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THE CONTENTS OF A CONTRACT: TERMS
We have so far looked at the methods of creating a contract between two parties and
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some other factors that may have a bearing on the making of a contract or the ability of
the parties to enter into such an arrangement.
The terms of a contract are otherwise known as the contents of a contract and they
represent what the parties have agreed to do or give under the contract, in other words,
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their obligations to each other. Both sides will have obligations as we have seen in the
chapter of offer and acceptance and from the doctrine of consideration.
Under a contract, both sides will have to carry out their side of the agreement for the
contract to be complete. It is commonly a failure to honour our contractual obligation,
and therefore a breach of a term of the contract, that leads to a dispute.
The terms of a contract can be what the parties have expressly agreed upon, but they can
also be what the law has said should be included in the contract and therefore is implied
into the contract.
The process of defining and distinguishing the express terms
Terms that have been expressly agreed upon by the parties will inevitably arise from the
negotiations that have taken place prior to the contract being formed and the statements
that each party makes to the other at the time. Such pre-contractual statements are
generally known as ‘representations’.
A pre-contractual statement may be made orally or in writing or indeed be implied by
conduct, as when a contract is formed on the fall of an auctioneer’s hammer.
The law rightly has to distinguish between different statements according to the relative
significance they will have in law. In all cases the court will determine what the intention
of the parties was by use of an objective test – what would a reasonable person consider
to be the significance of the statement?
There are also some statements made at the time the contract was formed or in the
negotiations leading up to it that will attach no liability and have no legal significance.
They will be treated as such because the courts can find no reliance placed upon them, or
indeed because no sensible person would believe that they would induce a party to enter a
contract. They are of three different types:
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Trade Puffs
Puffs are the boasts or unsubstantiated claims made by, amongst others, advertisers of
products or services to highlight the product they are selling. E.g. “Cadbury – probably
the best chocolate in the world” is an obvious example of such a boast.
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In contrast, Carlill v. The Carbolic Smoke Ball Co. Ltd (1893) is NOT a trade puff
but the statements made in that case were terms of an enforceable contract.
Opinions
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Some statements made by a party to a contract attach little legal significance because they
lack any weight. An example of this is a mere opinion. An opinion does not carry any
liability for the party making it because it is not based on fact.
Bisset v. Wilkinson (1927)
Obviously, if the statement of opinion is known to be untrue by the party expressing it,
then it can be actionable as a misrepresentation. Similarly, a party will be able to sue on
the basis of a false opinion which has been stated by a party with specialist expertise in
that field, and therefore who is in a better bargaining position than the party to whom it is
addressed.
Esso Petroleum Co. Ltd v. Marden (1976)
Mere Representations
Where a party to a contract has made a representation as to fact, which is intended to
induce the other party to enter the contract, but which is not intended to form part of the
contract, and it is in fact true, there can be no further contractual significance. The
representation has achieved what it was supposed to do but it is accurate so it has also
been complied with.
The process of incorporating express terms
Factors relevant to incorporating express terms
Clearly, the dividing line between some of the categories of statements are not always
obvious. Where the contract is in writing, then generally the terms are as stated in the
written contract. Where negotiations leading up to the contract are oral, the courts have
developed guidelines to determine whether a particular statement is a term of the contract
or not.
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In order to be a term of the contract the statement must be incorporated and form part of
the contract. Whether or not a statement is incorporated as a term can depend on a
number of different factors:
a) The importance attached to the representation
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The more importance is attached to the statement by either party then the more likely it is
that it is a term. The logic of this is clear. Where a party relied on a statement such that
without being incorporated into the contract as a term, then it is unlikely that the party
would have entered the contract without the inclusion of the provision identified in the
statement as a term.
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Birch v. Paramount Estates (Liverpool) Ltd (1956)
Here, a couple bought a new house from developers on the basis of a promise that the
house would be ‘as good as the show house’. In fact, the house was not as good as the
show house and the Court of Appeal concluded that the statement was so central to the
agreement that it had been incorporated into the contract as a term.
Where a party has requested specific details about the agreement this can also be taken to
indicate that importance is attached to them and that they are incorporated into the
contract as terms.
Bannerman v. White (1861)
During negotiations for the purchase of crops the defendant purchaser stated that ‘if they
have been treated with sulphur I am not interested in even knowing the price of them’.
Assurances were given that they had not, which asked them of samples that were
produced. In fact, some of the crop had been treated with sulphur. The defendant
repudiated the contract. The claimant argued that the discussions were preliminary to the
contract, but the court accepted that the stipulations regarding sulphur amounted to a
condition of the contract that was therefore breached.
b) Special knowledge or skill affecting the equality of bargaining strength
Thus where the statement is made without any particular expertise or specialist
knowledge to back it is less likely to be construed as a term.
Oscar Chess Ltd v. Williams (1957)
The defendants sold a car to motor dealers for £290, describing it as a 1948 Morris 10.
They honestly believed that was the correct age of the car since that was the age given in
the registration documents. When the car was later discovered to be a 1939 model, the
motor dealers sued for breach of warranty. Their action failed. The defendants had no
expertise or specialist skill, were reliant on the registration documents and their statement
as no more than an innocent misrepresentation.
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However, a statement may well amount to a term where the person making it possesses
specialist knowledge or expertise and the person to whom it is made is relying on that
expertise in deciding to contract.
