SINGAPORE POLYTECHNIC School of Business

BA0400 BUSINESS LAW

CHAPTER 3 TERMS OF THE CONTRACT

Objective
Students should be able to explain the various types of terms found in
contracts and be able to highlight some of the issues relating to exclusion
clauses.

Contents
 Introduction
 Express Terms
 Implied Terms
 Nature of Terms
– Conditions
– Warranties
– Innominate terms
 Exclusion clauses

1. Introduction

During the course of negotiations many statements may be made by the

parties involved. Not all the statements become terms of the contract. Some
will be mere ‘puffs’ and some may be mere .

A contract will consist of a number of terms. The number of terms will

depend on the complexity of the contract. Terms in a contract set out the
rights and obligations of the parties as well as the remedies that may be
available in the event of a breach of contract. Terms may be
stated or into a contract.

2. Express Terms

These are terms which are expressly communicated between the parties.
They have been discussed and upon either orally or in writing.
For example, an express term in an employment contract will be the
commencement date. This is a very important term to protect the employee
from unfair dismissals or to identify certain entitlements (rights).

3. Implied Terms

Implied terms refer to the terms that have not been agreed to expressly but
are nevertheless part of the contract. An example of an implied term in an
employment contract is that an employee is to work with good faith and
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commitment. If you are an accountant, then a high degree of integrity is

implied as part of your job requirements. If you are a human resource
personnel or an officer in a financial institution, then maintaining a high
degree of confidentiality is implied as part of your job requirements.
Likewise, if you are a guest relations officer in a hotel, a good grooming sense
in addition to having strong communication, interpersonal and listening skills
is implied as part of your job requirements.

An Implied term may be implied into the contract in the following ways;

(a) by fact, (b) by custom and (c) by law. Let us examine these ways in detail.

(a) By fact – The courts have implied terms into a contract for the purposes
of business . This means that the courts insert these
terms for businesses to operate effectively, even though the
parties themselves did not include the terms expressly. The
rationale is that the terms are so obviously necessary to the
contract itself that the parties must have intended such a term.

The Moorcock (1889)

- The defendants were the owners of a wharf.

- They had agreed that it should be used by the Plaintiff's ship for loading
cargo.

- The ship grounded and was damaged because of the condition of the river
bed.

- The court held that the defendants were liable for this damage; it was an
implied term that they would take reasonable steps to ensure the ground
below the jetty was safe.

Question: Must there be an express term in the contract that the berth
would be safe for the ship at low tide?

The answer is no. This is because there is an implied term that the owners of
the wharf would take reasonable care to ensure that the ground below the
jetty was safe.

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The courts also held that a term will be implied if it is one which the parties
themselves would have included in the contract had they addressed their
minds to it.

The rationale is to give "business efficacy" to their contract.

(b) by custom - This refers to the customs and practices of a particular trade
which have become so well-known in that trade that it does
not need to be expressed. For example, in the mango trade
and export industry, it is understood that temperature has
to be managed during storage of the mangoes before the
supply chain process begins. Otherwise, the mangoes will
begin to decompose. This does not need to be expressly
stated. It is implied into the contract.

(c) by law - This refers to the terms which are implied by law into the
contract irrespective of the expressed intentions of the
parties. An Act of Parliament may imply terms in certain
types of contract. An example is section 14(2) of the Sale of
Goods Act 1979 which states that where there is a sale of
goods in the course of business, there is an implied
condition that the goods would be of
quality.

3.1. Implied Terms (Sale of Goods Act)

The Sale of Goods Act (SOGA) implies certain terms into every contract for
the sale of goods such as:

(a) Title (legal ownership) - Section 12 of the Act states that there is an
implied condition in every sale of goods contract that the seller has the right
to sell goods. There is also an implied warranty that the buyer will enjoy
quiet possession of the goods.

(b) Description - Section 13 of the Act states that where there is a sale by
description, there is an implied condition that the goods will match the
description. For example, Leon contracts to buy a painting by a famous
painter from Oscar, an expert on paintings, based on the description. After
the sale, Leon realises that the painting was fake. Leon had relied on the
description of the painting i.e. that it was by a famous painter, before
deciding to purchase it. Therefore, Leon has an action under Section 13 of
the Sale of Goods Act, for goods not corresponding with description.
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(c) Quality - Section 14(2) of the Act states that where a seller sells
goods in the course of business, there is an implied condition that the goods
so supplied are of satisfactory quality. This means the goods must meet the
standard that a reasonable person would regard satisfactory, taking into
account the way they are described, the price and all other relevant factors.

