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Terms of Contract Lecture Notes
Terms of Contract Lecture Notes
2009-10
1. General Definition: a statement of fact which is intended to create a legal obligation under the contract i.e.
"the price is 10,000
Terms can be express or implied. They can also be classified as conditions, warranties and innominate terms
(see lectures on performance and breach)
Representations: a statement of fact which induces the other party into the contract i.e. the car passed its MOT
test first time.
How to distinguish?
Generally looking for intention of the parties, considering the totality of the evidence as a
whole assessed using the intelligent bystander test: Heilbut, Symons v Buckleton [1931] AC 30,
51 per Lord Moulton.
Other helpful factors:
(i) When was the statement made?
(ii) Is the statement important?
(iii) Did the maker of the statement have special knowledge or skill?
A person sold a car to a car dealer and said it was a 1948 model. They relied on the car's logbook for
this information. Unfortunately the logbook was forged and the car was in fact a 1939 model. It was
held that the statement was a representation and not a term. Denning reiterates the Heilbut, Symons v
Buckleton test re the totality of the evidence and the use of the intelligent bystander. He stated the
statement was an expression of belief and not a contractual promise.
Dick Bentley Productions v Harold Smith (Motors) Ltd [1965] 2 All ER 65:
Car dealers sold a car to a customer and said it had done 20,000 miles. In fact it had done 100,000
miles. It was held that the statement as to the mileage of the car was a term as the maker of the
statement had special skill and knowledge compared to the recipient
3. Oral Statements as Terms when the Contract is Written
Exceptions:
o The rule does not apply where it was not the intention of the parties was that
the written contract would contain the whole of the agreement: Allen v Pink
(1838) 150 E.R 1376.
Future of the Rule? See Law Commissions Report: The Parole Evidence Rule (1980) No.
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B. INCORPORATION OF TERMS
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injuries. P was later injured when he collected his car partly due to his own negligence and
partly due to the Ds. Are the statements in the notices terms of the contract?
The court held that there shall be an implied term in leases that a landlord shall keep
common parts of a building in reasonable care and in use. In this case tenants rented
flats in a block of flats but the landlord retained control of the lifts and did not repair
them. The court held that even though it was not stated expressly, there was an
implied obligation on the landlord to keep the lifts working
AG of Belize v Belize Telecom [2009[ 1 WLR 7988
Firstly we have to decide whether it is a breach or whether it is negligence. Then either use
section 2 (restrict or exclude liability) or section 3. Either it will declare the clause
automatically void, or the Act will tell us that the clause will be subject to the reasonableness
test. (Test is only used if the act tells us to do so).
B. EXEMPTION/EXCLUSION CLAUSES
4 questions:
1. Is the clause incorporated into the contract?
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2. Does it cover the particular breach of contract?
3. Does the Unfair Contract Terms Act 1977 apply?
4. Is it a consumer contract and how does that alter the analysis?
b. Negligence
*Canada Steamship Lines Ltd v The King [1952] AC 292
a. Does the clause contains language which expressly exempts a party
from liability for his own negligence?
If NO then clause must satisfy BOTH
b. Is the clause wide enough to cover negligence?
c. Can the clause cover something else as well as negligence?
HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003]
UKHL 6
(i) s. 2
(ii) s. 1: definition of negligence for purposes of UCTA
(iii) s. 2(i):
A person cannot by reference to any contract term or a notice given to persons
generally or to particular persons exclude or restrict liability for death or personal
injury resulting from negligence.
(iv) s. 2(2):
In the case of other loss or damage, a person cannot so exclude or restrict his
liability for negligence except in so far as the term or notice satisfies the requirement
of reasonableness.
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*R & B Customs Brokers Ltd. v United Dominions Trust Ltd. [1988] 1 WLR
321
P bought a car from D, a finance company. P, a private company, bought the car for the
directors private and business use. The sale contract for the car included exclusion clauses
attempting to exclude the implied terms from the Sale of Goods Act 1979. The car leaked
and the D wanted to rely on the exclusion clause to exempt it from liability. It could do so as
long
as the term was not excluded by the operation of UCTA.
d. Specialist clauses:
(i) s. 6(1) sellers implied undertaking as to title cannot be excluded or
restricted by a contract term: s.12 Sale of Goods Act 1979 only.
(ii) s. 6(2)(a) sellers obligation arising from s.13-15 Sale of Goods Act 197
only cannot be excluded or restricted by a contract term if buyer a consumer
(iii) s. 6(2)(b) similar obligations are imposed by the Supply of Goods
(Implied Terms) Act 1973
(iv) s. 7(2) consumer contracts of supply other than hire-purchase.
(v) s.6(3) those statutorily implied undertakings in s.6(2) can be excluded or
restricted against a person NOT dealing as a consumer but must be reasonable.
(vi) s. 5 consumer guarantees: not for general application, but specific to
written guarantees supplied with goods (e.g. warranties supplied with televisions etc)
[my input from lecture starts here previous notes are covered on a separate
document] The reasonableness of the clause is assessed at the date the contract
was made. Therefore, you can have a term that is unreasonable even if the breach is
tiny, because we are interested in the term not the breach.
