Oscar chess v williams 1957

Business Law 1100

Your pathway to Curtin. On campus. On track.

www.curtincollege.edu.au

Diploma of

Commerce

Lecture Topic 5

Contents of a Contract

What to do this week

Attend seminar

Read chapter 6 of First Principles of Business Law

Do the tutorial ‘The contents of a contract’.

Note – do not need to cover the material on innominate terms or the Sale of Goods Act (no. 8 in tutorial). Do not need to read about this or do the tutorial for these rules of law.

Learning Outcomes

After completing this topic you should be able to:

explain the importance of terms

explain the notion of freedom of contract

distinguish between statements that become terms and statements that do not

distinguish between express terms and terms implied from the circumstances

establish the relative importance of particular terms

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Learning Outcomes

After completing this topic you should be able to:

explain how agreed terms may be used to exclude liability

know how and when terms are put into a contract by law

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Terms of the contract

A ‘term’ is a particular agreed undertaking or promise made in circumstances from which it can be inferred that it was intended to be legally binding.

The ‘terms of a contract’ describe the entire contents of a legally enforceable agreement.

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Terms of the contract

Terms define the rights and duties of the parties.

Terms provide the yardstick by which performance of the contract is measured.

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Terms are important because…

Breach of contract:

Failure to perform in accordance with the terms means that there is a breach of contract.

A breach of contract provides a ‘cause of action’

If sufficiently serious, a breach may justify a refusal to accept performance in addition to a claim for damages.

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The importance of terms

In order to establish whether there was a breach giving rise to a cause of action must know:

An enforceable contract was created

What was promised in the contract -the terms of the contract.

The terms of a contract define the obligations of the parties. It is by analysing the terms that you can find out what has to be done to discharge those obligations

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Freedom of contract

Persons are free to choose the contractual terms on which they will be bound.

The law usually does not interfere with this, but it does set some parameters e.g. illegal contracts are not enforceable.

The law also provides contractual protection for vulnerable parties e.g. minors, persons of unsound mind.

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Proving the terms of a contract

Terms of wholly oral contracts are established by evidence from the parties themselves, or other witnesses.

Terms of wholly written contracts are proved by reference to the written contract alone – the ‘parol’ evidence rule’

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Parol evidence rule

A rule of evidence that a written document expresses the whole contract

External evidence of intention and negotiations cannot be considered

The rule excludes oral statements of extra terms

LG Thorne & Co v Thomas Borthwick & Sons (1955) 56 SR (NSW) 81

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Exceptions to the parol evidence rule

There are a number of circumstances in which the parol evidence rule will not be strictly applied. These include:

Where custom or trade usage is relevant to the written agreement

Where an ambiguity in the language of the contract needs to be resolved

Where the subject matter or a party to the contract are not identified in the written agreement.

Another situation that provides an exception to the parol evidence rule is when the contract is partly oral and partly written.

The terms of partly oral and partly written contracts are proved by oral and written evidence: Van den Esschert v Chappell [1960] WAR 114.

Summary

Proving the terms: Parol evidence rule.

Written contract on the face of it complete: LG Thorne

an alternative way of putting it is that terms cannot be added to a contract after it has been reduced to writing: Olley v Marlborough.

Exception if obvious importance; partly written/verbal contract: Van den Esschert v Chappell

Statements that do not become part of the contract

Not everything that is said while negotiating a contract becomes a legally enforceable part of that contract. Distinguish between the following:

Puffs

Opinions

Representations

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Puffs

Puffs are exaggerated or obviously insincere statements made by a contracting party to engage, attract or excite others into contracts.

Puffs do not become part of the contract

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But note this may change in the context of the facts (i.e. an accountant providing an opinion as to the ROC of a business that was for sale).

There are other areas of law that may cover these type of situations – but not contract law.

Representations

A representation is a statement of fact made by one party when negotiating a contract.

If it can be inferred from the circumstances that the statement was not intended to be a binding promise, the statement does not become part of the contract, even if it induced the other party to enter into the contract.

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Representations

A representation that proves untrue is called a misrepresentation. Misrepresentations can be deliberate (fraudulent), careless (negligent) or simply the result of error (innocent).

Misrepresentations (even fraudulent ones) are NOT terms of the contract’. But the law provides other relief.( ie NOT in contract)

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But remember

Not always clear from the form of the statement whether promissory or not.

