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Contract Law

Abu Khaled Al-Mamun

Terms of Contract


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



If the written agreement was not intended to be the whole contract on

which the parties had actually agreed, parol evidence is admissible.
Evans v Andrea Merzario [1976] 2 All ER 930.

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.


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

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.


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).


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.


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."


A document may fail in accurately recording the true agreement. Equity

allows such a written contract to be rectified by parol evidence.


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


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

· 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

· 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:


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.


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.


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.


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.


Traditionally terms have been divided into two categories: conditions

and warranties.


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).


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:
Bettini v Gye (1876) 1 QBD 183.


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 Mihalis Angelos [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.


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.


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.


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.


(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 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.


See the next Handout for the terms implied under:

· Sections 12, 13, 14 and 15 of the Sale of Goods Act 1979;

· Sections 13, 14 and 15 of the Supply of Goods and Services Act 1982;

· the relevant provisions of the Sale and Supply of Goods Act 1994.


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
(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).

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


(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

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 -

(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.


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.



Abu Khaled Al-Mamun

Barrister at-Law
Lecturer: Contract Law



A clause may be inserted into a contract which aims to exclude or limit one
party's liability for breach of contract or negligence. However, the party may
only rely on such a clause if (a) it has been incorporated into the contract, and
if, (b) as a matter of interpretation, it extends to the loss in question. Its
validity will then be tested under (c) the Unfair Contract Terms Act 1977 and
(d) the Unfair Terms in Consumer Contracts Regulations 1999.


The person wishing to rely on the exclusion clause must show that it formed
part of the contract. An exclusion clause can be incorporated in the contract
by signature, by notice, or by a course of dealing.


If the plaintiff signs a document having contractual effect containing an

exclusion clause, it will automatically form part of the contract, and he is
bound by its terms. This is so even if he has not read the document and
regardless of whether he understands it or not. See:

L'Estrange v Graucob [1934] 2 KB 394.

However, even a signed document can be rendered wholly or partly

ineffective if the other party has made a misrepresentation as to its effect.

Curtis v Chemical Cleaning Co [1951] 1 KB 805.


The exclusion clause may be contained in an unsigned document such as a

ticket or a notice. In such a case, reasonable and sufficient notice of the
existence of the exclusion clause should be given. For this requirement to be

(i) The clause must be contained in a contractual document, ie one which the
reasonable person would assume to contain contractual terms, and not in a
document which merely acknowledges payment such as a receipt. See:

Parker v SE Railway Co (1877) 2 CPD 416


Chappleton v Barry UDC [1940].

(ii) The existence of the exclusion clause must be brought to the notice of the
other party before or at the time the contract is entered into. See:

Olley v Marlborough Court [1949] 1 KB 532.

(iii) Reasonably sufficient notice of the clause must be given. It should be

noted that reasonable, not actual notice is required. See:

Thompson v LMS Railway [1930] 1 KB 41.

What is reasonable is a question of fact depending on all the circumstances

and the situation of the parties. The courts have repeatedly held that
attention should be drawn to the existence of exclusion clauses by clear
words on the front of any document delivered to the plaintiff, eg "For
conditions, see back". It seems that the degree of notice required may
increase according to the gravity or unusualness of the clause in question.

Thornton v Shoe Lane Parking [1971] 1 All ER 686

Interfoto v Stiletto Ltd [1988] 1 All ER 348.


Even where there has been insufficient notice, an exclusion clause may
nevertheless be incorporated where there has been a previous consistent
course of dealing between the parties on the same terms. Contrast:

Spurling v Bradshaw [1956] 2 All ER 121

McCutcheon v MacBrayne [1964] 1 WLR 125.

As against a private consumer, a considerable number of past transactions

may be required. See:

Hollier v Rambler Motors [1972] 2 AB 71.

Even if there is no course of dealing, an exclusion clause may still become

part of the contract through trade usage or custom. See:

British Crane Hire v Ipswich Plant Hire [1974] QB 303.


As a result of the doctrine of privity of contract, the courts held that a person
who is not a party to the contract (a third party) was not protected by an
exclusion clause in that contract, even if the clause purported to extend to
him. Employees are regarded in this context as third parties. See:

Adler v Dickinson [1954] 3 All ER 396

Scruttons v Midland Silicones [1962] AC 446.

Now see the provisions in the Contracts (Rights of Third Parties) Act 1999
(Handout on Privity of Contract).


