Distinction between representations and terms

Remedies for pre-contractual statements

· Pre-contractual statements under the Principles of European Contract Law

· The actions for Misrepresentation

· The actions for breach of a Collateral contract

· The actions for the tort of Negligent misstatement

· Conclusion on pre-contractual statements

Express terms

· Incorporation

· Construction

· Methods of interpretation of express terms

· Conditions, warranties and innominate terms

Implied terms

· Terms implied by the courts

· Terms implied by custom

· Terms implied in fact

· Terms implied by law

· Terms from the House of Lords’ decision in “Liverpool City Council v Irwin”.

· Terms implied by statute

· Implied terms under the Sale of Goods Act

Pre-contractual statements.

There is a situation where the parties have fulfilled all the requirements for making a valid contract. It may then become necessary to determine exactly what the obligations are under the contract. Problems may arise in a number of ways. There may perhaps, have been a lengthy period of pre-contractual negotiation, and it may not be clear which, if any, of the statements which were made at that stage were intended to form part of the contract. The contract may be in writing, and yet one of the parties may allege that it does not truly represent their intentions. In this case the job of the court will be to «construe» the contract in order to decide what the language which it contains should be taken to mean. The task of «interpreting» or «constructing» the contract is likely to be influenced by the surrounding circumstances, including the relative bargaining powers of the parties. Such a contextual approach would be easier if the courts adopted a «relational» approach to construction. This would enable them to take a broad view of the commercial and personal factors surrounding the agreement, both at the time it was made and as it has developed. Under the classical theory, the courts are limited to matters which may help them to decide what they think that the parties actually meant at the time the agreement was made.

The process of construing a written contract can also in some circumstances be constrained by statutory regulation.

In other situations, the contract may be purely verbal, in which case there may be a dispute as to what was said or promised, and by whom. The problems here are likely to be mainly evidential and so outside the scope of the Contract Law course. Nevertheless, issues of construction may arise here in a similar way to written contracts.

Some of the problems in deciding what the terms of a contract are may be resolved by the rules which the courts have developed to enable terms to be implied into a contract. Moreover, in certain situations, terms will be implied by statute, irrespective of the wishes or intentions of the parties.

The order of treatment adopted here is to look first at the question of pre-contractual statements, and the remedies that may be available for them. Secondly, the approach to express terms and their interpretation will be discussed. Finally, the rules relating to the implication of terms, both at common law and by statute, will be considered.

If there is an imbalance of skill and knowledge relating to the subject matter of the contract as between the claimant and defendant, this will be relevant in deciding whether an oral pre-contractual statement should be treated as a contractual term. The fact that the defendant is in a better position to be able to guarantee the truth of a statement will lend weight to its being regarded as part of the contract. If, on the other hand, it is the claimant who is the expert, then the reverse will be true.

The courts generally consider that the closer in time that the statement was made to the conclusion of the contract, the more likely it is that it was a matter of importance to the claimant, and should therefore be treated as a contractual term. It is certainly true that if there is no significant gap, the statement may well be treated as being intended to be part of the contract, particularly if the agreement is not put into writing. It is by no means clear, however, that the mere existence of a delay should be regarded as in itself reducing the significance of the statement. Such delay may well have been caused by matters irrelevant to the statement, and the claimant may have felt that having settled the issue which the statement concerned, there was no need to re-state it at the time of the contract. Nevertheless, whatever the true significance of the delay, it is undoubtedly the case that as far as the courts are concerned it will weaken the claimant’s case.

It must be remembered that none of the tests discussed here is automatically conclusive of the issue. All may need to be considered and, if they point in different directions, weighed against each other. The ultimate question is whether the statement, viewed objectively, was intended to form part of the contract. All the other tests are simply matters which may provide guidance to the court in determining this issue.

Pre-contractual statements under the Principles of European Contract Law. The suggested approach to the incorporation of pre-contractual statement under the Principles is set out in Art 6.101. This provides that the main question is whether the party to whom the statement was made reasonably understood it to give rise to contractual obligation, taking into account:

(a)the apparent importance of the statement to (the party to whom it was made);

(b)whether the party was making the statement in the course of a business; and

(c)the relative expertise of the parties.