The following are circumstances in which the rule does not apply:

- When a defect has been brought to the attention of the buyer; or

- If the buyer had already the goods prior to entering

into the contract.

The rationale is that the buyer had already been given the opportunity to
examine and reject the goods prior to (before) entering into the contract.

(d) Fitness for particular purpose - Section 14(3) of the Act states that
where the seller sells goods in the course of business and the buyer makes
known to the seller any particular purpose for which the goods have been
bought, there is an implied condition that the goods will be reasonably fit for
the particular purpose.

The exceptions are where the buyer does not rely on the seller or it is not
reasonable for him to rely on the skill and judgment of the seller.

4. Nature of Terms

All terms, whether express or implied can be classified into a condition,

warranty or an innominate term. An innocent party has the right to
terminate a contract if the other party has committed a fundamental breach
of the contract; i.e. a breach of a condition or breach of an innominate term.
Breach of a warranty on the other hand will only allow the innocent party to
sue for damages but still requires him to carry on with the contract.

4.1. Conditions

A condition is a term that is to the main purpose of the

contract. Breach of a condition will result in the termination of the contract.
The innocent party has the choice to: (i) terminate the contract and claim
damages; or (ii) accept the breach and claim damages.

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4.2. Warranties

A warranty is a term that is important to the main purpose of the

contract. The breach may cause some injury or loss to the innocent party.
However, it does not affect the main purpose of the contract. The innocent
party does not have the choice to terminate the contract for breach of
warranty. He is entitled to claim damages for the breach but is required to
carry on with the contract.

4.3. Innominate Terms

Sometimes a term cannot be classified as a condition or a warranty from the

outset. This can be due to the debatable nature of the term. How then can
they be classified? They are known as innominate terms. The consequences
of the breach of innominate terms can only be determined from the
of the breach. If the breach is a serious and fundamental one in a given
situation, then the contract will be treated as discharged. If the breach is not
serious and not fundamental in a given situation, then the contract cannot
be discharged. The innocent party is entitled to damages in either case.

5. Exemption Clauses

An exemption clause is used by a party in a contract to or limit the

liability of the party in breach of contract. It is frequently put into contracts
by the commercially stronger party. It arises in situations where parties
anticipate a breach of contract and try to protect themselves.

An exclusion of liability clause seeks to completely exclude liability. An

example of an exclusion clause is:

“All vehicles parked at owner’s risk. No liability accepted for any loss or
damage”.

A limitation of liability clause seeks to limit its liability. An example of a

limitation of liability clause is:

“An innkeeper is not liable for losses sustained by guests, except for wearing
apparel, luggage, or money for travel expenses and personal use. In the event
of such loss, the innkeeper is not liable for more than $300 in any one loss.
However, if the loss involves the loss of money or jewellry that is deposited
for safe keeping with the hotel, the innkeeper will be liable for an amount up t
o $1,000”.
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For consistency, we will refer to both types of clauses as exclusion clauses in

this chapter.

Exclusion clauses can be abused by the parties relying on them. There are
three ways through which the courts try to regulate the use of these clauses.
The parties relying on the clause must establish the following:

i. That the clause was into the contract;

ii. That the clause, when properly interpreted, clearly covers the
damage;
iii. That the clause does not run contrary to the Unfair Contract Terms
Act.

5.1. Incorporation of exclusion clause into the contract

There are ways in which the innocent party may challenge the other party’s
reliance on an exclusion clause. Firstly by asking the question if the clause
was indeed incorporated into (or made a part of) the contract. A clause can
be part of a contract through signed as well as unsigned documents.

5.1.1. Signed Documents

If the exclusion clause is contained in a document which is signed by a party

challenging it, the courts will regard it as being part of the contract. The
rationale is that any party signing a contract is deemed to have read, ______
and agreed to the terms and conditions contained in the
document. This would include the exclusion clause as well.

