BA4 Fundamentals of Ethics, Corporate Governance and Business

Law

Module: 8

Terms of the Contracts

1. Representations and contractual terms

Imagine you buy a motorbike from a dealership. You are told by the sales person

that the bike has alloy wheels. A few weeks later you discover the wheels are

not made of an alloy and have started to rust. Now the question is whether or not

the motorbike having allow wheels was in the terms of the contract.

If the alloy wheels were in the terms, then you'd be able to sue the seller for

breach of contract and you'd be awarded damages. However, if the alloy wheels

were only a representation in the contract, then you would be less likely to

receive compensation.

These statements made during the course of negotiation are called

contractual terms or representations. Lawyers must distinguish between a

representation and an actual term of the contract.

What is a representation?

A representation is a statement of fact which the receiving party relies on

and encourages them to enter into the contract. The representation is usually

given before the contract but may be repeated in the contract as well. If a false

representation has been made, the other party may claim

misrepresentation.

In the example above the issue was the wheels. If the salesmen told the buyer

that the model of bike being bought was designed with alloy wheels this would

be a representation. It is a factual statement about the model of the bike. If the

buyer was told the actual bike they were buying has alloy wheels and it didn't,

that would be misrepresentation and they may be able to make a claim against

the seller.

What is a contractual term?

A contractual term is any provision forming part of a contract. Breaching

this could lead to litigation. Not all terms are expressly stated, and some

terms have less legal gravity, such as those that are peripheral to the objectives

of the contract.

Knowing whether a particular statement is a contractual term, or a

representation is important for deciding the best course of action and remedy

available.

If the statement amounts to a term of the contract which is not fulfilled, the

innocent party may sue for breach of contract. If the statement is merely a

representation which turns out to be untrue, the innocent party may bring

an action for misrepresentation. Each instance will warrant different

remedies.

If the contract above described the bike being sold as having alloy wheels, that

would be a term of contract. If the bike didn't have alloy wheels that would be a

breach of contract.

The court looks at four points when considering whether a statement amounts to

a term or representation:

The parole evidence rule

Where the contract has been put into writing,

only the terms included in the written

document are terms. Any verbal statements

will be representations.

If when buying the bike, the buyer signed a

contract, anything said verbally would be a

representation. So even if the seller told the

buyer the bike had alloy wheels verbally, unless

it's written in the contract it would be a

misrepresentation not a breach of contract.

Importance of statement

Where the representee (seller) indicates to the

representor (buyer) the importance of the

statement, this is likely to be held as a term.

If the seller emphasised that the bike was

better than others because of the alloy wheels

and it was the major selling point, then it may be

a term rather than a representation.

Time

The longer the time lapse between making

the statement and entering the contract the

more likely it will be a representation.

If the seller told the buyer that the bike had alloy

wheels, but the buyer didn't purchase the bike

until a year later, then it would probably be a

representation.

Why is this important?

The way misrepresentations and breaches of contracts are treated differ in a

variety of ways:

• the time frame in which claims can be applied • right to terminate a contract (easier for a misrepresentation) • damages:

▪ breach of contract – put claimant in position if the contract was properly performed

▪ misrepresentation – put claimant in position before the contract was agreed

In fact, neither a breach nor a misrepresentation are necessarily worse it just

depends on the circumstances of each case.

If the person who had greater knowledge

makes a statement then it is more likely to

be a contractual term. Conversely if the

person with less knowledge makes a statement

then it is likely to be a representation.

So if the seller was naturally an expert in

bikes and the buyer a complete novice, the

court would be more inclined to state the

alloy wheels as a term.

Conversely, if the seller didn't know much

about bikes and the buyer was an expert then

the court would be more inclined to state it as

a representation.

UK case example: Oscar Chess Ltd v Williams (1957)

Mrs Williams sold a Morris car for £290 to car dealer Oscar Chess Ltd. The

registration document stated that the car was a 1948 Morris 10, but it was

really a 1939 model worth £175, so the book was a forgery. When Oscar

Chess Ltd realised they had been misinformed, they brought an action for

breach of contract. The statement relating to the age of the car was deemed

to be a representation, and not a term. As a car dealer, Oscar Chess Ltd had

the greater knowledge and would be in a better position to know the age of

the manufacture than the defendant who sold the car in good faith. It

followed that Oscar Chess Ltd lost the breach case as it was a

misrepresentation.