There is a clear overlap with the approach of the English courts here, though the number of matters to be taken into account is narrower. On the other hand, they specifically make the fact that a statement was made in the course of a business as something which will tend towards a statement being regarded as part of the contract.

Paragraphs 2 and 3 of the Article deal with the responsibility of a «professional supplier» for statements about the quality or use of goods and services in advertising and marketing information. Where the statement is made by the supplier directly, it will be treated as giving rise to a contractual obligation unless «the other party knew or could not have been unaware that the statement was incorrect». Where the statement is purported to be made on behalf of the supplier, «or by a person in earlier links of the business chain», it will again give rise to a contractual obligation, unless the supplier «did not know and had no reason to know of the information or undertaking».

This goes considerably further than English law, and brings advertising material much more clearly within the scope of contractual obligations.

What remedies, if any, are available to a person who has made a contract in reliance on a statement that it was not a term of the contract? Although it may be argued that discussion of this issue is out of place in this lecture since, by definition, such statements are not part of the contents of the contract, it is nevertheless helpful to consider them briefly at this stage, in order to fully understand the importance of deciding whether a statement is part of the contract or not. It is only by considering the consequences of that decision that its significance can be properly appreciated.

There are three possible forms of action which must be considered: the actions for misrepresentation; for breach of a collateral contract; and for the tort of negligent misstatement.

1) Misrepresentation.The common law and equity recognised two remedies for misrepresentation. Provided that there were no complicating factors, such as the involvement of third party rights, rescission of the contract was the mainremedy for all types of misrepresentation. If the misrepresantation was made fraudulently, there was, in addition, the possibility of an acton in tort for deceit, which would provide for the recovery of damages. Both these remedies are still available in appropriate cases. In addition, however, there is now the possibility of an action for damages for so called «negligent misrepresentation» under s 2 of the Misrepresentation Act 1967.

For any of these remedies to be available, the statement must have been a presentation in the strict sense. That is, it must have been a statement of existing fact, or (probably) of law, not a statement of opinion, or a promise to act in a particular way in the future. Thus, for example, a statement by a seller of a computer system that a 24 hour service facility will be provided is not a «representation», but a promise. A statement that the system is ideal for a small business may well be a statement of opinion rather than fact. However, a statement that the firm has already sold 1,000 similar systems, or that it has a team of six service engineers, are representations which, if untrue, may give the other party a remedy.

The statement must have induced the contract.

2) Collateral contract. The concept of the collateral contract, as a means of evading the doctrine of privacy, brings apparent third parties into a contractual relationship. However, the collateral contract can also be used between parties who themselves subsequently enter into a main contract. The collateral contract will take the form of one party expressly, or impliedly, saying to the other «if you enter into the main contract, I will promise you X». It can thus provide a remedy for pre-contractual statements which have not been incorporated into the main contract. It has the advantage over the remedies for misrepresentation in that it is not limited to statements of existing fact. A promise to act in a particular way is clearly covered. Using the computer contract example, a statement that «we will answer all service calls within six hours» could not be a misrepresentation, but could found an action for breach of a collateral contract. A statement of fact, or even opinion, may also give rise to a collateral contract, if it can be said that the maker of the statement was guaranteeing its truth.

It should be noted, that the collateral contract is a very flexible device. Its disadvantage as compared to the action for misrepresentation is that it will only provide a remedy in damages, and will not allow the claimant the possibility of rescinding the main contract. Moreover, the level of damages which can be awarded is more restricted than in the case of actions for deceit, or under s 2 (1) of the Misrepresentation Act (MA) 1967.