Even where an exclusion clause has been incorporated into a contract, it may
not have been incorporated in a collateral contract. See:

Andrews v Hopkinson [1957] 1 QB 229.


A problem arises if one party sends a form saying that the contract is made
on those terms but the second party accepts by sending a form with their own
terms on and stating that the contract is on the second party's terms. The
"rule of thumb" here is that the contract will be made on the last set of terms
sent. See:

British Road Services v Arthur Crutchley Ltd [1968] 1 All ER 811.


Once it is established that an exclusion clause is incorporated, the whole

contract will be construed (ie, interpreted) to see whether the clause covers
the breach that has occurred. The basic approach is that liability can only be
excluded by clear words. The main rules of construction are as follows:


If there is any ambiguity or uncertainty as to the meaning of an exclusion

clause the court will construe it contra proferentem, ie against the party who
inserted it in the contract. See:

Baldry v Marshall [1925] 1 KB 260

Houghton v Trafalgar Insurance Co (1954).

Very clear words are needed in a contract to exclude liability for negligence.

White v John Warwick [1953] 1 WLR 1285.


Under this rule, a court can strike out an exemption clause which is
inconsistent with or repugnant to the main purpose of the contract. See:

Glynn v Margetson [1893] AC 351

Evans Ltd v Andrea Merzario Ltd [1976] 1 WLR 1078.


· Prior to 1964, the common law considered that a fundamental breach could
not be excluded or restricted in any circumstances as this would amount to
giving with one hand and taking with the other. This became elevated to a
rule of law.

· However, the rule of law approach was rejected in UGS Finance v National
Mortgage Bank of Greece [1964] 1 Lloyd's Rep 446, on the basis that it
conflicted with freedom of contract and the intention of the parties. The
question of whether a clause could exclude liability for a fundamental breach
was held to be a question of construction.

· The UGS case was unanimously approved by the House of Lords in the
Suisse Atlantique case [1967] 1 AC 361, and Photo Production Ltd v Securicor
Transport [1980] AC 827.


The basic purpose of UCTA 1977 is to restrict the extent to which liability in a
contract can be excluded for breach of contract and negligence, largely by
reference to a reasonableness requirement, but in some cases by a specific


The Act does not apply to insurance contracts; the sale of land; contracts
relating to companies; the sale of shares; and the carriage of goods by sea
(Schedule 1); or to international supply contracts (s26).

Business Liability and Dealing as a Consumer

Most of the provisions of the Act apply only to what is termed "business
liability". This is defined by s1(3) as liability arising from things done by a
person in the course of a business or from the occupation of business
premises. The exceptions are ss6 and 7 where the Act also applies to private

The Act gives the greatest protection to consumers. Under s12(1) a person
"deals as a consumer" if he does not contract in the course of a business
while the other party does contract in the course of a business; and if it is a
contract for the supply of goods, they are of a type ordinarily supplied for
private use or consumption. But see:

Peter Symmons & Co v Cook [1981] 131 NLJ 758

R & B Customs Brokers v United Dominions Trust Ltd [1988] 1 WLR 321.


s2, Exemption of Liability for Negligence

* Under s2(1) no one acting in the course of a business can exclude or restrict

his liability in negligence for death or personal injury by means of a term in a

contract or by way of notice.
* Under s2(2) liability for negligence for any other kind of loss or damage can
be excluded provided the term or notice satisfies the requirement of

s3, Exemption of Liability for Breach of Contract

Where one party deals as a consumer or on the other party's written standard
terms of business, then the other party cannot exclude or restrict his liability
for breach of contract, non-performance of the contract or different
performance of the contract unless the exemption clause satisifies the
requirement of reasonableness.

s4, Unreasonable Indemnity Clauses

Indemnity clauses in contracts where one of the parties deals as a consumer
are unenforceable unless they are reasonable.

s5, Guarantees of Consumer Goods

A manufacturer or distributor cannot exclude or restrict his liability in
negligence for loss arising from defects in goods ordinarily supplied for private
use or consumption by means of a term or notice contained in a guarantee.

s6, Exemption of Implied Terms in Contracts of Sale and Hire-

* In contracts for the sale of goods and HP, the implied terms as to title
cannot be excluded or restricted by a contract term: s6(1).
* The implied terms as to correspondence with description or sample, fitness
for purpose and satisfactory quality cannot be excluded or restricted by any
contract term against a person dealing as a consumer: s6(2).
* Where the person is not dealing as a consumer, such liability can only be
excluded or restricted in so far as the term is reasonable: s6(3).