Dick Bentley Productions Ltd v. Harold Smith (Motors) Ltd (1965)
The claimant asked the defendants, who were car dealers, to find him a ‘well vetted’
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Bentley car, in other words, one is in good condition. The defendants found a car they
falsely stated had only done 20,000 miles since being fitted with a new engine and
gearbox. In fact, it had done 100, 000 miles. The claimant later found the car to be
unsuitable, as well as discovering that the statement about the mileage was untrue, and
sued for breach of warranty. The Court of Appeal upheld the claim since the claimant
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relied on the specialist expertise of the car dealers in stating the mileage.
c) The time between making the statement and formation of the contract
Sometimes the court may assess that the time lapse between the statement made in the
negotiations and the creation of the contract itself is too great to support a claim that the
statement is incorporated in the contract as a term.
Routledge v. Mckay (1954)
A motor cycle had actually first been registered in 1939 but on a new registration book
being issued it was wrongly stated a 1941. In 1949 the current owner, who was unaware
of this inaccuracy, was selling he motor cycle and in response to an enquiry as to the age
by a prospective buyer gave the age in the registration documents. The prospective buyer
then bought the motor cycle a week later in a written contract that made no mention of
the age. When he discovered the true age and tried to sue for a breach of a term he failed.
The lapse of time was held to be too wide to create a binding relationship based on the
statement.
d) Reducing the agreement, including the statement, to writing
Where a contact is made in a written document and a statement made orally between the
parties is not included in the written document then the court will generally infer that it
was not intended to form part of the contract but is mere representation.
Routledge v. Mckay (1954)
Here, since the written agreement made no mention of the age of the motor cycle, the
court held that it had not been considered important enough to be a term.
Furthermore, where a written agreement is signed this will generally make the contents of
the agreement binding irrespective of whether that have been read by the party signing.
(A clear warning that you should never sign anything without reading it first).
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L’Estrange v. Graucob (1934)
The claimant bought a vending machine from the defendants on a written contract, which
in small print contained the clause ‘any express or implied condition, statement or
warranty, statutory or otherwise not stated herein is hereby excluded’. The machine
turned out to be unsatisfactory and the claimant claimed for breach of an implied term as
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to fitness for purpose under the Sales of Goods Act 1893. (Exclusions of liability for
implied terms were possible under the 1893 Act). She also argued that she had not read
the clause and had no knowledge of what it contained. Judgment was initially given to the
claimant but on appeal she failed. As Scrutton LJ put it, ‘When a document containing
contractual terms is signed, then, in the absence of fraud, or misrepresentation, the party
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signing it is bound, and it is wholly immaterial whether he has read the documents or
not’.
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Of course, judgments like the above are now subject to the Unfair Contract Terms Act
and Unfair Terms in Consumer Contracts Regulations.
e) The extent to which the term is effectively drawn to the notice of the party subject
to it
In general, a term will not be accepted as incorporated into the contract unless it is
brought sufficiently to the attention of the party subject to it prior to or at the time the
contract is made. This is one of the basic ways in which judges have developed
protections for consumers in the case of exclusion clauses. So the party subject to an
alleged term must have real knowledge of it before entering the contract or it may not be
incorporated.
O’Brien v. MGN Ltd (2001)
The claimant bought a copy of the Daily Mirror containing a scratch card. On the card
was printed ‘for full rules and how to claim, see Daily Mirror’. The claimant bought
another Daily Mirror containing a scratch card on a later day. The card and paper
contained the words ‘normal Mirror rules apply’. This second card showed a £50,000
prize, but because of a mistake 1,472 other people were also told that for a draw to take
place in the event that there are more winners than prize money available. The paper
organized a draw with one prize of £50,000 and another £50,000 to be divided between
all the others (34p each). The contract included the phrase ‘normal Mirror rules apply’
and it was held that this was sufficient to incorporate the terms. The newspaper had done
just enough to bring the terms to the attention of the claimant since the rules were
referred to on the back of each card and were available at the offices of the paper and in
back issues of the paper.
f) The significance of the standard forms
It is commonplace in a modern commercial context for parties to contract on their own
standard terms and conditions. Very often, this can lead to problems when the terms are
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mutually conflicting. Where the contract has been formed orally, such terms can be relied
on only if they have in fact been incorporated into the contract at the time of its
formation.
Lidl UK GmbH v. Hertford Foods Ltd (2001)
Here, in a contract for supply of corned beef the seller was able to deliver only part of the
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order and was unable to get further supplies due to circumstances beyond his control. The
buyer then had to obtain supplies elsewhere at extra cost, which the buyer then sued for.
Both parties then tried to rely on their own standard terms and conditions. The seller’s
terms included a ‘force majeure’ clause, which would make them not liable. They had
done business with each other before so had seen each other’s terms, but the terms were
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inconsistent and not been incorporated into earlier contracts. As the contract was made on
the telephone and neither party had mentioned their standard terms, even though they had
later sent them to the other, the Court of Appeal decided in that neither set of terms was
incorporated. The seller was in breach of contract and liable.
It is important to remember that since the passing of the Misrepresentation Act 1967,
many of the above claimants would not necessarily have to try to prove that the statement
made to them amounted to a term of the contract. The Act allows a claimant an action
even in respect of an innocent misrepresentation such as that relating to age of a vehicle
found in the registration documents of a vehicle. Prior to this Act there were very limited
circumstances in which a claim for misrepresentation could be made. So it was vital for a
claimant to prove that a statement as a term, otherwise s/he may have had no remedy at
all.
