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Contractual terms

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Introduction

Traditionally, when deciding whether a term was present in a contract or not, the courts looked at, and extensively scrutinised, written correspondence. The courts said that only written words were good evidence. However, we have more recently seen a shift towards looking at the intentions of the parties, rather than what is written down. Of course, if the contract was negotiated by experienced businessmen who would understand the implications of a written contract, the courts will still favour the older view.

Incorporation of terms

In order for a term to be binding, it must have been incorporated, or included, into the contract. The landmark case of Interfoto v Stiletto Visual Programmes Ltd [1989] illustrates the issue of incorporation. Here, a 47 slides, sent by request, were to be returned by a certain date. They were returned late due to the defendant forgetting about them. Inside the delivery packet was a piece of paper on which there were 8 terms. One of the terms contained the fee penalties for late return. The defendant refused to pay the £4,000 invoice sent for late return, and the claimant sued. The issue was whether the late fee term was included in the contract. It was found that the contract was formed when the defendants decided to keep the slides, therefore the terms on the paper were generally included. However, the term containing the fees for late return was so unusual that reasonable notice should have been given to the defendant to this effect: in some way, the unusual term should have been highlighted. Without this extra notice, the term was invalid. Damages were awarded, but at a typical rate, rather than the extortionate rate imposed by the contract.

This case brings up a number of separate issues concerning incorporation.

Timing

There was no real issue with timing in Interfoto v Stiletto [1989]; the contract was formed after it could have been expected that the terms were read. However, in Olley v Marlborough Court [1949], it was found that a term included on the back of a hotel room door was ineffective as the contract had already been concluded in the reception area of the hotel. Terms cannot be added unilaterally to a contract, they must be assented to.

Assent

Assent can be taken as meaning agreement of a term included by one party with the other. In L’Estrange v Graucob [1934], it was said that a signature is powerful evidence of assent. This can also mean that someone can be bound by something which they haven’t even read. Although for a term to be included, it must be on a ‘contractual document’. According to Grogan v Meredith Plant Hire [1996], a timesheet is not a contractual document.

If a party misleads someone into believing that they are signing something with different terms, as was the case in Curtis v Chemical Cleaning & Dyeing Co [1951], the signature on that document will not be binding. Similarly, just to keep quiet about an unusual clause in Amiri Flight Authority v BAE Systems [2003] was an implied misrepresentation.

In Canada, the case of Tilden Rent-A-Car Co v Clendenning [1978, Canada] ruled that signing a document which you have not read constitutes assent to all reasonable terms contained in that document. Although this is not yet part of UK law.

Reasonable notice

A term may be included into a contract where it can be said that it had been impliedly assented to with no objection. A luggage ticket limiting the insurance value on that luggage bag was bought reasonably to a party’s intention in Parker v South Eastern Railway [1877]. therefore it was enforceable. According to Interfoto v Stiletto [1989], reasonable notice requirements vary depending on the effect which a term has. Not enough notice was given to the penalty clause.

Incorporation by reference

It is a risk to both parties to include terms into a contract by reference. Although it is legitimate to do so given reasonable notice.

Incorporation by a course of dealings

It is possible to include terms impliedly due to their regular use. Of course, the issue then arises as to how frequent such dealings need to be. In British Fermentation Products v Compair Reavell [1999], a one-off reference was not enough when including terms for machinery purchase. Similarly, in Hollier v Rambler Motors [1972], 3-4 dealings per 5 years was insufficient. For implied terms by a course of dealings to be effective, dealings must be very regular. In Kendall & Sons v Lillico & Sons [1969], 3-4 dealings per month over 3 years was enough. Following Circle Freight International v Medeast Gold Exports [1988], it is also possible to include terms by a letter to future contractual dealings.

Implication of terms

Beyond what the parties explicitly say, terms can be implied into contracts either by statute, or by judicial reasoning.

Implication by statute

3 statutes are effective here: the Sale of Goods Act 1979; the Consumer Rights Act 2014 and the Sale of Goods and Services Act 1982.

Sale of Goods Act 1979

The Sale of Goods Act 1979 implies fair terms into contracts for the purposes of efficiency.

  • s 12 – The seller must have the right to sell the proposed goods
  • s 13 – Goods sold by description must match that description
  • s 14(2) – In the course of a business, goods must be of satisfactory quality
  • s 14(3) – To the extent of things not pointed out by the seller implicitly or explicitly, in the course of a business, goods must be fit for purpose
  • s 15(2) – Goods sold by sample must correspond to that sample

The interesting point to note here is what does ‘in the course of a business’ mean. Section 14 does not apply to transactions not in the course of a business. Stevenson v Rogers [1999] gave a broad interpretation to this phrase, in which a fisherman was dealing in the course of a business to sell his boat, even though that was not part of his trade. This is because s 14(2) is designed to protect buyers and not sellers.