3) Negligent misstatement.In 1963, the House of Lords confirmed that the tortious action for negligence could provide a remedy for negligent misstatements which have resulted in purely economic loss. The development of the law in this area over the past 30 years has been complicated, as the courts have tried to decide exactly when a duty of care as regards such statements can be said to arise. There is little doubt, however, that a duty of this kind may arise between parties who subsequently enter into a contract. In practice, however, the existence of the remedies under s 2 (1) of the Misrepresentation Act 1967 means that it is not very likely to be needed in this situation. The action under the 1967 Act has the advantage that the burden of proof as regards negligence is on the defendant (who effectively has to disprove it), and that more extensive damages are available. The only situation where it might be necessary for a party to a contract to look to the common law negligence action is where the statement is not a representation in the strict sense, and it is also impossible to construct a collateral contract.

As we have seen, there are a variety of actions which may be available in relation to pre-contractual statements. There is nothing to stop a claimant relying on more than one. In an unusually frank (for a judge) recognition of the way in which lawyers manipulate legal concepts to achieve their desired result, he explained how, at a time when no damages were available for a non-fraudulent misrepresentation, other alternatives would be sought:

In order to escape from that rule, the pleader used to allege – I often did it myself – that the misrepresentation was fraudulent, or alternatively a collateral warranty. At the trial we nearly always succeeded on collateral warranty. We had to reckon, of course, with the dictum of Lord Moulton that «such collateral contracts must from their nature be very rare». But more often than not the court elevated the innocent misrepresentation into a collateral warranty; and thereby did justice ... Besides that experience, there have been many cases since I have sat in this court where we have readily held a representation ... to be a warranty sounding in damages.[8]

Nowadays, since damages for negligent misrepresentations are now available, the decision as to which action will be the most appropriate to press will depend mainly on the type of statement (is it a statement of fact?) and on the remedy which is being sought (is rescission of the contract required, or will damages be adequate?). If the statement cannot be constructed as being of fact, then collateral contract may be the best remedy to pursue. On the other hand, if rescission rather than damages is what is important, the contractual action for misrepresentation is the only one which will provide this.

Express Terms.

There may be disputes, however, as to whether the clause of the contract has been incorporated into the contract, as to its proper meaning, and as to the consequences of breaking it. In dealing with all these questions, the approach of the courts will again be professed to be that they are trying to determine the parties’ intention, from an objective viewpoint. The focus under classical theory is on the time of the original agreement, with later developments being ignored.

We have already discussed the rules which the courts adopt to decide whether pre-contractual statements should be regarded as having been incorporated into a contract. The situation under consideration here is slightly different, and will generally arise in relation to written contracts in a standard form which have not been signed. One party may object that a particular clause should not be regarded as being included in the contract, because they were unaware of it for some reason, and would have objected to it. In appropriate cases, they can apply to other types of clause, however, as is shown by the case of Interfoto Picture Library v Stiletto Visual Programmes.

The defendants were an advertising agency. They needed some photographs for a presentation. On 5 March 1984, they contacted the plaintiffs, who ran a library of photographic transparencies, to see if they might have anything suitable. The plaintiffs sent round a packet of 47 transparencies, together with a delivery note. The transparencies were, however, apparently overlooked and not used. They were eventually returned on 2 April, that is, nearly a month after they had been received. The plaintiffs then claimed the sum of £3,783 from the defendants as a «holding charge» for the transparencies. This was calculated in accordance with the terms laid down in the delivery note, which stated that, in relation to transparencies not returned within 14 days of receipt, a charge of £5 per day plus VAT would be made in respect of each transparency. The issue before the court was thus whether the terms of the delivery note formed part of a contract between the parties; and, if so, whether the plaintiffs could enforce these terms against the defendants. The Court of Appeal held that the clause could not be enforced. They did so by reference to the case law on exclusion clauses and when they are deemed to have been incorporated into a contract. In particular, they relied on Parker v South Eastern Railway Co and Thornton v Shoe Lane Parking. Parker established the principle that in order to rely on an exclusion clause in an unsigned contract, the defendant had to have taken reasonable steps to bring it to the attention of the claimant. Thornton added the gloss that the more unusual and onerous the clause, the more that the defendant had to do to draw it to the claimant’s attention. The court saw no reason why this approach should not apply to the case before them. The clause was particularly, and unusually, onerous in its effect. The plaintiffs had done nothing to draw it to the defendants’ attention. It should be regarded as not having been incorporated into the contract.