Will depend on context- what appears as a mere statement of fact might be construed as a promise.

Term or other…

Sometimes there is disagreement about whether a statement made was intended to be a term of the contract, or whether what was said was merely a representation.

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What is said in negotiations could be...

Salesman’s puff.

Not part of the contract.

Opinion

Not part of the contract.

Representation.

Not part of the contract.

Term.

Part of the contract.

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Term of the contract or mere representation?

The courts may consider a number of factors in determining whether a statement is a term or a representation, including:

whether the statement was promissory in nature;

the time that the representation was made relative to the making of the contract;

the importance of the representation;

whether the person making the statement had any special skill or knowledge; and

whether the representation was followed by a written contract.

Handbury v Nolan (1977) 13 ALR 339

Oscar Chess v Williams [1957] 1 All ER 325

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Terms of contract or representation?

Test used by the court:

What can reasonably be inferred from the circumstances?

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Handbury v Nolan (1977) 13 ALR 339

Oscar Chess v Williams [1957] 1 All ER 325

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Classifying the terms in a contract

Some of the terms in a contract are more important than others.

One way to distinguish between the important and less important terms is to classify them as conditions and warranties.

It is important to classify these terms correctly as the remedies for a breach of condition is different from a breach of a warranty.

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Why classify? Remedies for breach

Breach of a condition –

injured party can terminate contract and/or sue for damages or affirm and sue for damages

Breach of a warranty –

injured party can sue for damages.

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Distinguishing ‘conditions’ and ‘warranties’

Conditions are terms that are of fundamental importance in the agreement. Failure to perform a condition entitles the aggrieved party to reject performance tendered, or to terminate further performance of whole contract, and to claim damages for the breach.

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Distinguishing ‘conditions’ and ‘warranties’

Warranties are terms which are of lesser importance than conditions. Failure to perform a warranty does not justify rejecting performance or terminating future performance. It only justifies a claim for damages.

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Distinguishing ‘conditions’ and ‘warranties’

Whether a term is a condition or warranty depends on the intention of the parties, as evidenced by the circumstances.

Ask whether it can be inferred from the circumstances that the promise was so important that the person to whom it was made (the promisee) would not have entered the contract without it, and this was apparent to the person making the promise (the promisor).

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Distinguishing ‘conditions’ and ‘warranties’

Associated Newspapers Ltd v Bancks (1951) 83 CLR 322

www.hinet.net.au/ accessed November 2008

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Associated Newspaper Ltd v Bancks (1951) 83 CLR 322

The test of essentiality is whether it appears ... the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or a substantial performance of the promise.

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Bettini v Gye (1876) 1 QBD 183

http://www.npg.org.uk/collections/search/person accessed 27 March 2009

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Agreed terms and terms implied by law

Terms can become part of a contract either:

by the parties expressly agreeing that they be included;

being implied by the law; or

by the operation of the law.

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Express terms

Terms are ‘expressly agreed’ when they have actually been declared or definitely stated, either in writing or orally.

Terms may be expressly agreed to in various ways: by being discussed; or included in a signed document; or referred to on a ticket or notice.

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Express terms

Sometimes there is disagreement over whether particular terms have been included in the contract or not. This depends on the circumstances.

L'Estrange v F Graucob Ltd [1934] 2 KB 394

Causer v Browne [1952] VLR 1

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Causer v Browne [1952] VLR 1

The document handed to Causer did not appear to be a contractual document, or a document that was likely to contain contractual terms.

It cannot be inferred that Causer had agreed to exempt Browne from liability.

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Causer v Browne [1952] VLR 1

EXCEPTION TO THE RULE:

If attention had been drawn to the fact that the non-contractual document contained contractual terms.

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Implied Terms

A term may be ‘implied’ into a contract when, in the circumstances, it can be inferred that the term was intended to be part of the contract without being expressly stated or referred to.

Terms implied by fact and terms implied by law.

Such terms are not easily recognised by the courts. There are a number of requirements that must be satisfied before a term will be implied ad hoc.

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When terms will be implied by fact

A term will be implied by fact only if it is obvious from the circumstances that the parties must have intended to include such a term as part of their agreement.

The court applies the officious bystander test to determine if the necessary intention is present.

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When terms will be implied by fact

The officious bystander test is:

“What would the parties have replied if an officious bystander had asked them at the time of their agreement whether the suggested term was part of their contract?”