Consumer Rights Act 2014

As a preliminary point, the Consumer Rights Act 2014 is actually still a Bill at the moment; it is still under consideration by Parliament, but is expected to be given royal assent this year. At the time of writing this page (28th April 2014), the bill is currently at its report stage in the House of Commons. It has yet to be debated in the House of Lords. Therefore, this page is preempting the success of the Bill, and reported sections may change. However, prior to this ‘Act’, the law was particularly messy in this area, with conflicting EU and UK legislation.

The Consumer Rights Act 2014 sets out all of the rights of consumers in one place.

  • s 1(1) – A consumer transaction is one between a trader and a consumer
  • s 2(2) – A trader means any person (business) acting for purposes relating to that person’s trade, craft, business or profession.
  • s 2(3) – A consumer means any individual acting wholly or mainly outside of their trade, business, craft or profession.
  • s 9(2) – Satisfactory quality required, given (a) description, (b) price and (c) all other circumstances
  • s 9(3) – For satisfactory quality, consider (a) usual purposes, (b) appearance/finish, (c) freedom from minor defects, (d) safety and (e) durability
  • s 9(4) – Quality excludes (a) anything specifically bought to the consumer’s attention, (b) anything which ought to have been revealed by an examination or (c) anything which would have been apparent on sample

Terms implied by the statutes above are terms of strict liability. It is irrelevant whether the seller knows of any issues with the products he is selling. If such products are ‘defective’ as above, he will be liable.

Sale of Goods and Services Act 1982

This act generally requires reasonableness in the delivery of services.

  • s 13 – Reasonable care and skill is required
  • s 14 – Reasonable time may be taken
  • s 15 – Reasonable charges may be imposed

Once again, the Sale of Goods and Services Act 1982 will only apply in the course of a business due to the Consumer Rights Act 2014. However, s 55 of the Sale of Goods Act 1979 does allow for the exclusion of terms implied by statute, as far as the Unfair Contract Terms Act 1977 allows.

Implication by judicial reasoning

The judiciary may imply terms into a contract retrospectively, either by looking at the agreement as a whole, or by policy. In the past, many tests were developed to carry out such an exercise.

In A-G of Belize v Belize Telecom Ltd [2009], it was said that the judiciary should give effect to the agreement by imposing not reasonable, but necessary, terms. These terms may not be required for the agreement to work.

One of the aforementioned tests was the ‘officious bystander test’, imposed by Shirlaw v Southern Foundries [1939]. It was said that if an irritating bystander would be dismissed for reasons of obviousness after suggesting such a term, that term could be included in the contract.

A good example of a term implied can can found in Barnett v Lounova [1982]. A tenancy agreement did not provide for the external maintenance of a house; only the internal maintenance, which was assigned to the tenant. The courts imposed a term which required the landlord to carry out external repairs as the tenant’s obligations were already provided for and would be impeded upon eventually by a lack of exterior maintenance.

In Hutton v Warren [1836], a term was implied where it was customary for 1000 rabbits to actually mean 1200 rabbits.

Finally, in Liverpool CC v Irwin [1977], tenants sopped paying after the landlord failed to maintain ‘common parts’ of a tower block. It as required that an inspection schedule should be present, but the claim for enforce the payment of rent was upheld as the damage was in fact caused by vandals. A term had been implied in law that the landlord had a duty to maintain ‘common parts’.

Validity of contractual terms

Assuming that a particular term has been correctly incorporated into a contract, and the contract is binding, it is usually not possible to invalidate a term; however there are exceptions.

Common law

Penalty clauses, those which control liquidated damages, can be abused. Similarly, there is judicial distaste for restraint of trade clauses, those which restrict someone’s ability to contract with competitors. Exemption clauses are the most commonly abused type of term which the courts do not like. These clauses remove rights and remedies of parties. Often, they reflect economic reality. A product may be sold without insurance for a lower price than with insurance: this reflects the costs to the vendor. Over time, there was a battle between contract drafters and courts to remove ‘ambiguities’ which the courts could use to invalidate a term. Lord Denning established the idea of a fundamental breach doctrine, which was quashed in the Suisse Atlantique case [1966], which asked the legislature to intervene with the controls on exemption clauses.

Unfair Contract Terms Act 1977

11 years after the judiciary requested assistance, the legislature enacted the Unfair Contract Terms Act 1977 (UCTA). Do not be fooled by the title of this act though, it has a very limited scope, so may not assist in excluding ‘unfair terms’. It simply restricts the effectiveness of some clauses.

Scope

Firstly, s 26(1) of the Act provides that it is ineffective in international supply contracts. See Amiri Flight Authority v BAE Systems [2003] for the effects of this paragraph. S 26(3) says that an international supply contract has a broad meaning: it applies where (a) ownership passes or (b) parties conduct business in different states, where the Isle of Man and the Channel Islands are classed as different states to the UK’s mainland. It is enough that a commonly viewed offer and acceptance takes place across borders for s 26 to apply. For example, ignore the postal rule here.