The approach taken in the Interfoto case is an unusual one in relation to a commercial agreement. This aspect of the rule of incorporation has tended to be used mainly as a means of protecting consumers, particularly in relation to exclusion clauses. Where parties are contracting at arm’s length, in a business context, it would more commonly be the case that the court would expect each party to take care over the obligations to which it was committing itself. If they agree to unfavourable terms, then that is their own fault. It is perhaps significant that the Interfoto decision has not so far led to many similar reported decisions.

It would seem then that even in consumer contracts, there is no necessary requirement to take special steps to draw attention to a clause which may have the effect of disappointing the expectations of the unwary contractor. The position would, however, presumably be different if the consumer had paid a significant sum for what he or she was expecting to obtain under the contract.

Even where there is no dispute as to whether a clause is incorporated, the parties may disagree as to what it was intended to mean. It will be necessary to try to construe the clause in order to give effect to it. The courts will adopt the approach of trying to assess objectively what the parties must be taken to have intended. If the contract is in the form of a written document, this will generally be regarded as very strong evidence of the parties’ intentions. The «parol evidence rule» will apply, with the effect that it will not normally be open to one of the parties to argue that some part of the written document should be disregarded, or interpreted in a way which is not consistent with its most obvious meaning. The Law Commission has doubted whether there is such a rule of law as the «parol evidence rule» – regarding it as being essentially a circular statement, to the effect that when it is proved that a written document was intended to set out all the express terms of an agreement, other evidence of what was intended will not be admissible. Nevertheless, as the Commission itself recognised since the «rule» has regularly been referred to by writers and judges, it provides a convenient shorthand for the approach to constructing contracts to which it applies. The rule, whatever its precise status, thus makes it very important for the parties to ensure that any written document forming part of the contract is clear and explicit as to the obligations which are being imposed on each side. The parol evidence rule is not, however, unchallengeable, and there are certain established exceptions to it.

Exceptions to the parol evidence rule include:

• Ambiguity

Where a word or phrase contained in the written document is ambiguous, other evidence may be given as to what was actually intended.

• Written agreement incomplete

If either or both of the parties can show that the written agreement was not intended to contain all the terms of the contract, then oral or other extrinsic evidence may be used to fill it out. It will be more difficult where the written agreement contains some terms. The court will have to consider objectively whether it appears to be complete, or whether it is more likely that the parties intended it to be supplemented by other obligations. The insertion of a clause to the effect that «this document contains all the terms of the contract» will presumably make it difficult to rebut the presumption that it is complete, and that any other evidence of additional terms should be excluded.

• Custom

Sometimes, a particular word or phrase is used in particular trade, market or locality, in a way which does not accord with its obvious meaning. Custom may also be used to fill out an aspect of the contract on which the written document is silent. This use of custom overlaps with the use of custom to imply terms, which is discussed further below. Custom may not be used, however, where it is clearly contradicted by the terms of the contract. Where, for example, a charter provided that the expenses of discharging a cargo should be borne by the charterer, it was not possible to override this by showing a custom that the expenses should be borne by the owner of the ship.

• Starting or finishing date

Extrinsic evidence may be used to establish the date on which a contract is intended to start to operate.

• Other exceptions

Where it can be argued that a written document was intended simply to record earlier oral agreements, but fails to do so accurately, extrinsic evidence may be allowed to prove this, and thus to «rectify» the written document. The parol evidence rule may also be circumvented by showing the existence of a collateral contract. This is perhaps not a true exception, since it concerns not the interpretation of one contract, but rather a decision as to the priority between two inconsistent contracts. Finally, as we have seen earlier, a pre-contractual statement may become part of the contract if the courts feel that it related to something of great importance to one or other of the parties.

