4. Terms of a contract

Question 1

Ecay v Godfrey [1947]

Answer 1

Area: Deciding whether a statement is a term or a representation

1. A pre-contractual statement can become part of a contract, if the parties intend it to be so
2. If the maker of a pre-contractual statement asks the claimant to verify the truth of their statement (e.g carry out a survey), then they do not intended that statement to form part of the contract if it is clear that they are not prepared to be relied upon for its truth.

Question 2

What is a “mere representation”?

Answer 2

A “mere representation” is intended to induce a person into entering into a legally binding contract. These are statements which are not intended to become binding terms.

Question 3

Why is it important to distinguish between statements which are terms and those that are mere representations?

Answer 3

The potential remedies for a breach will differ.

A breach of a term may provide action for breach of contract, whilst a breach of a representation can only lead to an action for misrepresentation.

Question 4

What is a “mere puff”?

Answer 4

A “mere puff” is neither a representation or a term of the contract.

A “mere puff” can not be a cause of action. Puffs are considered not to have been taken seriously.

Question 5

What is the main test for determining whether a statement is a term or a representation?

Answer 5

What was the intention of the parties?

The question put forward by the House of Lords in Heilbut, Symons & Co v Buckleton [1913]: Was there evidence of an intention by one or both parties that there should be a contractual liability in respect of the accuracy of the statement?

The courts will apply an objective test to determine intention – What would the reasonable person consider to be the intention of the parties as regards the status of a particular statement in all the circumstances of the case?

Question 6

When determining whether a statement is a term or representation, what are the subsidiary aids the court will take into account?

Answer 6

• Timing between the statement being made and the date of the contract.

• Importance of the terms

• Any reduction of terms to writing

• Any special knowledge/skills held by the person making the statement

Question 7

Routledge v McKay [1954]

Answer 7

Area: The timing of the statement when determining whether a statement is a contractual term or a mere representation.

Facts: A registration document for a motorcycle had the incorrect date, suggesting that it was newer than it actually was. The owner, who was unaware of this inaccuracy, relied on the registration document when informing the prospective buyer of it’s age. The buyer bought the motorcycle a week later by a written contract that did not stipulate the age of the motorcycle. He later discovered the true age and sued for breach of a term.

Outcome: The buyer’s claim failed. The court considered that the lapse of time was too great to infer that the contract was formed based on the statement of age and, as such, the statement was not incorporated as a term of the contract

Question 8

Pub Co v East Crown Ltd [2000]

Answer 8

Area: The timing of the statement when determining whether a statement is a contractual term or a mere representation.

Importance: The court stated that the longer the interval between the statement and the contract, “the greater the presumption that the parties did not intend the statement to have contractual effect”.

Question 9

Bannerman v White [1861]

Answer 9

Area: The importance of the statement when determining whether a statement is a contractual term or a mere representation.

Facts: The defendant was a purchaser of hops. Before the contract was formed, the purchaser stated that “if they have been treated with sulphur, I am not interested in even knowing the price of them”. The seller stated (wrongly) that they had not been so treated. When the purchaser discovered this, he repudiated the contract. The seller sued on the basis that the discussions were preliminary to the contract and not part of it.

Outcome: The seller’s claim failed. The court held that the statement was so important to the purchaser that it became a term of the contract, rather than a mere representation. As such, the term had been breached.

Question 10

When determining whether a statement is a term or representation, what happens if an oral agreement has been partly reduced into a written agreement?

Answer 10

The court has to decide whether it was the parties’ intentions for the:
• written document alone should represent the contract; OR
• whether the contract should be regarded as partly oral and partly written.

In Birch v Paramount Estates ltd [1956], the courts had decided to read an earlier oral statement and a later written statement as one comprehensive contract. In this case, housing estate developers offered a house to the claimant stating that it would be as good as the “show house”. The written contract made no reference to this earlier representation and the house was not as good as the show house. The Court of Appeal treated the oral statement as part of the overall agreement and thus allowed the claimant’s claim for damages.

Question 11

Oscar Chess Ltd v Williams [1957]

Answer 11

Area: The importance of any special skill/knowledge when determining whether a statement is a term or a mere representation.

Facts: The defendant, a private seller, sold a car to a dealer after representing it to be a 1948 Morris. The registration document referred to it as a 1948 model, but this had fraudulently been altered by an unknown third party. In fact, the car was 1939 model and was worth less than the 1948 model.