If it can be inferred that the parties would have answered ‘of course’ the necessary intention is established.

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When terms will be implied by fact

The courts are willing to imply terms in fact to give a contract commercial meaning. Without this, the contract is hard to give effect to.

For this to occur, there must be gaps in the terms that have been expressly agreed by the parties.

Must be reasonable and fair

Must be capable of clear, unambiguous expression

Must not contradict any express terms

Codelfa Construction v State Rail Authority of NSW (1982) 149 CLR 337.

Moorhead v Brennan [1991] 20 IPR 161

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Terms implied by fact – Oral contracts

In informal contracts (oral contracts) where the terms have not been spelt out, terms may be implied by reference to the parties intentions where it gives effectiveness to a contract in the circumstances of the agreement.

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Exclusion of implied terms

“Where any right, duty, or liability would arise under a contract of sale, by implication of law, it may be negatived or varied by express agreement or by the course of dealing between the parties, or by usage, if the usage be such as to bind both parties to the contract.”

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Terms put into a contract by operation of law

Contracting parties cannot foresee every possible situation and anyway, it is inefficient to try and negotiate every detail of a contract. Most contracts therefore have some gaps.

The law may put terms into a contract to fill these gaps. These are called terms provided for (or imposed) by law. There are different possibilities to consider:

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Terms provided by law

Terms put into all contracts by the common law.

Terms put into particular types of contract by the common law.

Terms put into particular types of contract by statute

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Terms implied into all contracts

Universal terms are those put by the common law into all contracts. Two important universal terms are:

To cooperate and do what is reasonable so that both parties get the benefit of the contract;

Perri & Another v Coolangatta Investments Pty Ltd (1982) 149 CLR 537

Secured Income Real Estate (Aust) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596

Terms implied into all contracts

2. To act in accordance with good faith – i.e. use contractual powers honestly and reasonably.

Alcatel Australia Ltd v Sarcella (1998) 44 NSWLR 349

Burger King Corporation v Hungry Jack's Pty Ltd [2001] NSWCA 187

Terms put by law into specific kinds of contracts

Terms implied into certain types of contract are known as ‘generic’ terms. Generic terms are implied by the common law into, for example, a sale of goods contract; a lease; an insurance contract; a doctor and patient contract.

Breen v Williams [1995] HCA 63; (1996) 186 CLR 71

Terms implied by legislation

In many circumstances, terms are put implied into contracts by statute. An important example is Sale of Goods Legislation (SGL).

Australian states and territories inherited the English Sale of Goods Act 1893. In Western Australia, it is enacted as the Sale of Goods Act 1895 (WA).

Regulates sale of goods in the course of a business, rather than a private sale.

Can contracted out of.

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Terms implied by legislation

Sale of goods legislation contains many ‘residual’ provisions for commonly occurring gaps in sale contracts, e.g.

When, where and how delivery, and payment should be made.

When ownership in the goods passes to the buyer.

Imply terms into a contract making the seller liable for the quality of the goods.

Not examinable in this unit

EXPRESS TERMS

IMPLIED TERMS

What express statements, oral or written, form part of the contract?

Is a statement a term or a representation?

Is it promissory?

Was it made close to the entering of the contract?

Importance of the statement?

Did the maker have any special skill or knowledge?

Did a written contract follow?

Is a statement contained in another document, eg ticket, a term of the contract?

A reasonable notice prior to the contract.

A course of dealing between the parties.

Terms may be implied:

To give business efficacy

By custom or trade usage

By legislation.

A Diagram for Express Terms and Implied Terms

A diagram giving a pretty good run down of express terms implied terms

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Terms that exclude liability

It is common for contracts to contain terms, variously called exclusion, exemption or limitation clauses, that operate exclusively to the benefit of only one party. The effect of these clauses is to:

exclude all liability for breach;

limit liability for breach of contract or other wrongful conduct;

exempt a party from the obligation to perform as promised; or

limit the redress available to the other party where there is a failure to perform (usually by specifying a limit to the amount of damages available).

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Terms that exclude liability

Contracting parties often restrict their liability by agreement, e.g.