Secondly, schedule 1 of the Act provides other exclusions to the Act’s scope. Contracts involving carriage by sea are excluded as they are governed by international conventions, just as are insurance contracts. Of course, this latter is an example of Parliament giving in to political and commercial pressure.

Thirdly, the Act only applies to transactions which take place in the course of a business.

Lastly, the Act only applies to: exclusion clauses (which are easy to spot), limitation clauses (which limit damages to a certain amount, e.g. the contract price) and clauses specified in s 13(1), which are those which (a) impose restrictive or onerous conditions, (b) prejudice rights or (c) evidential exclusions.

Effect

As a general rule, where a term of a contract is within the scope of UCTA, the courts will decide whether that term is reasonable. If not, the term will be excluded.

Section 6 of UCTA deals with where there is an exclusion of terms implied by the Sale of Goods Act 1979. It has no prerequisites, but requires that the contract operated loosely within the course of a business (Stevenson v Rogers [1999]) for the terms to have been implied to start with. Exclusion clauses are then subject to a reasonableness test.

Section 2 of UCTA deals with where there is an exclusion of liability for negligence. Any term which excludes liability for death or personal injury due to negligence is automatically excluded. However, all other terms which exclude liability for negligence, for example damage to property, are subject to a reasonableness test. The complexity within this section lies in its prerequisite of the contract being carried out in a course of business. While Stevenson v Rogers [1999] applied a generous meaning to this phrase where the Sale of Goods Act 1979 is concerned, where UCTA is concerned, the case of R&B Customs Brokers v United Dominions Trust [1988] may apply. In the application of section 12 of UCTA, is was said that in the course of a business means that a company must be trading in the ‘mainstream’ of its business. Therefore, a contract involving a company car purchase by a company who did not regularly purchase cars was not dealing in the course of a business. Furthermore, the Consumers Rights Act 2014 repealed section 12 of UCTA. So we are left wondering whether R&B Customs Brokers v United Dominions Trust [1988]‘s decision was also repealed by the Act. It is submitted that we should use the generous interpretation given by Stevenson v Rogers [1999], however there is an argument to say that given UCTA’s supposedly narrow scope, we should stick to the narrow meaning. As a final point, Smith v Eric S Bush [1990] allowed for financial loss to be compensable under negligence losses.

Section 3 of UCTA is the final of the 3 operative sections of UCTA. It concerns exclusions for any breach of contract in the course of a business (s 1(3) with the argument above), provided that (s 3(1)) the transaction took place on written standard terms of business. According to McCrone v Boots Farm Sales Ltd [1981], this can include a contract which is only partially written. However, a one-off adoption, as in the previously mentioned case of British Fermentation Products v Compare Reavell [1999] will not be classed as a standard terms contract. It was said in St Albans City & DC v International Computers [1996] that a contract will not be a contract on standard terms if there has been an appreciable quantity of negotiations over those terms. For section 3 to operate, according to Yuanda v WW Gear Construction [2010], the terms must have been used for nearly all of the contracts by a party. In Watford Electronics v Sanderson [2001], s 3 was applicable due to awareness of all of the terms.

If a contract is on standard terms, there is a more detailed alternate scope for section 3: the clauses may also either (2)(b)(i) render performance substantially different or (ii) not require any performance. There are a few exceptions to this though. In Paragon Finance v Nash [2002], it was said that UCTA does not apply to variable interest rates, as they are not part of the performance of the contract (amount repayable does not change), nor does is apply to termination of services clauses, according to Hadley Design Associates v Westminster CC [2003]. Do-buy 925 v Natwest [2010] added to the exceptions list by saying that UCTA does not apply to a contract between a retailer and a merchant acquirer, and finally in Timeload v BT [1995], the possibility of challenging a termination clause was suggested.

If section 3 is operative on a clause, it is then subject to a reasonableness test.

Liability may not be excluded for fraudulent misrepresentation.

Reasonableness

Assuming that a clause is subject to a reasonableness test, section 11 of UCTA provides what that test entails.

  • s 11(1) – Consider the surrounding circumstances
  • s 11(2) – Schedule 2 – look at relative bargaining power, inducement, knowledge of effect of term, whether it would be reasonable to expect compliance and whether goods had been adapted for the customer.
  • s 11(3) – Fair and reasonable reliance
  • s 11(4) – Where financial exclusion, consider insurance options and resources
  • s 11(5) – The onus for proving reasonableness is on the party alleging reasonableness

Examples of the reasonableness test include Stewart Gill v Horatio Myer [1992], which involved an unreasonable anti set off clause, and George Mitchell v Finney Lock Seeds [1983] which found it unreasonable to exclude liability for some defective seeds to £207.60, where the losses concerned exceeded £61,000.

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