Conditions, warranties and innominate terms. Not all terms within a contract are of equal importance. In a contract for the provision of a service, for example, terms specifying the dates on which the service is to be provided and the date for payment will be likely to be more important than, for example, a term requiring the supplier of the service to submit an annual account of the work done. The consequence of breach of one of the first two terms is probably going to be more serious than the latter, and may indeed result in the contract as a whole being terminated. The parties may attempt to give effect to such differences in the status of various contractual provisions by the way in which their agreement is drafted in respect of its «express terms». There is, in fact, a generally accepted hierarchy of terms, with «conditions» being more important than «warranties». Use of these labels may well indicate an intention by the parties as to the relative status of the terms concerned, though any presumption to this effect may be rebutted by other evidence. As indicated above, the distinction between the status of terms is of most importance when the consequences of a breach are being considered. Breach of «condition» may well lead to the other party having the right to treat the contract as being at an end as well as suing for damages. Breach of «warranty will probably only entitle the other party to claim damages. If no labels are used, and the tern is difficult to classify, it may be regarded as an «innominate» term, in relation to which the consequences of the particular breach which has occurred may determine whether the party not in breach has a right to bring it to an end. The context in which the breach occurred will be important, as will its effect on the rest of the contract. The details of the rules which the courts apply in this area are concerned specifically with the issues of performance and breach. It is important, however, that the parties should have such issues in mind when drafting their agreement, so that if they wish, they can include express terms dealing with the consequences of a breach of any particular obligation. They may also wish to agree in advance the amount of damages which will be recoverable in such circumstances.

Implied Terms.The express terms of an agreement may not tell the complete story, because in certain situations a term or terms may be «implied» into a contract, although neither party has made reference to it at the time of the agreement. This may arise from one or other of the parties to the agreement claiming that although a particular term has not been set out explicitly, either in words or writing, it should nevertheless be part of the contract. In addition, in some situations, a term will be implied because Parliament has by statute required that all contracts of a particular type should contain such a term.

The order of treatment here will be to look first at terms implied by the courts, which can be further divided into terms implied by custom, terms implied in fact, and terms implied by law.

Terms implied by the courts. The general approach of the courts is that they are reluctant to imply terms. The parties are generally expected to take the trouble to set out the provisions of their agreement in full. A contract in which certain terms are implicit clearly gives great opportunities for dispute, and the courts have been reluctant to give any encouragement to parties to try to escape from contractual obligations on the basis of some term which was not stated, but which is now alleged to be of great significance. There are certain situations, however, where this reluctance is overcome, and terms are implied. When the courts do this, they run the risk of suggesting that all contractual issues can be resolved by deciding what the Parties must have agreed at the time of the contract - that is, the myth of presentation». A «relational» approach would recognise that not all issues can be solved in that way, in particular where a contract or a contractual relationship develops over time. This would allow a more flexible approach to the implication of terms to deal with particular situations.

The first basis on which the courts, applying the classical approach, will imply terms is where the implication of the term derives from a local or trade custom.

Terms implied by custom. Provided that there is sufficient evidence to establish the custom, the courts will be prepared to interpret the contract in the light of it.

The person wishing to rely on the custom must produce convincing factual evidence of its existence and general acceptance. Assuming that there is sufficient evidence, the courts will imply a term to give it effect.

Such implication will not be possible, however, if the contract contains an express term which is inconsistent with the custom.

Terms implied in fact. The approach here is based on the attempt to determine the true intention of the parties. The courts will imply a term if they consider that it represents the true intention of the parties on a particular issue. In other words, the term is implied not as a matter of law, but on the basis that as a matter of fact, this is what the parties had agreed, though the agreement was implicit rather than explicit. The courts will not easily, however, be convinced that such implication should take place. It is certainly not sufficient that a particular clause would appear to be «reasonable». Nor will a term be implied to deal with an eventuality which the parties had not anticipated. If they had not expected a particular circumstance to happen, they cannot be said to have intended that a particular term would apply to the situation.

