Legal Environment

Contract 6
The Terms of a Contract
Learning Objectives
Quick Review
Terms of a Contract
Terms v. Representation
Types of Terms
Implied Terms
Exclusion clauses

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Quick Review
A contract is a legally binding agreement
In order to create a valid contract, there
must be
 An offer
 An acceptance

 Consideration

 Capacity to contract

 Intention to create legal relations

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Terms of a Contract
Now that we know how to create a valid
contract, we need to think about what is in a
contract
A contract is an agreement
The terms of a contract express what the
parties to the contract have agreed
A term in a written contract is often called a
clause
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Terms v. Representations
It is often important to identify whether a
statement is a term of the contract or a
representation made during negotiations
about the contract
This is because a term is part of the
contract
That means it is binding and the parties
must do what the term says
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Terms v. Representations (cont.)
On the other hand, a representation does not
form part of the contract so the parties to
not have to do what it says
A representation is a statement made to try
to get someone to enter into a contract

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 Terms v. Representations (cont.)
There are 4 tests to help us decide if a
statement is a term or a representation
The importance of the statement
The time between making the statement and
making the contract
An oral statement before a written contract
Where one party to the contract has special
skill or knowledge
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Importance of the Statement
If the statement is so important that someone
would not have entered into the contract without it,
then it is a term of the contract (and not a
representation)
Eg: Angela is a vegetarian. She does not eat any
meat. When she orders a pizza she asks the
restaurant if it contains any meat. They say, “No.”
The reply made by the restaurant would be a term
of the contract because Angela would not buy a
pizza which contains meat.

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Timing
If some time passes between the statement
being made and the contract being created,
then the statement is likely to be a
representation
However, if the time between the statement
and the contract is quite short then it may
not be a representation

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Oral Statement / Written Contract
One party makes the statement verbally (ie
it is spoken)
The contract is made in writing and does
not include the spoken statement
In this case, the spoken statement is likely
to be a representation
For example, Routledge v McKay
concerned the sale of a motorbike
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Oral Statement / Written Contract
In the verbal negotiations the owner said the
motorbike was a 1942 model
In fact, it was from 1930
However, when the written contract was
made it did not include any statement about
the year
Therefore, the statement was a
representation not a term of the contract
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Special Skill or Knowledge
If one of the parties to the contract has
special skill or knowledge then statements
made by him will be terms of the contract
However, statements made to him will not
be terms, they will be representations

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Special Skill or Knowledge (cont.)
Eg 1: If a garage sells a car to Fred then
statements made by the garage to Fred would
be terms of the contract because the garage
are experts on cars. They have special
knowledge.
Eg 2: If Fred sells his car to a garage, then
statements made by Fred about the car are
not terms because the garage has special
knowledge and should know if Fred is
correct.
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Types of Terms
Once we know that a statement is a term in
a contract, we need to identify what kind of
statement it is
This is important as different kinds of
statements have different remedies when a
party breaches them
A breach of contract occurs when one
party does not follow an agreed term of the
contract
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 Types of Term (cont.)
There are 3 types of term:
Conditions
Warranties
Innominate terms

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Conditions
A condition is a basic and important part of
the contract
If one party breaches a condition then the
other party may
 End the contract
 Refuse to perform their part of the contract

 Continue with the contract but then sue for

damages

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Warranties
On the other hand, a warranty is not vital to
the contract
If one party breaches a warranty then the
other party can only continue with the
contract and then sue for damages

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Conditions v. Warranties
Two cases involving opera singers show the
difference between conditions and
warranties
In Poussard v Spiers and Pond, Mrs
Poussard was an opera singer. She agreed
to sing in an opera starting on 28
November. However, she became ill and
was unable to sing until 4 December.
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Conditions v. Warranties (cont.)
The opera company had to hire another
singer so that the opera could start on 28
November.
They could only get another singer if they
hired her for all the performances of the
opera.
They did this and refused the services of
Mrs Poussard once she was better
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Conditions v. Warranties (cont.)
Mrs Poussard raised a court action to try to
make the company pay her
However, the court said that Mrs Poussard
breached a condition of the contract when
she was unable to perform on 28 November
This was a basic term of the contract

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Conditions v. Warranties (cont.)
The position was different in Bettini v Gye
Bettini was an opera singer
He agreed to sing in London in a number of
theatres beginning on 30 March
He also agree that he would arrive in
London 6 days before the first performance
in order to practise

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Conditions v. Warranties (cont.)
Bettini became ill and did not arrive in
London until 3 days before the first
performance
The opera company refused to allow him to
sing
They said he had breached the contract

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Conditions v. Warranties (cont.)
However, the court said that the part of the
agreement about practicing was a warranty
not a term
That meant it was not a basic part of the
contract. It was subsidiary part.

