focus on case law so some cases will also be explained to help describe some more complicated principles, if not explained there will be links to an explanation from another source.
DISCLAIMER: all information in these module reviews are taken from our own notes and research so please do not cite this in your work.
The terms of a contract dictate what the contract is for and what the parties limits and obligations are. There are many different types of term in a contract which each vary in significance, depending on the consequence of them being broken. Furthermore, even if terms are stated clearly they could be interpreted differently by the courts dependent on the party's intentions and 'commercial common sense' as opposed to always following the dictionary definition. Lord Hoffman, for instance, strongly encourages including everything which 'would have affected the way in which the language of the document would have been understood by a reasonable man'. Some key cases regarding interpretation of terms include: Prenn v Simmonds (1971), Chartbrook v Persimmon Homes (2009), Marley v Rawlings (2014)and Arnold v Britton (2015).
Express Terms
Firstly, express terms are the simplest to understand as these are terms that are directly written into the contract by the parties (or stated if the contract is made orally). Generally the most important terms will be written as express terms as it is much easier to claim against them not being followed if they are clearly laid out in the contract.
In the case of an oral contract, evidence would be needed to prove any express terms however in most cases there will not be a breach and therefore no evidence will be required. There can also be confusion about whether statements made are simply representations (to entice someone to make a contract) or a physical term, however this distinction can be made based on the parties intentions. For instance, the importance of the satement, special knowledge of the parties, timing of the statement and the strength of inducement would all be considered. Key cases surrounding this include: Bannerman v White (1861), Dick Bentley Productions (1965), Routledge v McKay (1954) and Ecay v Godfrey (1947), for the factors above respectively.
Agreements in writing are much simpler than those made orally as any statement written into the contract will be regarded as a term and any oral promises made before this are likely to be regarded representation only, as established in Henderson v Arthur (1907). These terms may be incorporated by signature, reasonable notice or on a previous course of dealing however anything added to the contract is subject to the 'parole evidence rule'. This means that any external evidence cannot be used to change the express terms of a contract as courts believe that the parties must intend to be bound if they have made a written contract. This can be displaced however if it is recognised the agreement is only partially written and there is a clear intention to be bound by other statements, for instance in Couchman v Hill (1947).
Implied Terms
In some circumstances, courts are able to imply terms that have not been included under recognition that the parties must have intended that term to be a part of the contract. Terms may only be implied in very limited circumstances where they are required to make the contract work, not to reinstate fairness, as shown in M&S v BNP Paribas (2015). For example, courts will look at whether the implied term would be: reasonable, equitable, capable of clear expression, compatible with express terms, obvious and necessary to give business efficacy.
Looking at whether a potential implied term is 'so obvious it goes without saying' is regarded as the 'officious bystander test', as noted in Shirlaw v Southern Foundries (1936) which stated if someone were to suggest it as a term the response should be 'of course'. This will not stand however if it is not clear that both parties would have agreed to its inclusion in the contract (Luxor Ltd v Cooper (1941)). Similarly, the business efficacy test may also be used to prove a term must be implied as the contract wouldn't work without its inclusion as see in The Moorcock (1889). These tests are merely guidelines however to be used in conjunction with the context of the case to determine if any terms can be implied.
Terms may also be implied by law in certain contracts however and some statutes, such as the Consumer Rights Act 2015, govern particular parts of contracts such as including terms for the benefit of consumers.
Furthermore, terms may be implied by custom, if evidence shows that they would normally be included, or by trade usage, if a term is regularly used in that specific trade. This implication may be prevented however if there is an entire agreement clause which states the written contract forms the entire agreement and therefore no party can argue later that any other term should be implied.
Conditions, Warranties and Innominate Terms
As mentioned in the opening paragraph, some terms are more important than others and therefore they are split into three categories based on how essential they are: conditions, warranties or innominate terms.
Conditions are the most important terms in a contract and if these are breached there would be significant consequences meaning the other party could terminate the contract (more on this in part four). For instance, in Poussard v Spiers (1876), Poussard was contracted to perform opera however fell ill and couldn't perform on the first four nights so Spiers refused to let her perfom at all. The courts held that, as in opera the opening nights are the most important, Poussard was in breach and therefore Spiers could terminate the contract.
On the contrary, warranties are terms that can be broken without significant consequences for the performance of the contract, meaning only damages may be claimed. For example in Bettini v Gye (1875), a performer was contracted and fulfilled the requirement to perform but missed rehearsals due to illness which were specified as a requirement in the contract. As they still performed however the significant terms (conditions) were fulfilled so the other party could only sue for damages.
Innominate terms are slightly different as they are conditions or warranties where the breach could be serious or trivial depending on the consequence. For instance, in Hong Kong Fir Shipping v Kawasaki (1962) the judge noted the problem wasn't solved by debating if the issue was a condition or a warranty, rather they should look at what happened as a result of the breach and determine if they were deprived of the benefit.
Exemption Clauses
Exemption clauses allow for the exclusion of all liability or limitation of liability, up to a certain amount in damages, should something go wrong. These are generally in the standard terms of businesses and therefore there is no possibility of negotiation. The most notable case for this is Photo Productions Ltd v Securicor Transport (1980) in which the doctrine of fundamental breach was argued - follow the link to find out more.
Common Law Controls
Courts are often very skeptical of exclusion/limitation clauses and consequently apply the 'contra-proferentem rule', meaning they interpret it in the least favourable way to the party relying on it. The courts will check to ensure the clause has been effectively incorporated (by signature, reasonable notice or previous dealings) and look at the wording of the clause and read it in the least favourable way to those who wrote it. Under incorporation by signature, if a document is signed when the contract is made then you are bound by it regardless of whether you actually read it or not (L'Estrange v Graucob (1934)), unless there is a case of misrepresentation.
Under incorporation by reasonable notice, the courts must take into account the timing and form of the notice, the onerous nature of the clause and whether it is reasonable to inform, for example in Parker v South Eastern Railway (1877) it was noted that if separate written terms are presented at the same time a contract is made then they will become part of the contract if the recipient had reasonable notice, such as a note saying 'see terms and conditions on reverse'.
Terms may also be implied by previous courses of dealing, in which case the courts favour terms that have appeared in any previous contracts, as in Spurling v Bradshaw (1956). This can be rebutted however, particularly if a term is regarded as onerous, so previous dealings will not be relied upon.
Common law also follows the fundamental breach principle which prevents exclusion clauses that relate to serious breaches of contract from applying, for example excluding liability for death.
Statutory Controls
There are also some statutory limitations on contract terms which can be found in the Consumer Rights Act 2015 (CRA) and the Unfair Contract Terms Act 1977 (UCTA). The UCTA now only applies to non-consumer contracts and is very specific about what it does and doesn't apply to. The main provisions are related to negligence (section 2), non-performance (section 3), implied sale and hire-purchase terms (section 6) and implied terms in miscellaneous contracts (section 8).
Statutory controls control exemption clauses in two ways, either by deeming them ineffective, so they no longer exist, or deeming them unreasonable. Reasonableness is considered in section 11 and determined by the courts who consider a variety of factors such as the strength of bargaining power, inducement and whether the term was known.
I hope this has helped explain the different types of contract term and how these are monitored, however if you have any further questions please get in contact with us and we will do our best to help you out!
Comments