Relative expertise of both

parties

2. Defining contractual terms

Express terms

When forming a contract, it is up to the parties involved to include whatever terms

they choose in an agreement. Express terms are terms that are agreed orally

or in writing, during the formation of a contract.

Most contracts include some express terms.

In an employment contract a common express term would be the employee's

salary. The contract would state how much that employee is to be paid.

Incorporated terms

Incorporated terms are a type of express term. It is where another text is

referenced in a contract to add the contents of that text into the terms of a

contract.

For example, a company may state in an employment contract that the

employee “has to follow the health and safety rules laid out in the company

manual”. This, in effect, inserts the contents of the company's health and safety

manual into the contract. The manual is an incorporated term.

Implied terms

Terms can also be inferred from other sources such as relevant legislation or

established case law. These are known as implied terms. These terms can be

implied by statute, custom or by the courts and do not need to be expressly

agreed by parties.

In employment contracts one typical implied term required an employee to

“faithfully to serve the employer”. This means that an employee may not act

against the interests of the employer and can be relevant when moving to a

competitor or setting up a competing business.

Terms implied by custom

Sometimes contracts are subject to terms which are customarily used in a

particular trade. A term implied by custom does not override express terms on

the same matter.

For example, in the fishing industry it may be customary that fish suppliers deliver

every day including weekends. If a contract of supply didn't express this, it may be

implied by custom. On the other hand, if the contract stated that delivery would

take place every day apart from Sundays then the express term would override

the term implied from custom.

Terms implied by statute

Statutes are laws which regulate behaviour, sometimes contracts will imply

statements from these laws into contracts.

For example, in the UK, a contract may be subject to the terms of the Consumer

Rights Act when purchasing from a shop. This for example means that in all such

contracts of sale in the UK imply products are of: satisfactory quality, fit for

purpose and as described on the packaging or in the advertising.

Terms implied by the courts

Courts will make judgements on the parties involved in a contract based on

what they feel is reasonable.

The Moorcock case in the UK demonstrates how this can be applied:

UK case example: The Moorcock (1890)

In this important civil law case the claimant had moored his ship at the

defendant's wharf on the Thames river. When the tide went out the ship

came into contact with the riverbed and was damaged by rocks. The

claimant sought to claim damages from the defendant. The defendant

argued that there was no provision in the contract to guarantee the

condition of the riverbed. The court implied a term in fact, that the

riverbed would be safe for mooring, and the case was held. The case set

a precedent for the use of implied terms.

3. Types of term

Conditions and warranties

Contract terms are also known as conditions or warranties. The available remedies in the case of a breach of contract will vary depending on

whether the term was a condition or a warranty.

Condition

A condition is a fundamental part of a contract that goes to the root of its

purpose. Breaching a condition gives the innocent party the right to refuse to

accept the contract and claim damages.

A condition of the sales contract of a vacuum cleaner is that it sucks up dust.

That's fundamental to nature of it's purpose.

Warranty

A warranty is a subsidiary term to the main purpose of the contract.

A warranty of the vacuum cleaner contract might be that the seller has to

replace or repair the cleaner if it stops working within a year of purchase. It is not

central to why the hoover is being sold/bought, but it is none the less stated in the

contract.

A breach of warranty will give rise to a claim for damages, and the contract

must still be honoured. So, if the seller would have to honour the contract and

repair or replace the vacuum cleaner.

Implied terms

As you hopefully remember Implied terms are not expressly made in the

contract but are implied by: statute, custom or courts. However – are they conditions or warranties? Actually, they can be either.

In the case of statute, the law may specifically state if it is a condition or a

warranty to avoid any debate on the issue.

Sometimes the results of past cases (case law) dictates how future cases will deal

with an issue. Here's an example:

UK case example: Poussard v Spiers (1876)

Mme Poussard entered a contract to sing in opera for a three-month period.

