Elements in a Contract XVI – End of Contract – Mistake II

There are a few factors that influence a court’s decision when it comes to determining if a mistake had been made or otherwise. The mistake must precede the contract i.e. the mistake must be made prior to the contract coming into existence or before the contract is entered into. In Amalgamated Investment & Property Co Ltd v John Walker & Sons Ltd (1977) the seller sold the buyer a warehouse knowing that the buyer intended to redevelop the property. A day later the Department of Environment designated the property a listed building – a mechanism that is used to protect buildings of historic importance or significance.

The buyer brought an action in court to render the contract void on the grounds that a mistake had been made. The court held that there was valid and enforceable contract. At the time the parties entered into the contract neither of the parties knew that the building was to become a listed building.

The mistake must have induced the party to enter into the contract. In Couturier v Hastie (1856) a cargo of corn was on board a ship sailing from the Mediterranean to London. During the journey, due to extensive heat, the crew discovered that the cargo was going bad and sold the corn at the nearest port. In the meantime, the seller and buyer who were not aware of the fact that the corn had been sold, entered into a contract under the assumption that the corn was still on board the ship. It was held that the contract was void because the subject of the contract did not exist. In a contract for the sale of goods if the goods perished without the knowledge of the seller, at the time the contract was entered into, the contract is void.

The mistake could either be a mistake of fact or a mistake of law. In Hartog v Colin and Shields (1939) the defendants were in possession of hare skins which they intended to sell at a price per piece as dictated by custom but instead quoted the price as per pound. When the defendants realized their mistake, they tried to stop the sale and the plaintiffs sued. The court held that the contract was void. The defendants had made a mistake of fact.

In Kleinwort Benson Ltd v Lincoln City Council (1999) a bank had paid a local council for certain financial transactions which at the time of making the payments, the bank was under the impression that such payments were legal. It later turned out that the payments were illegal and the court ruled that the payments should be returned to the bank. The bank had made a mistake of law.

In addition to mistake as to the terms of the contract, mistakes can also include mistakes of identity. In Cundy v Lindsey (1878) the plaintiffs received an order by post for handkerchiefs from a Mr. Blenkarn whose address was the same as a highly reputable firm with a similar name (Blenkiron & Co) that was located on the same street, as the address Mr Blenkarn had provided. The order was signed in a manner that was identical to that of Mr. Blenkiron from the above-mentioned firm of Blenkiron & Co.

The plaintiffs thinking that it was Mr. Blenkiron who intended to purchase the handkerchiefs dispatched the goods and Blenkarn sold the handkerchiefs to the defendant. By the time the plaintiffs had discovered the mistake most of the handkerchiefs had been sold. The court held that there was no contract with Mr. Blenkarn because the plaintiffs had intended all along to deal with Blenkiron & Co.

In King’s Norton Metal v Edridge Merrett & Co (1897) the defendant, using an alias, ordered some goods by post using a company letterhead that he had created purporting to be a large company with various subsidiaries. The plaintiffs sent the goods on credit but the defendant never paid for them. The plaintiffs sought to recover the outstanding payment from the defendant and brought the matter before the courts. The court held that the plaintiffs had intended to enter into a contract with the defendant and that the contract was valid and enforceable. The defendant was liable.

In Shogun Finance v Hudson (2003) a rogue entered a showroom and agreed to buy a car on hire-purchase. The rogue pretended to be someone else and produced a driver’s license and other documents in the name of the person he pretended to be. The documents were in fact stolen.

He paid the down-payment of 10% and soon after sold the car to another person. Shogun Finance traced the car down to the new owner and sought possession of the car. The court held that Shogun Finance was entitled to reclaim the car and that the hire purchase agreement was void. Therefore, there was no title to pass and the new owners could not claim ownership of the car.

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Elements in a Contract – Cases involving local councils

In Amalgamated Investment & Property Co Ltd v John Walker & Sons Ltd (1977) (Mistake) – the seller sold the buyer a warehouse knowing that the buyer intended to redevelop the property. A day later the Department of Environment Designated the property a listed building – a mechanism that is used to protect buildings of historic importance or significance. The buyer brought an action in court to render the contract void on the grounds that a mistake had been made. The court held that there was valid and enforceable contract. At the time the parties entered into the contract neither of the parties knew that the building was to become a listed building.

