TERMS OF CONTRACT

After determining that a contract has been formed, consider the obligations on the parties.

*The notes in this section have been adapted for both PQs and essay questions in exams.

1 Identification of terms

Deciding if a statement is a term of the contract or a mere representation

Relevance

1. What damages can be recovered

If it is a term, damages look to the future – what position C would have been had the contract been performed.

If it is a misrepresentation, the damages look to the past – what position C would have been in had the contract not been formed.

2. The ability of C to set the contract aside

Can set contract aside only if term is a contract and if there is a serious breach of an innominate term.

If it is a misrepresentation, contract can always be set aside.

Criteria

Approach: look at the intention of the parties as ascertained objectively.

• Heilbut v Buckleton [1913] AC 30, 51 (per Lord Moulton):

“[whether there is] evidence of an intention by one or both parties that there should be contractual liability in respect of the accuracy of the statement.”

Factors:

1. Importance of the term

A statement is likely to be a term where it is so important to the person to whom it is made that, had it not been made, he would not have entered into the contract. Couchman v Hill: A heifer was put up for sale at an auction and C asked whether it was used in breeding before, stating that he was not interested in buying it if it had been. Held: a term.

2. Relative position/knowledge

If the parties’ degree of knowledge is equal, or if the person to whom the statement is made has greater knowledge, the statement is likely to be a mere representation. If the maker of the statement has some special knowledge or skill compared to the other party, the statement is likely to be a term.

Apply following analogously:

• Oscar Chess Ltd v Williams (1957)

Facts: D sold a car to C, describing it wrongly. D had obtained this information in good faith from the car logbook, which was actually a forgery.

Verdict: not a term. C was a car dealer – meant that he was in as good a position as D to discover true age of car. However, if maker of car has special skill or knowledge with C does not have, statement will likely be a term.

• Dick Bentley Productions v Harold Smith (1965)

Facts: C asked D to find a Bentley car. D, a car dealer, found a car which he sold to C, stating that it had only done 20,000 miles when it had done 100,000.

Verdict: The statement was a term as the maker of the statement had some special knowledge or skill compared to the other party.

3. Verification of truth of the statement

A statement is unlikely to be a term if the maker of the statement asks the other party to verify its truth. Ecay v Godfrey: D sold a boat to C, stating that the boat was sound, but advising C to have it surveyed. The boat turned out to be defective. Verdict: The statement was a representation.

4. Omission of the statement in the formal written contract

If there is such an omission, it is unlikely to be a term.

5. Time elapsed between making the statement and final manifestation of consensus

If the time is too long, the statement is unlikely to be a term.

Parol evidence rule

E.g. 2 parties have written everything down. Can evidence of matters outside be admitted to affect the content of the written document?

Bank of Australasia v Palmer (1897): Parol evidence does not affect what the terms of the contract are. “Parol testimony cannot be used to contradict, vary, add to or subtract from the terms of a written contract (only where the contract is entirely contained in writing), or the terms in which the parties have deliberately agreed to record any part of their contract.”

NB. Rule applies where the contract is entirely contained in writing. It does not apply if the contract is partly written and partly oral.

Justifications for the rule

1. Safeguards the primacy of the agreed text and promotes certainty. Parties know where they stand by looking at the written document. Important in commercial world so that parties know where they stand and can plan their business.

2. Eliminates inconvenience and troublesome litigation in many cases. Reference to external matter will complicate and unsettle the process of discovering the meaning of the contract.

3. Fundamentality of the doctrine to English mercantile law

• Shogun Finance Ltd v Hudson [2004] 1 AC 919 at [49] (per Lord Hobhouse):

“[the parol evidence rule] is fundamental to the mercantile law of this country… the certainty of the contract depends on it… This rule is one of the great strengths of English commercial law and is one of the main reasons for the international success of English law.”

Disadvantages of the rule

1. Many exceptions

Extrinsic evidence is admissible: 1) to prove terms which must be implied into the agreement, 2) to show that the contract is invalid because of misrepresentation/fraud, 3) to show that the document should be rectified, 4) to prove the existence of a collateral agreement.

Though, the Law Commission argues that because of these exceptions, the rule is advantageous in that it would not lead to injustice

• Law Commission No 154, Law of Contract: The Parol Evidence Rule (1986):

2 Incorporation of terms

3 methods of incorporation: signature, bringing terms to notice of other party, course of dealing.

Signature

L’Estrange v F Graucob (1934): “Where a document containing contractual terms is signed… the party signing it is bound, and it is wholly immaterial whether he has read the document or not.”

Peekay Intermark Ltd v Australia and NZ Banking Group Ltd: The rule applies even where one party knows or should have known that the other party does not actually consent, or where he is responsible for the mistaken signification of consent. This is because “[the rule in L’Estrange is] an important principle of English law which underpins the whole of commercial life; any erosion of it would have serious repercussions”

There...

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