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Innominate Terms
These are terms which may be either
conditions or warranties
It depends how serious the breach of the
contract is
If the breach is serious the court will say the
term was a condition
If the breach was less serious then the court
will say it was a warranty
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Innominate Terms (cont.)
For example, if you buy a used car (that is,
one which has already been owned by
someone else) then one of the things which
affects the price you pay is the number of
kilometres which it has travelled
A car which has travelled a high number of
kilometres is worth less because it has been
used more
It is more likely to wear out
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Innominate Terms (cont.)
Therefore, if a garage is selling you a used
car and they tell you that it has travelled
32,000 km
If the car has really travelled 60,000 km,
then a court would say there was a breach
of condition because of the big difference
between 60,000 and 32,000

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Innominate Terms (cont.)
However, if the car had really done 34,000,
then the court would say the statement was
only a warranty
The difference between 34,000 and 32,000
is not significant

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Implied Terms
So far, we have only looked at statements
which the parties actually make in words or
writing
However, contracts can also have implied
terms
These terms are not stated expressly by the
parties, but they are still regarded as being
terms of the contract
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 Implied Terms (cont.)
There are 3 ways in which implied terms
become part of a contract:
Implied by statute
Implied by custom
Implied by a court

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Implied by Statute
Some statutes say that certain terms are included
in contracts even if the parties to the contract do
not include them expressly
For example, the Sale of Goods Act 1979,
implies terms concerning the quality of the good
sold
This means that even if the parties do not
mention anything about the quality of the goods
being sold in the contract, the Sale of Goods Act
includes a term about quality automatically
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Implied by Statute (cont.)
Therefore, if one party supplies the other
with goods of poor quality, the other party
can rely on the term implied by the Sale of
Goods Act even though the parties did not
include any terms about quality themselves

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Implied by Custom
Some terms may not be included in a
contract by the parties, but they are
regarded as having been included
automatically because it is customary in
that kind of business or contract

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Implied by Custom (cont.)
So for example, a school makes a contract
with a foreign teacher
In the contract, the school agrees to provide
the teacher with a place to live
However, the contract does not mention
which party will pay for the gas and
electricity and phone calls

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Implied by Custom (cont.)
If there was any argument about who
should pay, the teacher could argue that the
custom is that schools pay for the gas and
electricity but teachers have to pay for the
phone calls which they make

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Implied by Court
A contract represents what the parties have
agreed
Therefore, a court is usually unwilling to
make changes to a contract
However, a court will say that a term should
be implied in a contract if it thinks it is
commercially necessary (ie, it makes good
business sense)
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Implied by Court (cont.)
In the case of The Moorcock, a boat was
damaged while it was tied up to be
unloaded
There was nothing in what the parties
agreed to suggest that the company in
charge of unloading had said it was safe to
unload there

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Implied by Court (cont.)
However, the court decided that there was
an implied warranty that the place where
the boat was to be unloaded would be safe
This makes good sense in business
No sensible boat owner would pay to have
his boat unloaded in a place which would
damage his boat

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Exclusion Clauses

Exclusion clauses are terms of a contract

which try to limit the liability of one of the
parties if they breach the contract
These clauses can create unfair situations
where one party is able to insist they are
included in the contract because that party
is much stronger than the other party

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Exclusion Clauses (cont.)
One area where the courts and Parliament
have tried to control the effect of exclusion
clauses is in contracts between business and
individual consumers
This is because the business is usually in a
stronger position than the consumer