A bus company restricts liability for injury to passengers

A dry-cleaner excludes liability for damage to clothing;

Causer v Browne [1952] VLR 1

An insurance company excludes liability for death arising from dangerous sports

A manufacturer excluding liability for defective products

Curtin College A member o Navitas l CRICOS Provider Code 02042G

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Terms that exclude liability

Particular aspects of liability can be excluded or limited but to be enforced the terms must be:

clear and precise in its wording and the aspects of liability that are being excluded; and

properly brought to the attention of the other party prior to entering into the agreement (so as to be incorporated into the agreement).

Olley v Marlborough Court Ltd [1949] 1 All ER 304.

Note: Prior dealings would be relevant in determining whether a term excluding liability has been brought to the attention of the other party.

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Interpretation of exclusion clauses

If they are properly incorporated into the contract, exclusion clauses are generally interpreted in the same way as any other term.

But where the meaning of an exclusion clause is ambiguous, they are likely to be interpreted against the interest of the preferred party (contra proferentem), for example:

Interpretation of exclusion clauses

Ambiguous words are interpreted narrowly.

Events which fall outside the ‘four corners’ of the contract will not covered by an exclusion clause which is intended to exclude liability for things done within the ambit of the contract.

Sydney City Council v West (1965) 114 CLR 481

Very good example in CBT

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Topic 5 case study

Establishing the agreed terms in a contract

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Case study: the sofa

Annie is moving into a new apartment and needs furniture. Her friend Bella says: “I have a sofa that I want to sell. Come and look at it. If you like it you can have it for $100. I think it’s worth twice that much. It’s a very nice sofa.”

Annie goes to Bella’s house the next day and sees the sofa. Annie likes the fabric and it looks clean and unmarked. Bella says: “It’s Australian made.” Annie sits on the sofa for a bit. She says: “It’s great. I’m happy to pay you $100 for it.” Bella accepts her offer.

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Case study: the sofa

Annie pays Bella $100 and has the sofa delivered to her apartment. But after sitting on it for an hour or two, Annie discovers that the sofa is very uncomfortable indeed. In particular, the cushions have thin, cheap stuffing through which Annie can feel the hard frame and springs.

And the sofa cushions, although in good condition on one side, are badly faded on the other. She finds a label under the couch that says: ‘Made in Romania’.

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Case study: the sofa

On reflection, Annie is not satisfied with the sofa she has bought. She says that it is certainly not ‘a very nice sofa’ which is what Bella said. Annie says it was obvious that the sofa had to be comfortable to sit on. She claims that Bella clearly said that the sofa was worth at least $200 but, if anything, it is worth much less. And, says Annie, Bella promised that the sofa was Australian made and it isn’t.

Bella denies making any of the promises that Annie now claims she made.

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Question: Using the four step process determine the contents of the contract. What are the agreed terms of this contract?

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Ascertaining the terms of the contract

When there is a dispute involving a contract, the first step is to ascertain what terms were agreed to. It is the terms of the contract that determine what performance is owed.

But it is not always easy to ascertain the terms of a contract. The parties may disagree about what the agreed terms are, or what they mean, or what obligations they create.

Consider and discuss the case study and make a list of the possible terms (The PLANNING STAGE). The following questions may help you:

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PLANNING STAGE ( or identifying the important facts for issue spotting)

What are the potential agreed terms in this contract?

Was it a term of the contract that the sofa was ‘very nice’?

Was it a term of the contract that the sofa was worth at least $200?

Can a term be implied by fact that the sofa would be comfortable to sit on?

Was it a term of the contract that the sofa was Australian made?

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Thoughts for next week…

In relation to one or more of the possibilities considered today, is Bella likely to be liable for breach of contract?

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Notices

Do the tutorial ‘The contents of a contract’.

Read Chapter 6 of the textbook.

Make sure to study and learn the cases in this week’s lecture.

Copyright reserved 2015 Australian Law Courseware

Step 1

Identify the legal issue

The principle (or issue) of law is

Step 1

image1.png

Identify the legal issue
The principle (or issue) of law is
Step 2

Explain the rule(s) of law relevant to the legal issue

identified in step one with reference to authority.

Step 2

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Explain the rule(s) of law relevant to the legal issue identified in step one with reference to authority.

Step 3

Apply the law to the facts of the question in a detailed and logical

manner, to each rule of law explained in step 2

Step 3

image1.png

Apply the law to the facts of the question in a detailed and logical manner, to each rule of law explained in step 2

Step 4

Draw possible conclusions (logical and consistent with what you

have argued above)