Due to illness she was unable to perform for the first four nights. The

producer of Spiers then replaced her with another opera singer. When Mme

Poussard wished to return she was told her services were no longer

required.

The case was held on the grounds that Mme Poussard was in breach of a condition of the contract and therefore Spiers were entitled to end the

contract. She had missed the opening night, which for publicity reasons was

the most important performance of them all.

Innominate terms

Sometimes a term cannot be classified as either a warranty or a condition.

Such a term is called an innominate term by the courts.

The test used to classify the term is whether or not the innocent party ‘loses the

whole of the benefit of the contract’. Let's see an example to clarify what this

means.

For the vacuum cleaner sale, it might be that the cleaner works but not as well

as is expected. Perhaps the cleaner does suck up dust, but the customer is

disappointed in how well it does so. As it is still working it is not a warranty issue

or a condition as the whole of the benefit of the contract has not been lost: the

customer still has a working vacuum cleaner – so some benefit remains.

So why does this matter? If the term is 'innominate' it means that the contract

can not be ended by the unhappy party (i.e. the customer can not claim for a

breach of contract and expect their full money to be repaid). However they may

be able to sue for damages. How much they get will be determined by the

courts.

4. Misrepresentation

A misrepresentation can make a contract voidable. So you need to know what

misrepresentation is and how to avoid it.

Misrepresentation refers to a false statement of fact made by one party to

another party, which has the effect of inducing that party into the contract.

It does not, however, automatically make a contract void –

misrepresentation has to be proved.

A misrepresentation is:

A false representation of facts.

Made by one party to the other before any contract is made.

An inducement to mislead one party into entering the contract.

Distortion of facts. A representor may make a statement which appears

true, but only tells half the story.

Representation of the facts

Not everything said prior to forming a contract will qualify as a possible

misrepresentation.

It is does not include:

Statements of opinion or sales talk (a salesman saying “in my opinion this

is the best vacuum cleaner money can buy”)

Statements of law or intention (according to law the vacuum cleaner can

not have an engine bigger than 1000W)

Saying nothing (silence). If you sold a car that had wheels from a

different model and didn't tell the buyer, as long as you didn't make any

statement contradicting this fact you are not guilty of misrepresentation.

Statement made by one party to another

Generally a misrepresentation must have been stated by one party (the

misrepresentor) to another (the misrepresentee). The seller of the car sates “This

car has air conditioning.” to the buyer as they look at the car.

The two exceptions to this rule are:

A misrepresentation can be made to the public in general. For

example, an advertisement may contain a misleading representation.

e.g. the car advert said “air conditioning” even though nothing was said as

the individual looked around the car.

The misrepresentor has known that the misrepresentation was to be

passed on to the appropriate person (perhaps by an agent). If when

selling a house through an estate agent you tell them it's 10 years old

when it's actually 100 years old. You are not lying to the buyer, but you are

lying to the agent who passes on that lie to the buyer. That is

misrepresentation.

Inducement to enter into the contract

For a claim of misrepresentation to be valid, the original representation of the facts must have induced the other party to enter into the contract. In other

words the other party:

knew of the existence of the representation

allowed it to affect their judgement

was unaware of its falsity.

Let's consider the case of the insurance company insuring someone who drives

30,000 miles a year but claiming they only drive 10,000 miles. This is a

misrepresentation because:

• they know the representation was made (as they specifically asked for it)

• it affected the insurance premium paid (making it cheaper)

• they were unaware it was false as they could not confirm it in any other way.

UK case example: Peekay Intermark Ltd & Harish Pawani Ltd v Australia

and New Zealand Banking Group Ltd (2005)

A customer, PI Ltd was told important information about an investment being

made. However when they came to sign the contract it had different terms,

which he did not read. The investment was unsuccessful and the claimant

lost the majority of his money.

Even though the contract did correctly state the terms and conditions,

because customer, PI Ltd, was initially given different information orally, the

court held that the Australia and New Zealand Banking group were

misrepresenting the facts in the first place, so he won his claim and was

awarded $250k in damages.

Diploma in Corporate Governance & Business Law - Level 3 copy_1.pdfModule 8 Terms of the Contracts.pdf