Outcome: It was held that the statement in the registration document was a representation, not a contractual term.

The deciding factor was that it was obvious to any reasonably buyer that the seller had no actual knowledge of when the vehicle was first registered AND being in the trade, the buyer was in a better position to check the year/model.

Question 12

Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965]

Answer 12

Area: The importance of any special skill/knowledge when determining whether a statement is a term or a mere representation.

Facts: The defendant car dealer told the claimant that a car had been fitted with a replacement engine, gearbox and had only done 20,000 miles since these repairs. The speedometer showed a mileage of 20,000 miles and it had in fact done 100,000 miles.

After buying the car, the claimant found the statement as to the mileage to be untrue.

Outcome: The court held that the statement was a contractual term as the defendant, a car dealer, clearly had special knowledge and was therefore taken to have warranted the accuracy of his statement.

In reaching the above decision, Lord Denning considered that the presence of fault was the basis of whether a statement was incorporated as a term or amounted to a mere representation. (i.e. the dealer should have known better compared to a private seller / did the statement maker take reasonable care to verify their statement?).

Question 13

What are the comparable cases to illustrate how any special skill/knowledge is taken into account when determining whether a statement is a term or a mere representation?

Answer 13

Oscar Chess Ltd v Williams [1957]
&
Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965]

Question 14

What is the parol evidence rule?

Answer 14

The general parol evidence rule states that where a contract has been reduced to writing, extrinsic evidence (whether written or oral) is in admissible to add to, vary or contradict its terms. In other words, at common law, a written contract is presumed to contain everything upon which the parties agreed, and anything that is not embodied in the contract is considered never to have been intended to be included.

Question 15

What are the exceptions to the parol evidence rule?

Answer 15

There are several exceptions (which has caused the Law Commission to change their mind on initially suggesting the parol evidence rule should be abolished):

1. If the written agreement was not intended to be the whole contract on which the parties had actually agreed, parol evidence is admissible (J Evans and Son (Portsmouth) Ltd v Andrea Mezario Ltd [1976].
2. Parol evidence only forbids a person relying on extrinsic evidence as to the terms of the contract and not whether the contract is valid or invalid. A party can adduce extrinsic evidence to show that the contract was not binding for lack of consideration or was invalid because of some other defect, such as lack of capacity, mistake or misrepresentation.
3. Parol evidence may be used to show that the written document does not accurately record the true agreement (such as a poor attempt to represent a prior oral agreement). In such an instance a party apply to the court for the written agreement to be rectified.
4. Parol evidence can be used to explain words or phrases that are ambiguous or that, if taken literally, make no sense.
5. Parol evidence can be used to show that that the contract does not yet operate, or that it has ceased to operate. (Pym v Campbell [1856])

Question 16

What are the three classifications of a contractual term?

Answer 16

Originally there was only two categories, the condition and the warranty. However, the courts have since created a third category, the innominate term.

o Condition: The injured party may repudiate and/or claim damages.
o Warranty: Repudiation is not available. The injured party may only claim damages.
o Innominate term: The remedy is at the court’s discretion: the injured party may be able to repudiate or only obtain damages

Question 17

In general, what is a “condition” and the consequences of breaching a “condition”?

Answer 17

• A condition is a term going to the very root of the contract: it is a term of fundamental importance.

• Generally speaking, what are the broad consequences of a breach of a condition? A breach of a condition does not automatically cause a contract to be terminated – the innocent party is given the option to repudiate (cancel) the contract and claim damages (if appropriate) OR to affirm the contract and continue with it while claiming damages for the breach.

Question 18

In general, what is a “warranty” and the consequences of breaching a “warranty”?

Answer 18

• A warranty is a term of lesser importance than a condition. A breach of a warranty is less likely to be fatal to the operation of the contract as a whole.

• A breach of a warranty only allows a claim for damages and not repudiate the contract.

Question 19

What two cases helpfully illustrate the different definitions between a “condition” and a “warranty”?

Answer 19

Poussard v Spiers [1876]

&

Bettini v Gye [1876]

Question 20

Bettini v Gye [1876]

Answer 20

Area: Classifying a term as a “condition” or a “warranty”.