In Blackpool and Flyde Aero Club Ltd v Blackpool Borough Council (1990) (Invitation to Treat) – the defendants invited tenders from operators wishing to operate flights from the local airport to submit a tender by a stipulated date. The plaintiffs submitted a tender by the stipulated date but it arrived after the stipulated date. As a result, the defendants refused to consider the tender and the plaintiffs sued. It was held that the defendants’ invitation to tender was an invitation to treat and since the plaintiffs had submitted a genuine offer the defendants must consider it.

In Chapleton v Barry Urban District Council (1940) (Express Terms) – the plaintiff hired a deck chair from Barry UDC and according to the sign that was posted, payment for the hire of the chair was to be made at a specified counter or booth. The plaintiff followed the instructions and once payment was made he was given a receipt which had an exclusion clause printed on it that excluded liability for injury incurred while using the chairs. The plaintiff sat on the chair and was injured as a result of a faulty chair. He brought an action against Barry UDC and was successful in his claim.

The court held that the terms in a contract must be made or stipulated prior to the acceptance or the formalization of the contract and any term, stipulation or clause that came after the formalization of the agreement would not be part of the contract.

In Glasbrook Brothers v Glarmorgan County Council (1925) (Consideration) – the defendants owned a colliery and requested for protection from the police during a strike. Once the strike was over the police submitted a bill for the work that they had put in. The defendants refused to pay and an action was brought against the defendants. The plaintiffs were successful because in providing the additional resources that was required the police had gone over and above their duty.

In Gibson v Manchester City Council (1979) (Offer) – Manchester City Council advertised details of a scheme for tenants to buy their council houses. The plaintiff wrote to the council and the council accordingly replied with a price and certain terms. The house was then taken off the list of tenant-occupied houses maintained by the council and put on the house purchase list. A local election ensued and the new council reversed the policies of the former council and the sale did not go through. Gibson sued.

The Court of Appeal held that despite the fact that all the formalities had not been concluded, there was a clear intention to contract based on the transaction or what had transpired as a whole and found in favor of the plaintiff.

The council appealed. The House of Lords held that the fact that the council stated the price of the house and some other terms did not mean that there was an offer. It was merely a step in the negotiation process and the negotiations had not yet ripened into a contract.

In Kleinwort Benson Ltd v Lincoln City Council (1999) (Mistake) – a bank had paid a local council for certain financial transactions which at the time of making the payments, the bank was under the impression that such payments were legal. It later turned out that the payments were illegal and the court ruled that the payments should be returned to the bank. The bank had made a mistake of law.

In Liverpool City Council v Irwin (1977) (Parol Evidence) – the tenants in a block of flats rented out by the City Council refused to pay the rent because the flats were in a state of disrepair and some of the basic amenities were either not available or were unusable. The council sued and in their claim they argued that the duty to keep the flats in good repair was not a term of the agreement. The House of Lords held that the landlord should take reasonable care to ensure that the facilities were kept in a good state of repair and the plaintiffs were unsuccessful in their claim.

In Storer v Manchester City Council (1974) (Offer) – the city council wrote to a sitting tenant (a sitting tenant is a tenant who is already occupying a property and has a legal right to stay on the premises) asking him if he wished to purchase the property he was residing in and if so to sign and return the council’s standard form agreement, which the tenant did.

Soon after a new council took over and did not wish to proceed with the agreement and put forward the argument that the agreement had not been signed on the council’s behalf. It was held that the council had made a valid offer and its acceptance constituted a contract, despite the fact that, it was not signed by the council’s representative.

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Elements in a Contract XV – End of contract -Mistake I

Vitiation

Vitiation occurs when the parties in a contract reach an agreement based on facts or circumstances that are non-existent for example as in instances of mistake, illegality, duress, undue influence, and misrepresentation.

Mistake

When deciding whether there has been a mistake or otherwise the courts will apply the objective test and will not look at the matter from the perspective of the contracting parties but rather from the perspective of the man on the Clapham omnibus or the common man.

Mistakes can be divided into three different categories: –

i) Common mistakes

ii) Mutual mistakes

iii) Unilateral mistakes

Common Mistakes

Common mistakes occur when both the contracting parties make the same mistake. In Griffith v Brymer (1903) the plaintiff had entered into an oral agreement with a landlord to view the coronation procession from the landlord’s premises. The procession did not take place as intended and the plaintiff sought to recover the money the he had paid. The court held that there was a mistake and therefore the contract was void and the plaintiff was able to recover the money he had paid.

In Scott v Coulson (1903) the plaintiff and the defendant entered into a contract to insure the life of a third party, who at the time the contract was entered into, they believed was alive but as it turned out the third party in question was deceased. The court held that the contract was void. Applying the objective test, a reasonable person would not seek to insure the life of someone who was no longer alive.