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Exclusion Clauses (cont.)
A common situation is where the business
has a standard printed contract
The consumer only has a choice of signing
(and making a contract) or not signing (and
not making a contract)
There is no opportunity for the consumer to
negotiate to try to improve his (or her)
position
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Exclusion Clauses (cont.)
An example might be booking a holiday
with a travel company where the terms of
the contract are printed in the travel
company’s holiday brochure

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 Dealing with Exclusion Clauses
When a court looks at an exclusion clause, it
thinks about 3 things:
Has the exclusion clause been included in
the contract?
How should the exclusion clause be
interpreted?
Does the Unfair Contract Terms Act 1977
apply to the exclusion clause?
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Included in the Contract
An exclusion clause has to be part of the
contract or it has no effect
There are 3 ways that an exclusion clause
can become a term in a contract
 By signature
 By notice

 By custom

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By signature
If someone signs a contract which contains
an exclusion clause then the exclusion
clause is a valid term in that contract
This is true even if the person did not read
the contract before signing it

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By notice
Except in the case where someone does not
read the contract, an exclusion clause is
only valid where the person knew about it
or was given notice of it
For example, you arrive at a hotel and book
a room for a few days
When you get to your room, you find a sign
inside which says that the hotel is not
responsible if any of your things are stolen
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By notice (cont.)
However, the hotel will not be able to rely
on this exclusion as the contract was made
before you got to your room
The contract was made at the reception desk
of the hotel before you had a chance to see
the sign

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By notice (cont.)
If the exclusion clause is very severe (the
payment of a lot of money, for example) the
court will not usually allow the exclusion
clause to be in another document (or sign)
which is referred to by the contract
The person entering into the contract should
have the opportunity to read the actual
exclusion clause
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By custom
If the parties have previously entered into
other contracts with each other which
contained exclusion clauses, then the clause
may become part of later contracts too
But the party affected by the clause must
know it was in the previous contracts

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Interpreting Exclusion Clauses
Courts usually attempt to limit exclusion
clauses by giving them a very narrow
meaning
If the clause is unclear or ambiguous, then
the court will usually interpret the meaning
of the clause against the person who wants
to rely on the clause
This is referred to as the contra
proferentem rule
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Contra Proferentem Example
In Alexander v Railway Exective, a man
left several boxes to be looked after at a
station
The man was given receipts for the boxes
He was going to send instructions to say
where the boxes should be sent
Before the station received those
instructions the man’s assistant visited the
station
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Contra Proferentem Example (cont.)
He was allowed to open the boxes even
though he did not have any of the receipts
from the station
The assistant stole several things from the
boxes
The man sued the station for breach of
contract

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Contra Proferentem Example (cont.)
The station tried to avoid paying damages
for the stolen property by relying on an
exclusion clause printed on the receipts
Part of this said that the station was not
liable if it delivered things to the wrong
person
The court said that this did not include
giving it to an unauthorised person who had
no receipt
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Unfair Contract Terms Act 1977
This Act prohibits clause which try to
exclude liability for death or injury
resulting from negligence
The Act also says that an exclusion clause
in a contract with a consumer is only valid
if it is reasonable

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Summary
It is important to know if a statement is a
term of a contract or simply a representation
There are 4 tests to decide this:
 The importance of the statement
 The time between making the statement and
making the contract
 An oral statement before a written contract
 Where one party to the contract has special skill
or knowledge
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 Summary (cont.)
There are 3 types of term:
Conditions
Warranties
Innominate terms

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Summary (cont.)
Implied terms are included in a contract
even though the parties did not create them
There are 3 ways in which implied terms
become part of a contract:
 Implied by statute
 Implied by custom

 Implied by a court

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Summary (cont.)
Exclusion clauses are terms of a contract
which try to limit the liability of one of the
parties if they breach the contract
There are 3 ways that an exclusion clause
can become a term in a contract
 By signature
 By notice

 By custom

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Summary (cont.)
The courts and Parliament try to limit the
effect of exclusion clauses
The courts give a narrow meaning to
exclusion clauses
Parliament passed the Unfair Contract
Terms Act 1977

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Reading
(MacIntyre) Pgs. 99-108, 112-120, 122
essential points
(Kelly) Pgs. 161-166 (skip mistake in
respect of domains), 167-171, 175-178,
183-184

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