Facts: Bettini agreed by contract to perform as an opera singer for a three-month period. He became ill and missed three of the six days of rehearsals. The employer sacked him and replaced him with another opera singer. It was held that Bettini was in breach of warranty and therefore the employer was not entitled to end the contract.

Outcome: The term was considered to be a warranty. The rehearsal clause was subsidiary to the main purpose of the contract and therefore, missing the rehearsals did not go to the root of the contract. The producers were entitled to sue for damages, but not to repudiate and terminate the contract.

Question 21

Poussard v Spiers [1876]

Answer 21

Area: Classifying a term as a “condition” or a “warranty”.

Facts: Mme Poussard entered a contract to perform as an opera singer for three months. She became ill five days before the opening night and was not able to perform the first four nights. Spiers then replaced her with another opera singer, who insisted that she should be engaged for the whole run. When Mme Poussard recovered, the producer declined to accept her services for the remaining performances.

Outcome: It was held that Mme Poussard’s failure to sing on the opening night was a breach of condition and Spiers were entitled to end the contract. She missed the opening night which was the most important performance as all the critics and publicity would be based on this night.

Question 22

What is an innominate term?

Answer 22

An innominate term is an intermediate category, to be used when there is no clear position as to the status of the term and such classification (of a condition or a warranty) is pending determination by the court.

The court will have reference to the effects of the breach in order to determine the rights of the innocent party. Therefore, a breach of an innominate term can lead to either repudiation or damages.

Question 23

What is the first case that introduced the concept of an innominate term?

Answer 23

Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962].

Question 25

Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962]

Answer 25

Area: Innominate terms Facts: • Kawasaki contracted with Hong Kong Fir Shipping to charter a vessel for a two-year period. • A term in the contract required that the vessel was “fitted in every way for ordinary cargo service” and that the owners would “maintain her in a thoroughly efficient state … during service”. • Soon after the beginning of the voyage, the ship broke down due to the incompetence of its engine-room staff and it was discovered that it was not seaworthy and in need of many repairs. • To allow these repairs to be carried out, to bring the ship to a seaworthy state, the claimants were deprived of the use of the ship for 18 weeks. • Kawasaki wrote to the owners repudiating the charter. HK Fir brought an action for wrongful repudiation, claiming that the term was a warranty and not a condition. Legal Principle: • It was held that HK breached the terms of the contract, by not maintaining the ship in an efficient state. However, this breach was not substantial enough to entitle the character to repudiate the contract. • In reaching this decision, the court stated that one must look at the consequences of the breach and then decide if that entitles the innocent party to repudiate the contract. The key question arising from this decision is whether the innocent party is substantially deprived of the whole benefit that the contract was intended to confer. • Therefore, the first step must be to determine what was the benefit that the contract was intended to confer. Then, determine whether the innocent party has been substantially deprived of that benefit.

Question 26

The “Mihalis Angelos” [1971]

Answer 26

Area: Negative for innominate terms The Court of Appeal were pressed to accept the reasoning adopted in Hong Kong Fir but it was of the opinion that classifying terms as either a condition or a warranty still had valuable benefits in certain classes of contracts. Certain contracts with regularly reoccurring conditions require some kind of certainty and the finding of said terms as innominate would cause uncertainty in a whole industry, due to the effect of an innominate term being uncertain

Question 27

How does the case of Manbre Saccharine Co v Corn Products Co [1919] support the argument in support of innominate terms?

Answer 27

It is arguable that, despite creating certainty, classification of a term at the outset of a contract can ultimately be unfair. Very often, a party will claim to be entitled to repudiate a contract because there has been a breach of condition, when there is arguably no real justification for them doing so (other than economic or commercial reasons, perhaps). In those situations, classification at the time of contractual formation provides for harsh results. For example, in Manbre Saccharine Co v Corn Products Co [1919] a term in a goods contract stipulating that a large quantity of starch be delivered in 280 lb bags was held to be a condition giving rise to a right to terminate if breached when all of the starch was delivered, on schedule, but in differently sized bags

Question 28

Grand China Logistics Holding v Spar Shipping AS [2016]

Answer 28

Hamblemen LJ said the following, which is being increasingly cited in subsequent cases: “The modern English law approach to the classification of terms is that a term is innominate unless it is clear that it is intended to be a condition or a warranty”.