In Bell v Lever Bros (1932), the plaintiffs entered into a contract with the defendants who were appointed president and vice president of a subsidiary company which they had set up. The company ran at a loss and the plaintiffs subsequently decided to merge the company with another company and terminated the contracts of both employees but not before making suitable redundancy payments.

The plaintiffs later discovered that the initial company that they had set up ran at a loss because of mismanagement and they thereby sought to recover the redundancy payments that they had made by bringing an action in court on the grounds that they had made a mistake.

The court held that the mistake was a mistake as to quality i.e. in this instance the service that was provided and did not go to the root of the contract and as such the contract was not void. The plaintiffs were unable to recover the redundancy payments that they had made.

Mutual Mistake

A mutual mistake occurs when both parties in a contract make different mistakes. In Raffles v Wichelhaus (1864) the plaintiff agreed to sell the defendant a cargo of cotton that was due to sail from Mumbai between October and December. The defendant entered into the contract thinking that the ship carrying the cotton would set sail in October while the plaintiff entered into the contract on the understanding that the ship would set sail in December. The defendant subsequently, when the cotton did not arrive on time, terminated the contract and the plaintiff sued.

The court held that the contract was void because a reasonable person would not have been able to say for certain when the ship would have set sail.

Unilateral Mistakes

Unilateral mistakes are instances where only one party makes a mistake. In Wood v Scarth (1858) the defendant rented his pub to the plaintiff for a certain amount to be paid each year and an additional one off payment and informed his clerk accordingly but the clerk failed to inform the plaintiff of the one-off payment. The defendant subsequently refused to rent his pub and the plaintiff sued. The court held that there was a valid agreement in place and by applying the objective test the court arrived at the conclusion that despite the mistake, the defendant had made a clear unambiguous offer which the plaintiff had accepted.

In Smith v Hughes (1871) the claimant made inquiries into purchasing some oats which he stipulated must be old because he intended to use it as horse feed and the defendant sold him some oats which in fact were not old as the claimant had stipulated but new. The defendant knew of the claimant’s requirements but kept silent on the matter. The claimant later, after purchasing the oats and realizing that the oats were not old brought an action against the defendant arguing that the oats were of no use to him and that there had been a mistake and that the defendant had made a misrepresentation.

The court held that there was no mistake or misrepresentation because the defendant had not misled him or misdirected him in any way. He merely remained silent.

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Elements in a Contact XIV – End of contract – expiration and breach

There are four ways in which a contract can come to an end. They are as follows –

i) When a contract expires or expiration

ii) Termination

iii) Vitiation

iv) Frustration

Expiration

A contract expires or meets a natural demise when all the terms in the contract have been fulfilled or complied with. Let’s say for example that Alex contracted to supply Fred with 10 tonnes of coal on the 1st of June and the delivery was to be made by the 30th of June. On the 15th of June, Alex delivered 10 tonnes of coal to Fred’s residence and was reimbursed accordingly. The contract has ended or has run its course and no further action needs to be taken by any of the parties in the contract.

Termination

A contract can be terminated when there has been a breach. A breach of a condition for example allows the innocent party to terminate the contract. A breach of contract can be divided into actual breaches and anticipatory breaches.

Actual Breach

An actual breach occurs when a party in a contract fails to perform that which is expected of him or her or the duty that is expected of him or her.

In Poussard v Spiers (1876), the plaintiff an opera singer of some note was contracted by the defended to perform at an opera but a week prior to the opening, she fell ill and the defendants subsequently had her replaced. Once the plaintiff had recovered she contacted the defendants wanting her spot back but the defendants refused stating that the contract had been terminated. The plaintiff sued.

The court held that, the plaintiff’s performance on the stipulated date was a condition in the contract and therefore the defendants were entitled to terminate the contract.

Similarly in The Mihalis Angelos (1970), a ship was hired out to the defendants to ferry goods with the stipulation that the ship would be ready for loading by a specific date. The ship was not ready by the stipulated date and there was an unusually long delay before the ship could be loaded. The defendants cancelled the contract because of the delay and the plaintiff sued.

It was held that the term that the ship must be ready by a specific date was a condition in the contract and as a result the defendants were entitled to terminate the contract.

In Pilbrow v Pearless de Rougemont & Co (1999) the appellants a legal firm brought an action against the defendant for outstanding fees. The defendant had made an appointment via telephone with the firm to seek legal advice and when he arrived he was attended to by a legally trained employee of the firm who was not a qualified solicitor. The defendant was dissatisfied with the service that he received and refused to pay the outstanding fees.