The burden of proof of proving whether a term is fair or not falls on the party wishing
to rely on it generally speaking the person being sued.
What does reasonableness actually mean? Section 11: fair and reasonable in
relation to having regard to the circumstances which were/should have been known
at time of contract formation.
Schedule 2 (of section 11) of the Act can be relied upon if we are using section 6 and
section 7 of the Act. Schedule 2 gives us a list of criteria to take into account when
assessing reasonableness:
(i) Relative strength of the bargaining power of each of the parties (see Watford
Electronics v Sanderson [2001] 1 ALL ER 696) the courts will take a much
more robust approach when two business people are involved, i.e. when 2
business people are involved it is more likely that the clause will be
reasonable.
(ii) Did one party receive an inducement to enter the contract? i.e. did they
receive a reduced price or the like. If they did get an inducement its more
likely to be reasonable.
(iii) Was the customer aware of the terms because it is in common usage in the
industry? The more common the term, the more likely the customer is to be
aware of it and the more likely it is to be reasonable.
(iv) Have the goods been manufactured specially for the customer? If so, it is
likely that the clause will be reasonable.
Schedule two is only an indicative list it is not all encompassing or prescriptive.
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Schedule 2 is limited in its use to section 6 and section 7 whilst we will be mainly relying on
section 2 and 3. So how can we assess reasonableness for these sections? Is there any way
to incorporate schedule 2 into any other sections?
Granville Oil and Chemicals Ltd v Davies Turner & Co Ltd [2003] 1 ALL ER 819 (CA)
(above)
Claimant is contracting with freight man to ship some paint to sea. Defendant
arranged insurance for the voyage. Contracts were said to be subject to a standard
term in the British International Freight Association standard trading conditions. We
are concerned with the limitation clause in clause 30 which says that the insurer
can only claim if they claim within 9 months of the event. The paint is damaged in
transit and the claimant makes a claim. The claim is rejected and they are only told
about this the day after the 9 month period expires. The claimant then sued for
breach and the defendant seeks to rely on the limitation clause (9 month period,
missed by one day). Although going one day over may seem unreasonable, we are
not required to assess this we are required to assess the reasonableness at the
time the contract was made. The court held that the defendant could rely on the
clause. They imported all of schedule 2 into the judgment. The court cannot say we
are directly looking at schedule 2, because this is a section 3 claim (not 6 or 7),
however, the court did incorporate schedule 2 as a set of relevant criteria. The court
did not label this as schedule 2, but the factors were very similar. Although schedule
2 only applies in section 6 and 7, the principles are much broader. The court mainly
relied on the fact that this was a contract between to business parties in the same
industry and they could have insured themselves separately if necessary they were
saving money by not doing so. The court also felt that 9 months was a reasonable
period of time for this industry.
(A) Any claim by the Customer against the Company arising in respect of any
service provided for the Customer or which the Company has undertaken to provide
shall be made in writing and notified to the Company within 14 days of the date upon
which the Customer became or should have become aware of any event or
occurrence alleged to give rise to such claim and any claim not made and notified as
aforesaid shall be deemed to be waived and absolutely barred except where the
Customer can show that it was impossible for him to comply with this Time Limit and
that he has made a claim as soon as reasonably possible for him to do so.
(B) Notwithstanding the provisions of sub-paragraph (A) above the Company shall in
any event be discharged from all liability whatsoever howsoever arising in respect of
any service provided for the Customer or which the Company has undertaken to
provide unless suit be brought and written notice thereof given to the Company
within nine months from the date of the event or occurrence alleged to give rise to a
cause of action against the Company. Clause 30 of the British International Freight
Forwarders Association (BIFA) Standard Trading Terms 1989.
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Britvic Soft Drinks v Messer [2002] 2 Lloyds Rep. 368
4. Is the clause a consumer contract? How does this alter the analysis?
This is a statutory instrument derived from EU directives. In 1993 the European Council of
Ministers concluded negotiations on Council Directive 93/13/EEC on Unfair Terms in
Consumer Contracts. (OJ(1993)L95/29). These were incorporated into UK law by the Unfair
Terms in Consumer Contracts Regulations 1994 (S.I. 1994/3159) and were later replaced by
Unfair Terms in Consumer Contracts Regulations 1999 (S.I. 1999/2083) which came into
force 1st October 1999. Parliament literally lifted the text from the European directive and
placed it into the UK statutory instrument. There was no attempt to tidy up the law on unfair
terms. Therefore we have the act running alongside the consumer regulations. This has
cause a lot of mess as the act operates on specific clauses. The regulations however, are
much broader and seek to give the consumer much wider rights than the act does. Drafting
of the regulations: Tightly drafted with a literal approach. EU directive: product of negotiation
of member states, therefore a compromise of different legislative forms and political ideals.
Therefore we have to look at the purpose behind EU directives more than with UK legislation.