5.2.2 Unsigned Documents

Where the exclusion clause is contained in an unsigned document, for

instance on a ticket stub or a notice displayed on the premises, it will only be
regarded as being part of the contract i f the other party knew or should
reasonably have known of the existence of the exclusion clause. In order for
the party to rely on the exclusion clause, he must show that:

(a) he had taken reasonable steps to bring it to attention of the other

party before or at the time of the contract; or

(b) there had been a course of past dealings between the parties on
terms which included the exclusion clause.

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Reasonable steps:
- Notice must be placed in an obvious place.
- Notice must be visible and legible

5.2. The clause covers the damage

The wording of the clause must clearly cover the loss which took place. The
clause must be properly worded to cover the situation where liability (or
legal responsibility) is being excluded. If the wording is ambiguous, it will be
interpreted against the party relying on the clause (the contra proferentum
rule). The courts will proceed to interpret it in a manner least
to the party who inserted it into the contract and is trying to rely on it to
escape legal responsibility.

5.3. The clause does not run contrary to the Unfair Contract Terms Act

There have been instances where even if the exclusion clause has been
incorporated into the contract, it can be rendered void by law. One such
important law is the Unfair Contract Terms Act, also known as the UCTA.

5.3.1. Reasonableness

This Act operates on the basis of reasonableness. If an exclusion clause is

unreasonable, it would be deemed even if it had been
incorporated into the contract. The following will be considered in
determining reasonableness:

(i) The bargaining positions of the parties: If the parties are on equal
footing i.e. one party does not have a stronger bargaining power
than the other, then the exclusion clause would be considered
reasonable, all other things being equal.

(ii) Whether the customer had received an inducement to agree to

the term: An example would be of a customer receiving an
incentive to enter into the contract with an exclusion clause. This
would be regarded as reasonable as the incentive was given “in
exchange” for the contract with the exclusion clause.

(iii) If the customer had knowledge of the exclusion clause: If there

was knowledge, then it is likely to be reasonable.

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(iv) Whether it is practical to comply with the exclusion clause.

5.3.2. Scope of UCTA

The operation of the provisions of UCTA are mainly visible in business liability
cases or consumer .

Business liability refers to liability arising from things done in the course of
business or professional activities. A business party is a party who makes the
contract in the course of business.

Consumer transactions refers to consumer contracts i.e. contracts made by

individuals who enter into contracts with other people who acts in the
course of business. A consumer is someone who does not make a contract in
the course of business. However, he makes a contract with a party who is
acting in the course of business for goods of a type ordinarily supplied for
private use or consumption.

5.3.3. Scope of Sections 2(1) and 2(2) UCTA

For section 2(1) UCTA, the exclusion clause that restricts or limits liability for
death or personal injury arising from negligence is void. Therefore if death or
personal injury is caused by negligence of the business party relying on the
exclusion clause, liability cannot be excluded. In other words, the exclusion
clause is void and the business party will be held .

For section 2(2) UCTA, the exclusion clause that restricts or limits liability for
other types of loss or damage is valid if the term or notice of the exclusion
clause is reasonable.

5.3.4. Instances where exclusion clauses are deemed invalid by UCTA

The following are instances where the business party cannot exclude liability:

(a) For death or personal injury arising from the business party’s negligence.

(b) For breach of an implied term as to title under section 12 of SOGA in

contracts for sale of goods or hire purchase between two business
parties or a business party and a consumer.

(c) For breach of an implied term as to description under section 13,

satisfactory quality under section 14(2), and fitness for purpose under
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section 14(3) in contracts for the sale of goods or hire purchase

with a consumer.

5.3.4. Instances where exclusion clauses are deemed valid

The following are instances where a business party may exclude liability
based on fairness and ________________:

(a) If there is property loss or damage arising from the business party’s
negligence.

(b) If there is a breach of an implied term as to description under section 13

SOGA, satisfactory quality under section 14(2) and fitness for purpose
under section 14(3) in a business to business contract.

6. Conclusion

At this juncture, you should be able to distinguish between puffs,

representations and terms. Terms form the basis of a contract and are
further categorised into conditions, warranties and innominate terms. You
should also be able to state the consequences of breach of a condition,
warranty and an innominate term. You also looked at exclusion clauses and
how an innocent party may protect himself from those clauses. Exclusion
clauses are subject to the UCTA namely the test of reasonableness. You
should also familiarise yourself with the factors that determine
reasonableness.

NOTES

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