The defendant’s argument was based on the fact that he had entered into the agreement with the view that he would receive advice from a legally trained solicitor, which he clearly did not.

The court held that despite the fact that the advice given to the defendant was legally sound, it was a condition in the contract that the defendant be attended to by a legally trained solicitor and therefore the defendant was entitled to terminate the contract.

Actual breach also includes breaches of terms that are nominated as warranties and innominate terms. The remedy for a breach of a warranty is normally damages. When it comes to innominate terms it depends on the extent of the breach.

Anticipatory Breach

An anticipatory breach occurs prior to when a party in a contract is due to perform that which is expected of him or her or the duty that is expected of him or her.

In Bowdell v Parsons the plaintiff contracted to move hay from the defendant’s premises, at the plaintiff’s convenience, and in return the plaintiff would pay the defendant an agreed sum for each load. The plaintiff moved 1 load after which the defendant sold the remaining 11 loads to a third party. The plaintiff sued and was successful.

In Hochster v De la Tour (1853) the plaintiff was contracted to be a tour guide to assist the defendants during their tour of Europe. The agreement was made a month before the tour was to start. Three weeks later, the defendants informed the plaintiff that his services were no longer required. The plaintiff sued and the court held that he was entitled to damages.

In Frost v Knight (1872) the defendant promised to marry the plaintiff after his father had passed on. The defendant later called off the engagement, while his father was alive and the plaintiff sued for breach of promise. The plaintiff was successful and the court held that the plaintiff was entitled to damages.

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Elements in a Contract – Cases involving boats and ships

In Bunge Corp v Tradax Export SA (1981) (Conditions) – the contract concerned the sale and purchase of US soya bean meal (normally used as a protein supplement in animal feeds).

According to the terms of the contract the freight of the soya bean meal was to be handled by the buyers but the seller required at least 15 days’ notice for loading as per the contract. The buyer gave only 13 days’ notice. The contract further stated that the soya bean meal must be shipped by the end of the month.

The court held that the requirement that the seller ship the soya bean meal by the end of the month was a condition and therefore the other party was entitled to terminate the contract if the shipment was not made according to the stipulated terms.

In Couturier v Hastie (1856) (Mistake) – a cargo of corn was on board a ship sailing from the Mediterranean to London. During the journey, due to extensive heat, the crew discovered that the cargo was going bad and sold the corn at the nearest port. In the meantime, the seller and buyer who were not aware of the fact that the corn had been sold, entered into a contract under the assumption that the corn was still on board the ship. It was held that the contract was void because the subject of the contract did not exist. In a contract for the sale of goods, if the goods perished without the knowledge of the seller, at the time the contract was entered into, the contract is void.

In Hartley v Ponsonby (1857) (Consideration) – half the crew in a ship deserted while the ship was sailing to Mumbai. The captain of the ship promised the remainder of the crew extra wages should they be willing to carry on. The remainder of the crew agreed and upon reaching Mumbai the captain of the ship refused the crew the additional wages. The plaintiff sued.

It was held that by agreeing to take on the additional duties, the plaintiff had taken on duties that were not in his contract and was thus entitled to the extra wages.

In Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha (1962) (Innominate Terms) – the defendants had chartered a ship from the plaintiffs for 2 years on the understanding that the ship was seaworthy and was able to complete the 2-year period without docking for repairs. However, as it turned out that the ship needed repairs and spent 20 weeks in the docks. The defendants were entitled to claim for damages but instead they chose to terminate the contract.

The court had to decide on the importance of the term and if the breach was so severe that it would lead to the termination of the contract. The court held that it was not a matter of deciding whether the plaintiffs undertaking to provide a seaworthy ship was a warranty or a condition.

The correct approach according to the court was to look at the consequences of the breach and then decide if the charterers had been deprived of the entire benefit that they desired to obtain under the contract.

The term seaworthy has many interpretations and some breaches may be less severe or serious than others and therefore it is best to look at what has happened as a result of the breach and then decide if the term that has been breached is a condition or a warranty.

In J Evans & Son (Portsmouth) Ltd v Andrea Merzario Ltd (1976) (Parol Evidence) – the defendant assured the plaintiff that goods will be ferried below deck when in actual fact the goods were stored on the deck and were damaged in a storm. The plaintiff sued and was successful. The oral agreement was held to be a collateral contract i.e. a subsidiary contract which induced the party to enter into the main contract.

