Terms of the Contract Term and Representations
Where the parties are involved in pre-contractual negotiations numerous statements may be made. The law has to distinguish between statements which become part of the contract, i.e. terms, and those which cause the contract to be formed but do not form part of the con- tract, i.e. representations.
- If a term of a contract is broken, then the remedies available are:
- damages; and possibly
- the ending of the injured parties obligations under the contract.
- If a representation proves to be false, then the remedies available are:
(i) found in the law of misrepresentation.
Distinguishing a Term and a Representation – Intention
In order to identify terms and representations, the court looks at the intention of the parties, i.e. “did they intend the statement to be a term of the contract or to be a mere representation?”
In order to ascertain the intention of the parties, the court will look at the strength of the statement made (Schawel v Raede); whether the representor, the maker of the statement, has any specialist knowledge; and they will also look at whether the representee made it clear to the maker of the statement that its presence was vital to the making of the contract (Bannerman v White). If any of these elements are present, it is likely to be a contractual term.
The court will also find intention where a written contract is formed, but the statement is not included; as well as the time lapse between the making of the statement and the formation of the contract – with the greater the lapse of time the more likely the statement is to be a mere representation and not a term of the contract (Routledge v McKay).
Implied terms
A contract can include “express” or “implied” terms. Terms may be implied where there is:
- the parties intended such a term but have unintentionally omitted it from the contract (i.e. the term can be implied in fact): A term can be implied in fact where:
- it is necessary to imply the term because the contract would not make business sense without it (“the business efficacy test, The Moorcock); and
- if an officious bystander had been present at the time the contract was made and had suggested that such a term should be included, it must be obvious that both parties would have agreed to it (“the officious bystander test, Shir- law v Southern Foundries).
- operation of law states that a contract is subject to terms determined by law:
In contracts for the sale of goods and supply of services certain basic provisions are implied by statute in order to provide protection to purchasers. The main provisions derive from the Sale of Goods Act 1979 and the Supply of Goods and Services Act 1982. The Sale of Goods Act protects purchasers where the seller does not have the right to sell the goods (s.12). Where the goods are sold by description there is an implied term that the goods will correspond to that description (s.13). Businesses must ensure that the goods they sell are of satisfactory quality and fit for their purpose (s.14). Goods are fit for purpose where a reasonable consumer would have accepted the goods at the same price had they known of the defect, or where the transaction is commercial where a reasonable purchaser could have used the goods for purposes for which the goods were commonly supplied. Where the goods are sold by sample there is an implied term that the goods will correspond to the sample in quality (s.15).
Where the goods are supplied along with a service then the Supply of Goods and Services Act 1982 applies. This implies the identical provisions as the Sale of Goods Act in relation to the goods supplied. In addition there are implied terms that the service must be carried out with reasonable care and skill (s.13), that the service will be carried out within a reasonable time (s.14) and where no price is agreed a reasonable price will be paid (s.15).
- custom or trade usage:
Alternatively, where a particular term is prevalent in a trade the courts may imply a term in a contract of the same type in that trade (Hut- ton v Warren).
The weight of the terms – Conditions, warranties and innominate terms
Contractual terms can be:
- conditions
A condition is a major term of a contract. If a condition is breached the innocent party is entitled to:
- end the contract; and
- claim damages (Poussard v Spiers)
- warranties
A warranty is a minor term of a contract. If a warranty is breached the innocent party is entitled to:
- only damages (Bettini v Gye)
In determining whether a term is a condition or a warranty, the court will consider the intention of the parties at the time the contract is made (though statute law such as the Sale of Goods Act 1979) or case law which requires certainty in commercial contracts may deter- mine that a term is a condition; Mihalis Angelos).
- innominate terms.
If the term is unclear when the contract is formed, the court will shift its focus from the classification of the term at the time the contract is formed and instead focuses on the breach of the contract and the seriousness of the breach (an “innominate or intermediate” term).
If the consequence of the breach is serious, the injured party can end their obligations under the contract and claim damages. If the conse- quence of the breach is minor, the injured party can only claim damages (Hong Kong Fir Shipping).
What type of liability does the term impose?
- Strict liability arises whether or not a contracting party is at fault (e.g. I say I will do X by date Y and I fail to perform, it does not mat- ter that it was due to circumstances beyond my control).
- Liability for negligence is based on fault (e.g. liability can arise in the term implied by section 13 of the Supply of Goods and Serv- ices Act 1982 where services are to be carried out with “reasonable care and skill”).