So both scope and way of interpretation is different and both pieces of legislation run in
parallel so it is a mess. There are no guidelines on which piece of legislation should be used.
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b. Effect of the Regulations
Elements that need to be shown to see if a term is unfair (under Reg 5(1):
(i) Not been individually negotiated (definition in 5(ii) - Term is drafted in advance,
consumer has no input in the drafting of the term this is aimed at standard
contracts
(ii) The term must be contrary to the requirement of good faith
(iii) The term must cause significant imbalance between the parties
(iv) The term operates to the detriment of the consumer
*DG of Fair Trading v First National Bank Plc [2002] 1 ALL ER 97 (House of Lords)
First National Bank (FNB) is licensed to carry on consumer credit business in the UK.
It is a major lender and has numerous credit agreements licensed under existing UK
legislation. The Director General of Fair Trading exercising powers under the Unfair
Terms in Consumer Contracts Regulations 1994 brought an action to declare one of
the clauses of First National Banks credit agreement under Regulation 4 (now Reg.
5) unfair. Condition 4 of FNBs terms stated: The rate of interest will be charged on a
day to day basis on the outstanding balance and will be debited to the Customers
account monthly in arrears Time is of the essence for making all repayments to
FNB as they fall due. If any repayment instalment is unpaid for more than 7 days
after it became due, FNB may serve a notice on the Customer requiring payment
before the specified date not less than 7 days later. If the repayment instalment is not
paid in full by that date, FNB will be able to demand payment of the balance on the
Customers account and interest outstanding together with all reasonable legal and
other costs, charges and expenses claimed or incurred by FNB in trying to obtain the
repayment of the unpaid instalment of such balance and interest. Interest on the
amount which becomes payable shall be charged in accordance with Condition 4, at
the rate stated in paragraph D overleaf (subject to variation) until payment after as
well as before any judgment (such obligation to be independent of and not merge
with any judgment.) Lord Bingham: a core term is a term that describes the main
subject matter of the contract. He says that we should look at the phrase core term
restrictively. Because the wider scope we give to this term, the more freedom
businesses have to escape from contracts on this ground and this is unfair to the
consumer. Reg 6.2a and 6.2b a core term would be something relating to the price
(cost or renumeration) However, unfair terms Act applies when one party deals in
the course of business or in standard business.
What does the court mean by the term significant imbalance? Bingdaddy felt that if
the balance was weighted significantly weighted against our consumer then it would
be regarded as unfair. To determine this we would have to look at the contract as a
whole.
What is the difference between reasonableness and good faith? Reasonableness
relates purely to the clause itself whereas good faith has an element of personal
content in it. Good faith: open and fair dealing. Good faith requirements:
(i) Clear and legible terms
(ii) No pitfalls or traps
(iii) If the term is disadvantageous to the consumer it should be very prominent.
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(iv) It is important for the seller not to take advantage of the consumers weak
position the courts refer schedule 2 (of the regulations not the Act)
Good faith has a larger scope that reasonableness. Of course all assessed at the time the
contract was made.
Morgan J: The test for fairness will be different for when the claim is brought by the OFT and
when it is brought by the consumer. The court will be much more lenient and more likely to
find the term unfair if the consumer brings the claim.
d. Rule of Construction
Reg. 7:
If there is doubt about the meaning of a written term, the interpretation which is most
favourable to the consumer shall prevail
e. Adequacy of Price/Consideration
Reg. 6(2):
In so far as it is in plain intelligible language, the assessment of fairness of a term shall not
relate:
(a) to the definition of the main subject matter of the contract, or
(b) to the adequacy of the price or remuneration, as against the goods and services
supplied in exchange.
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over their overdraft limits. This is therefore a price of entering into a bank account
contract.
That was the Supreme court decision. However, CA said that they are not core
terms. Emphasis on the purpose of the directive and regulations. Lots of references
to achademic writing. Should assess consumers thoughts and expectations of the
terms and consumers regard these terms as incidental. Both courts are looking at the
essential bargain between the two parties, however the CA take a different approach.
There is a difference between an unfair term and a consumer getting treated unfairly.
As a result of the Supreme court judgment we will see more terms being considered
as core terms and therefore falling outside the scope of the regulations. Therefore,
we must use the Act more.
Judgments on OFT Abbey tell us the schedule 2 is a grey list not a black list i.e. not
definitive.
Regulation 8 The term is not binding on the consumer if it is found to be unfair. The
contract can carry on, but the term cannot. 1
2. Reform?
1
Either the consumer can bring a claim themselves or the OFT can bring a mass claim. Generally the
OFT claims are the that go up the courts due to costs.
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Further Reading:
Case C237/02 Freiburger Kommunalbauten GmbH Baugesellschaft & Co KG v Hofstetter
[2004] ECR I 3403 (European Court of Justice) explores the scope of the significant
imbalance part of the unfairness test from Regulation 5 of the Unfair Terms in Consumer
Contracts Regulations 1999. The court concludes that because a national court in one
member state finds that a term is unfair, does not necessarily mean that a court in another
member state will come to the same conclusion.
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