In The Mihalis Angelos (1970) (Condition) – a ship was hired out to the defendants to ferry goods with the stipulation that the ship would be ready for loading by a specific date. The ship was not ready by the stipulated date and there was an unusually long delay before the ship could be loaded. The defendants cancelled the contract because of the delay and the plaintiff sued.

It was held that the term that the ship must be ready by a specific date was a condition in the contract and as a result the defendants were entitled to terminate the contract.

In Stilk v Myrick (1809) (Consideration) – two sailors abandoned ship during a voyage and the captain of the ship promised the rest of the crew additional wages should the remainder of the crew take on their duties and help the ship complete its journey. Once the journey was completed the captain did not pay the additional wages and the plaintiff brought an action in court.

It was held that the plaintiff was not entitled to the additional wages because he had merely done what he was contracted to do i.e. complete the journey.

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Elements in a Contract XIII – Conditions, Warranties and Innominate Terms

The impact of a term depends on the importance that is attached to it and from the perspective of the courts terms can be either express or implied, oral or written and can be divided into the three following categories: –

i) Conditions

ii) Warranties

iii) Innominate Terms

Conditions

Conditions are terms of paramount importance. In Poussard v Spiers (1876), the plaintiff an opera singer of some note was contracted by the defended to perform at an opera but a week prior to the opening, she fell ill and the defendants subsequently had her replaced. Once the plaintiff had recovered she contacted the defendants wanting her spot back but the defendants refused stating that the contract had been terminated. The plaintiff sued.

The court held that, the plaintiff’s performance on the stipulated date was a condition in the contract and therefore the defendants were entitled to terminate the contract.

In Bunge Corp v Tradax Export SA (1981) the contract concerned the sale and purchase of US soya bean meal (normally used as a protein supplement in animal feeds).

According to the terms of the contract the freight of the soya bean meal was to be handled by the buyers but the seller required at least 15 days’ notice for loading as per the contract. The buyer gave only 13 days’ notice. The contract further stated that the soya bean meal must be shipped by the end of the month.

The court held that the requirement that the seller ship the soya bean meal by the end of the month was a condition and therefore the other party was entitled to terminate the contract if the shipment was not made according to the stipulated terms.

In The Mihalis Angelos (1970), a ship was hired out to the defendants to ferry goods with the stipulation that the ship would be ready for loading by a specific date. The ship was not ready by the stipulated date and there was an unusually long delay before the ship could be loaded. The defendants cancelled the contract because of the delay and the plaintiff sued.

It was held that the term that the ship must be ready by a specific date was a condition in the contract and as a result the defendants were entitled to terminate the contract.

Warranties

A warranty is a lesser term in a contract and a breach of a warranty does not lead to major consequences. In Bettini v Gye (1876), the plaintiff was an opera singer who was contracted to perform in an opera but became ill during the rehearsals and as a result was not able to attend 6 days of the rehearsals. The defendant terminated the contract and the plaintiff sued. It was held that not attending rehearsals was not a serious breach or a breach of a condition and therefore the defendant was not entitled to terminate the contract – compare the case with Poussard v Spiers (1876).

As a result of its secondary status, a warranty is sometimes described as a collateral term which is subordinate to a much more important term i.e. a condition.

Innominate Term

Innominate terms are intermediate terms and the consequence of a breach of an innominate term depends on the importance that is attached to it. In Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha (1962) the defendants had chartered a ship from the plaintiffs for 2 years on the understanding that the ship was seaworthy and was able to complete the 2-year period without docking for repairs. However, as it turned out that the ship needed repairs and spent 20 weeks in the docks. The defendants were entitled to claim for damages but instead they chose to terminate the contract.

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Elements in a Contract XII – Terms implied by custom, trade usage & entire agreement clauses

A term may also be implied by custom. In Smith v Wilson (1832) the defendant agreed to lease a rabbit warren, agreeing to pay £60 per thousand rabbits and paid less than what was outstanding. The plaintiff sued and the defendant argued that according to local custom 1,000 rabbits was taken to mean 1,200 rabbits and therefore he wasn’t in arrears.

The court found in favor of the defendant. It was implied that at the time of entering into the contract, the parties had acted in accordance with local custom and therefore the defendant had made the correct payment.

In Hutton v Warren (1936) the plaintiff was a tenant in the defendant’s fields and had accordingly tilled the fields and sown it with seeds. The tenancy was then terminated prior to the crops being harvested and the defendant, contrary to local custom refused to pay the plaintiff for the cost he’d incurred and for the work he’d done because it was not stipulated in the written agreement. The plaintiff brought and action against the defendant and was successful.