Terms implied by law. The distinction between terms implied in fact, and terms implied by law, was well explained by Lord Denning in Shell v Lostock Garage. The case concerned a contract under which a garage owner agreed to buy petrol exclusively from Shell. Subsequently, at a time when there was a petrol «price war», the garage owner discovered that Shell was supplying other petrol stations in the area at a lower price. This was having a disastrous effect on his business. The garage owner was arguing that a term should be implied to the effect that Shell would not discriminate against him in the terms on which it supplied the petrol. The majority of the Court of Appeal (Bridge LJ dissenting) held that no such term could be implied. In coming to this conclusion, Lord Denning emphasised the difference between terms implied in fact, and those implied by law. As regards the first category, as we have seen, this involves deciding what the parties themselves would have put into the contract had they addressed themselves to the issue. Lord Denning thought that the required term could not be implied on this basis, because it was highly unlikely that Shell would have agreed to the inclusion of such a term if this had been requested by the garage owner. Terms implied by law, however, do not depend on determining the intention of the parties. The court in this case will impose the term on them, whether they would have agreed to it or not. Two conditions need to be satisfied before this can be done, however. First, the contract has to be of a sufficiently common type (for example, seller/buyer, owner/hirer, employer/employee, landlord/tenant) that it is possible to identify the typical obligations of such a contract. Secondly, the matter to which the implied term relates must be one which the parties have not in any way addressed in their contract. There must be a clear gap to be filled. In Shell v Lostock Garage, the garage owner failed on the first test. Lord Denning was not prepared to hold that exclusive dealing contracts of this kind were sufficiently common that typical terms could be identified.

Terms implied by statute. There are two reasons why it may be appropriate for Parliament to enact that certain provisions should be implied into all contracts of a particular type. One relates to efficiency. If it is virtually universal practice for certain terms to be used in particular contractual relationships, there is no need for the parties to state them specifically every time. In terms of economic analysis, there is a saving in «transaction costs». Rather than having to agree an appropriate wording on each occasion, the parties can rely on the statutory formulation as representing their obligations. In such a situation, however, there should be the possibility of the parties being able to agree to depart from the statutory wording, if they so wish.

The second reason why terms might need to be implied by statute is for the protection of one of the parties. It may be thought that a particular type of contractual relationship is likely to involve inequality of bargaining power, so that, unless protective provisions are implied, the weaker party may be forced into a very disadvantageous bargain. If this is the reason for the implication, then it may well be that the obligation to include the term should be absolute, without any possibility of its being excluded, or amended, in particular contracts.

Examples of both these bases for implying terms by statute can be found in the history of the implied terms as to quality under the Sale of Goods Acts. The original Sale of Goods Act (SGA) 1893 was intended to represent a codification of current commercial law and practice. Thus, the implied terms as to quality, contained in ss 13-15, were those which merchants of the time would have expected to appear in any contract for the sale of goods. This was an example of the first ground for implying terms, that is, business efficiency. In line with this approach, s 55 of the SGA 1893 allowed the parties to agree to different terms as to quality, or to exclude them altogether, if they so wished. By the time of the enactment of the revised version of the SGA in 1979, however, the atmosphere had changed. The provisions as to quality had come to be regarded as important elements in the law of consumer protection. Their role was therefore at least in part to provide protection for the weaker party in a sale of goods contract. As a result, the Unfair Contract Terms Act (UCTA) 1977 made it impossible in situations where the contract is made between a business and consumer for the business to exclude the implied terms. Even as between business parties, the exclusion will be subject to a test of «reasonableness». The terms implied by the Supply of Goods and Services Act 1982 also seem to be based on principles of protection, rather than the avoidance of transaction costs.

A further example of a term implied on the grounds of protection is to be found in the Equal Pay Act 1970. Section 3 implies into every employment contract an «equality clause» which has the effect of ensuring that as between men and women employed on «like work», there is equal treatment in relation to all terms of their contracts.

The implication of terms on this basis runs counter to the normal philosophy of classical English contract law, which is to make the intentions of the parties paramount. Here the clause is imposed on the parties, whether they like it or not. Even if they expressly agree that it is not to operate, the courts will still give effect to it. This is an area where there is clearly a tension between the «classical» and «modern» law.

Date: 2015-12-18; view: 720