s7, Exemption of Implied Terms in other Contracts for the Supply of

* Exclusion clauses relating to title in contracts of hire are subject to the
reasonableness test.
* The implied terms as to correspondence with description or sample, fitness
for purpose and satisfactory quality cannot be excluded or restricted at all in
consumer contracts.
* Where the person is not dealing as a consumer the exemption is subject to
the requirement of reasonableness.

s8, Exemption of Liability for Misrepresentation

Any clause which excludes or restricts liability for misrepresentation is
ineffective unless it satisfies the requirement of reasonableness.

s10, Exclusion Clauses in Secondary Contracts

Section 10 contains an anti-avoidance provision which prevents the rights
preserved under one contract from being removed by a secondary contract.



Under s11(1) the requirement of reasonableness is that "the term shall have
been a fair and reasonable one to be included having regard to the
circumstances which were, or ought reasonably to have been, known to or in
the contemplation of the parties when the contract was made."

Section 11(2) provides that, in determining whether the clause is a

reasonable one for the purposes of ss6 and 7, regard shall be had to the
Guidelines set out in Schedule 2 of the Act, which are as follows:

(1) The bargaining strengths of the parties relative to each other and
the availability of alternative supplies.
(2) Whether the customer received an inducement to agree to the
term. (The supplier may have offered the customer a choice: a lower
price but subject to an exemption clause or a higher price without the
(3) Whether the customer knew or ought reasonably to have known of
the existence and extent of the term.
(4) Where the term excludes or restricts any relevant liability if some
condition is not complied with, whether it was reasonable at the time of
the contract to expect that compliance with that condition would be
(5) Whether the goods were manufactured, processed or adapted to
the special order of the customer.

Under s11(3) in relation to a notice (not being a notice having contractual

effect), the requirement of reasonableness is that it should be fair and
reasonable to allow reliance on it, having regard to all the circumstances
obtaining when the liability arose or (but for the notice) would have arisen.
This provision applies a test of reasonableness to disclaimers for tortious
liability. See:

Smith v Eric Bush [1989] 2 All ER 514.

Under s11(4) where the exclusion clause seeks to limit liability rather than
exclude it completely, the court must have regard to two factors: the
resources available to meet the liability, and the extent to which insurance
cover was available to the party aiming to limit liability. See also:

Ailsa Craig Fishing Co v Malvern Fishing Co [1983] 1 All ER 101

George Mitchell v Finney Lock Seeds Ltd [1983] 2 All ER 737
St Albans District Council v ICL [1996] 4 All ER 481.

Section 11(5) provides that it is up to the person who claims that a term or
notice is reasonable to show that it is.

4. s13 CLAUSES

A party to a contract may try to disguise an exclusion clause, even though the
effect of such a clause is to exclude liability. Section 13(1) tries to stop this
and prevents:

(a) making the liability or its enforcement subject to restrictive or onerous

(b) excluding or restricting any right or remedy in respect of the liability, or
subjecting a person to any prejudice in consequence of his pursuing any such
right or remedy;
(c) excluding or restricting rules of evidence or procedure.

Such clauses are void or must be reasonable if they exclude or restrict liability
respectively. Section s13, for example, will apply to terms: (a) imposing a
time limit for making claims; (b) limiting a buyer's right to reject defective
goods; and (c) stating that acceptance of goods shall be regarded as proof of
their conformity with the contract. See also:

Stewart Gill v Horatio Myer [1992] 2 All ER 257.


These Regulations revoke and replace the Unfair Terms in Consumer

Contracts Regulations 1994 which implemented the Council Directive on
unfair terms in consumer contracts. They came into force on 1st October
1999. They re-enact Reg. 2 to Reg. 7 of those Regulations with modifications
to reflect more closely the wording of the Directive.

The Regulations apply, with certain exceptions, to unfair terms in contracts

concluded between a consumer and a seller or supplier and provide that an
unfair term is one which has not been individually negotiated and which,
contrary to the requirement of good faith, causes a significant imbalance in
the parties' rights and obligations under the contract to the detriment of the
consumer. An unfair term shall not be binding on the consumer. Schedule 2
contains an indicative list of terms which may be regarded as unfair.