Terms are also implied into a contract based on trade usage. In British Crane Hire Corp Ltd v Ipswich Plant Hire Ltd (1975) the defendants were in urgent need of a crane and the plaintiffs agreed to supply a crane over the telephone without entering into a written contract and the defendants started using the crane prior to the formalization of the contract. It was not the first time that the defendants had hired a crane from the plaintiffs.

Subsequently, there were two accidents one after the other and the question of liability arose. It was held that the normal terms that were stipulated in the two previous contracts would apply.

Entire Agreement Clauses

Some contracts contain clauses that are called entire agreement clause and these clauses are included in the contract to prohibit one party from arguing that the contract was part oral or part in writing or that there is a collateral contract in place which induced the party to enter into the main contract or that there are implied terms that should be read into the contract.

In Inntrepreneur Pub Co v East Crown Ltd (2000) a landlord contracted with a tenant to rent out his public house with the condition or stipulation that the tenant purchase the beer that was served from a nominated supplier.

The contract contained an entire agreement clause which read somewhere along the lines of that the contract contained the entire details of the agreement. The tenant later started purchasing the beer that was supplied in his public house from other parties and the landlord sued. The courts held that the clause constituted a binding agreement and that the entire terms of the contract were to be found in the agreement.

Entire agreement clauses though valid do not exclude liability for misrepresentation. In Lloyd v Sutcliffe (2007) a landowner and a developer had an agreement whereby, the developer would have an equal share in a company formed to develop the landowner’s land. The agreement was later put into writing but there was an additional promise to share the profits that was not included. The agreement however did contain an entire agreement clause which stated that the agreement superseded any previous agreements entered into by the parties and that the agreement (the written agreement) contained the entire agreement.

The court held that because the agreement did not in any manner infringe the profit sharing clause, the entire agreement clause did not apply to the promise to profit share. Furthermore the promise had been affirmed by words and conduct after the contract had been formalized.

I.e. even if there was a promise made prior to entering into a contract which contained an entire agreement clause, the promise would still be valid if it was affirmed by words and conduct after the formalization of the contract.

Entire agreement clauses can exclude implied terms. In Exxonmobil Sales and Supply Corp v Texaco Ltd (2003), Exxonmobil entered into a contract for the sale of diesel to Texaco. Upon delivery, Texaco had the diesel tested and decided that it did not comply with the contractual conditions or stipulations and thereby rejected the consignment.

Exxonmobil contended that the diesel had been tested by an independent inspector and Texaco argued that it was an implied term of the contract that a representative portion of the diesel should be retained.

The contract contained an entire agreement clause which stated that the agreement contained all the details of the contract and that the agreement would not be effected by any other agreements, terms or promises. The court held that the entire agreement clause was sufficient to exclude any other terms either express or implied and that it was valid.

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Elements in a Contract XI – Terms Implied By Law

There are certain terms that are implied in a contract by law, especially for public policy reasons. A landlord for example is required to keep his property in a state of good repair. In Liverpool City Council v Irwin (1977) the tenants in a block of flats rented out by the City Council refused to pay the rent because the flats were in a state of disrepair and some of the basic amenities were either not available or were unusable. The council sued for the outstanding rent and in their claim they argued that the duty to keep the flats in good repair was not a term of the contract.

The House of Lords held that the landlord (the council) should take reasonable care to ensure that the facilities were kept in a good state of repair and that the terms to do so were implied into the contract. The plaintiffs were unsuccessful in their claim.

In Spring v Guardian Assurance Plc (1994), an employee was about to leave his company and his employer who discovered his employee’s intention to leave terminated his contract. The employee then applied to join another firm and gave his previous employer as a reference. When the new firm contacted the employer, the disgruntled employer gave him an unfavorable reference and as a result the employee remained unemployed for a certain period of time. The unfortunate employee brought the matter before the courts.

It was held that there was an implied term in most employment contracts that an employer when giving another prospective employer a reference with regards to a previous employee will exercise due care in giving the reference. Accordingly the courts decided that the disgruntled employer was negligent and as a result of his negligence the employee was unable to secure a job.

In Malik v Bank of Credit and Commerce International (1997), the plaintiffs sued their former employers, a bank, after it went under following allegations of money laundering, misappropriation of funds and various other offences. The plaintiffs argued that because of the circumstances under which the bank collapsed, they could not find suitable employment elsewhere and that there was a term implied in their employment contract that nothing would be done to undermine the mutual trust and confidence that existed in an employer-employee relationship.

The House of Lords held that the bank had breached the implied term i.e. not to undermine the trust and confidence in an employer-employee relationship and as a result the plaintiffs’ future job prospects had significantly narrowed. The plaintiffs were successful.

Certain statutes, for example s13 of the Sale of Goods Act 1893 imply certain terms into a contract. The section reads as follows: – “Where there is a contract for the sale of goods by description, there is an implied condition that the goods shall correspond with the description; and if the sale be by sample, as well as by description, it is not sufficient that the bulk of the goods corresponds’ with the sample if the goods do not also correspond with the description”.

Similarly the Sale of Goods Act 1979 also implies terms into a contract. Listed below are some examples of implied terms with regards to the Sale of Goods Act 1979:-

– s.12 (1) “In a contract of sale, other than one to which subsection (3) below applies, there is an implied (term) on the part of the seller that in the case of a sale he has a right to sell the goods, and in the case of an agreement to sell he will have such a right at the time when the property is to pass”.

– s13 (1) “Where there is a contract for the sale of goods by description, there is an implied (term) that the goods will correspond with the description”.

– S14 (2) “Where the seller sells goods in the course of a business, there is an implied term that the goods supplied under the contract are of satisfactory quality”.

– S15 (2) In the case of a contract for sale by sample there is an implied (term) – (a) that the bulk will correspond with the sample in quality; ….

Under the Consumer Rights Act 2015 there are certain implied terms that are read into a contract for the sale of goods, for example, the goods will be fit for its purpose, be of merchantable quality, the goods must fit the description and goods must match the sample, to name a few.

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Elements in a Contract X – Terms Implied By Fact

In addition to the express terms that have been agreed to by the parties there may also be additional terms that are read into the contract by the courts. These terms are known as implied terms. There are in essence and substance four types of implied terms. They are as follows:-

i) Terms implied by fact

ii) Terms implied by law

iii) Terms implied by custom

iv) Terms implied by trade usage

Terms implied by fact are terms that despite not being included in the contract, are included or read into the contract because the court assumes that the parties must have intended the terms to be part of the contract.

In Shirlaw v Southern Foundries (1926), it was held that implied terms are terms which in any contract are left to be implied and need not be expressed i.e. they are tacit terms.

These terms are so obvious that they go without saying and if, while the parties were making their bargain, an officious bystander were to suggest some express provision to be included in the agreement, the parties would testily suppress him with a common “Oh, of course!”. This test is also known as the officious bystander test.

In Banco de Portugal v Waterlow & Sons Ltd (1932), the plaintiffs a bank had contracted with the defendant company to print bank notes. The defendants delivered the notes to a third party and the notes were then circulated. The plaintiffs subsequently retracted the notes and sued for damages.

The defendants argued that the term was not part of the contract. The court held that the term was implied and that any person would know that the notes should not make their way into the hands of an unauthorized person or persons.

The test that is applied is the subjective test because it is applied from the perspective of the parties in the contract in that it would have been obvious to them that the term should be a part of the contract.

In Liverpool City Council v Irwin (1977) the tenants in a block of flats rented out by the City Council refused to pay the rent because the flats were in a state of disrepair and some of the basic amenities were either not available or were unusable. The council sued for the outstanding rent and in their claim they argued that the duty to keep the flats in good repair was not a term of the contract.

The House of Lords held that the landlord (the council) should take reasonable care to ensure that the facilities were kept in a good state of repair and that the terms to do so were implied into the contract. The plaintiffs were unsuccessful in their claim.

Terms are also incorporated or read into a contract in order to give the contract business efficacy. In the Moorcock (1889) the defendants owned a wharf and the plaintiffs contracted with them to unload their boat (the Moorcock).

Because the water levels were low at the time, the docking of the boat was dependant on the river bed. If the river bed was soft, it was possible to unload the boat but if the river bed was hard then it would not be possible to unload the boat without the boat sustaining some form or type of damage. The plaintiffs boat docked and did in fact incur some type of damage. The plaintiff sued.

The Court of Appeal held that the contract was based on the proposition that the plaintiffs could unload their boat without causing any damage to the boat. The plaintiffs were successful. The term that the boat should not be damaged was read into the contract because otherwise it was like saying unload at your own risk which would not have been the intention of the parties to start with.

The use of implied terms to facilitate business efficacy was however restricted by the court in Reigate v Union Manufacturing Co (1918). The court decided that it is important to first determine what the parties had expressed in the contract and if the court feels or deems it necessary then an implied term can be imported into the contract.

A term can only be implied if it is necessary in the business sense to give efficacy to the contract, that is to say that if at the time the parties were entering into the contract, someone had stood up and said what would happen in such a case?

The position of the courts was clarified in Trollope and Colls Ltd v North West Regional Hospital Board (1973). An express term can only be implied if the courts are satisfied that the parties would have incorporated the term into the contract and it does not suffice that a reasonable man would have stood up and suggested it to them. It must be a term that that goes without saying i.e. implied or understood to be part of the contract and a term necessary to give business efficacy to the contract.

In Alpha Trading Ltd v Dunnshaw Patten Ltd (1981) an agent was to receive a commission from a sale. The agent introduced a third party to the principle who subsequently entered into a contract with the third party but pulled out before the sale was completed. Since there was no sale the agent despite having made the introduction as per the agency agreement stood to lose his commission. The principle settled with the third party but did not pay the agent his commission. The agent sued.

The Court of Appeal held that business efficacy required that the principle would not withdraw from the sale and leave the agent without his commission. The court ruled that the agent was entitled to his commission.

Both the officious bystander test and the business efficacy test are subjective in that the court will look into the intention of the parties at the time that they entered into the contract to determine if a term can be implied into the contract or otherwise.

Copyright © 2017 by Dyarne Ward

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Elements in a Contract – Contract Interpretations

Just like the words in an enactment or a statute can lead to an ambiguity, similarly words in a contract can also sometimes be a source of confusion. Therefore, the courts have developed certain guidelines in addition to the existing rules of interpretation (see statutory interpretation) to make the law more flexible.

In Investors Compensation Scheme Ltd v West Bromwich Building Society (1998) Lord Hoffman set out five guidelines to aid with the interpretation of contracts. They are as follows: –

1) The terms in a contract should be looked at from the perspective of the reasonable man after taking into account all the background knowledge that was available to the parties at the time of entering into the contract.

2) The background knowledge that is to be taken into account is what is known as the matrix of facts or the factual matrix that was put forward by Lord Wilberforce and it includes anything, as long as the information is available to the parties, which would have affected the way in which the language of the document would have been understood by a reasonable man.

For example, in the case of Reardon Smith Line v Hansen Tangen (1976) the charterers agreed to take ownership of a tanker that was being built in a specific shipyard. The contract identified the tanker as Osaka No. 354 corresponding to the shipyard that it was being built in. Due to unspecified reasons the work could not be completed in the shipyard and the building of the tanker was subsequently transferred to another shipyard. The tanker was completed satisfactorily but it was no longer designated Osaka No. 354.

In the meantime, that world tanker market had taken a turn for the worse. The charterers refused to take possession of the tanker and claimed that the tanker did not fit the description as per s13 of the Sale of Goods Act – “Where there is a contract for the sale of goods by description, there is an implied condition that the goods shall correspond with the description ….”. The courts held that the designations i.e. Osaka No. 354 and the following designation were merely labels and were not valid descriptions as per the act and that there was in fact a valid contract in place

3) Previous negotiations or any other past declaration of intent however is no included it what is deemed or termed as background knowledge. Lord Wilberforce in Prenn v Simmonds (1971) said that the reason for not admitting evidence of these exchanges is not a technical one or even one of convenience. It is simply that such evidence is unhelpful.

By the nature of things, where negotiations are difficult, the parties’ positions, with each passing letter, changes. It is only the final document which records a consensus.

4) The meaning of the words that have been used and the meaning of the words incorporated in a document may not be the same as that which is perceived or understood by an ordinary man. Words and sentences have numerous meanings. The meaning of the words in a contractual document is what the parties using those words against the relevant background would reasonably have understood the words to mean.

In Mannai Investment Co Ltd v Eagle Star Life Assurance Co (1997), the appeal was concerned with the question of whether a notice given by a tenant pursuant to a break clause in a lease was effective notice, Lord Hoffman said that it is of course true that the law is not concerned with the speaker’s subjective intentions. But the notion that the law’s concern is therefore with the “meaning of his words” conceals an important ambiguity. The ambiguity lies in a failure to distinguish between the meanings of words and the question of what the words would mean to a person who uses the words.

5) The “rule” that words should be given their “natural and ordinary meaning” excludes the probability that people can make mistakes especially when it comes to formal documents. The law does not attribute to the parties an intention that they clearly could not have had.

In The Antaios Compania Neviera S.A. v. Salen Rederierna A.B. (1984) Lord Diplock said that “if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.”

Copyright © 2017 by Dyarne Ward

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