Contract Terms (Case Law)

Contract Terms

• Terms define the parties’ rights and obligations

  • e.g. what they have to do or pay

• There are Express and Implied terms

• Main legal issue in this topic is whether contract terms are enforceable against the other party

Express Terms

• These are terms that the parties put into the contract themselves

• If parties do not comply with these terms they will be in breach of contract

  • Types of Term

    • Huge variety as there are many types of commercial agreements

    • Parties may provide for what happens in the event of a breach, might include a ‘termination clause’

    • May include a ‘force majeure’ clause (suspension of contractual obligations during extreme circumstances) if some catastrophic event occurs

    • Parties can draft contract terms from scratch, use ‘precedents’ or use standard form contracts

  • Exemption and limitation clauses

    • These are express terms which exclude or limit liability to pay damages is something goes wrong

      • e.g. “we are not liable for any damage to your property suffered on our premises”

    • An exemption clause removes a party’s obligation to pay damages

    • A limitation clause caps damages to a stated amount

      • Some cases limit liability to contract price or to the cost of repair or replacement components

    • If an exemption or limitation clause is enforceable against the other party, it denies them a remedy for their loss

    • Exemption clauses make it easier for smaller companies to stay in business

      • They allow companies to keep prices low

      • Claims for losses from breach of contract can be huge

Goodlife Foods v Hall Fire Protection [2018] EWCA 1371

• Legal issue: Whether the exemption clause HFP relied upon was onerous or unusual and whether it was reasonably brought to Goodlife’s attention

• HFP were specialist contractors who supplied a fire detection and suppression system for a fryer in Goodlife’s Frozen food factory

• 10 years after the system was installed, there was a fire due to a fault in the system

• Goodlife sued for damages due to damage to property and business interruption costs

• HFP relied on an exemption clause in their standard terms to exclude liability for the loss

• Their term, in cl.11, wrote that “loss, damages, or expense consequential or otherwise caused to your property, goods, persons or the like, directly or indirectly resulting from our negligence or delay or failure or malfunction of the systems or components provided by HFS for whatever reason”

• They offered to pay some of the cost

• Goodlife declined this

• Court held that:

  • HFP could only rely on this exemption clause if it had been:

    1. properly incorporated into the Goodlife contract

    2. Was ‘reasonable’ according to the Unfair Contract Terms Act 1997

• Court of Appeal upheld the exemption clause

Implied terms

• Terms that the Law puts into the contract

• Law will only imply terms in certain situations:

  1. Necessity

     • Law may imply a term where necessary to give effect to the business intentions of the contract

     • The Test is strict necessity

       • The Moorcock [1889] LR 14 PD 64

       • Owners of a riverside jetty contracted with shipowners to unload there

       • Shipowner had to land ship on riverbed which what unsafe

       • Meant the whole contract didn’t make sense

       • So court implied a term that the jetty owner would take reasonable care to ensure the jetty was safe

     • The test must be an obvious omission:

       • Objective bystander must conclude that parties overlooked a really obvious term to include

       • Only then will the law imply a term: Shirlaw v Southern Foundries [1939] 2 KB 206

     • Term must be necessary to give effect to parties’ business purpose behind the contract: Rainy Sky v Kookmin Bank [2011] UKSC 50

  2. Implied terms by case law

     • Law might imply terms into certain contracts as a matter of policy

     • Liverpool City Council v Irwin [1976]

       • Lease covered tenant’s obligations but was silent as to the landlord’s obligatoins

       • Lifts vandalised and hardly ever worked

       • Court implied an obligation on part of landlord to take reasonable care to keep those common parts of the building in reasonable repair

  3. Terms implied by statute

     • e.g. Sale of Goods Act 1979, Consumer Rights Act 2015

Enforceable Terms

• For a term to be enforceable, it must satisfy 3 hurdles:

  1. Must be Incorporated

  2. Interpretation must be unambiguous and clear and cover loss claimed

  3. Adherence to correct Statute

     • Unfair Contract Terms Act 1977 - B2B

     • Consumer Rights Act 2015 - B2C

Incorporation of Terms: by Signature

Methods of incorporation:

1. By Signature

   If a claimant signs the contract, generally its terms are incorporated, even if defendant hasn’t read through all of them: L’Estrange v Gracoub Ltd [1934] 2 KB 86

   • Curtis v Chemical Cleaning Co [1951] 1 KB 805

     • Customer took wedding dress to cleaners

     • Customer asked to sign form:

     • Your dress is accepted “on condition that the company is not liable for any damage howsoever arising”

     • Customer queried this and assistant said it meant only damage to “beads or sequins” on the dress

     • Company were held to what assistant said - customer could claim all other damages apart from damage to beads or sequins

     • EVEN THOUGH THIS WAS NOT WRITTEN INTO THE CONTRACT, court held that what assistant said was the part to which the claimant signed and agreed to

Incorporation of terms: by Notice

Methods of incorporation:

2. by Notice

   a Term will be incorporated if the party relying on the term has taken reasonable steps to being the term to other party’s attention

   ^IF the term is ordinary and reasonable, the threshold is quire low:

   • Parker v South East Railway Co [1877] 2 CPD 416

     • P paid for ticket to leave his bag at railway cloakroom

     • Front of ticket had ‘See back’ on it

     • On back of ticket, there were printed terms; one read that the Company excluded liability for loss of packages over £10

     • P claimed he had not read this so should not be bound

     • Court held term incorporated - not necessary for P to have actually read them

     • “Delivering the ticket to him in such a manner that he could see writing upon it” was reasonable notice that the writing contained conditions

   • Thompson v London, Midland, and Scottish Railway Co [1930] 1 KB 41

     • Passenger purchased ticket for rail travel from company

     • Small print on ticket stated customers could find terms and conditions in the full timetable which cost 1/5th of the ticket price

     • Notice of the existence of the terms was sufficient and they did not have to be specifically identified

   • Chapleton v Barry UDC [1940]

     • Receipt for use of a deck chair was not somewhere it would be reasonable to expect to find contract terms

     • Terms must be in a reasonable place

Incorporation of Terms: Timing of notice

Notice must be given BEFORE parties conclude the contract

• Olley v Marlborough Court [1949] 1 KB 532

  • Exemption clause contained in a notice on the bedroom wall of a hotel

  • Guest formed the contract at the reception desk prior to going to the room

  • Term not incorporated

• Thornton v Show Lane Parking [1971] 2 QB 163

  • Notice too late when obtained from an automatic ticket machine

  • Because there were notices outside the carpark stating the prices and that cars were parked there at the owner’s risk, this was counted as an offer which Thornton accepted when he gave money to the ticket machine

  • The terms on the ticket that the machine printed back out to him were not incorporated as the contract had already been made

Incorporation of Terms: Onerous or unusual terms

If a term is ‘onerous or unusual’ a greater degree of notice is required to incorporate the term

• Spurling v Bradshaw [1956] 1 WLR 461

  • The more unreasonable a term is, the more notice must be given

  • “Some clauses…would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice [is] sufficient”

• Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989]

  • S wanted photographic transparencies from the 1950s for a client

  • Contracted IPL who dispatched 47 to them

  • In package with transparencies was delivery note with 9 conditions displayed on bottom

  • Condition 2 provided a holding fee of £5 per day + VAT would be payable if the transparencies were not returned within 14 days

  • Contract was concluded when S telephoned IPL after opening the transparencies

  • S then forgot about them and didn’t return them ‘till a month later

  • IPL sent an invoice of £3,783.50 to them

  • Legal issue: was term incorporated and would S have to pay?

  • Court held:

    • This was an unusual condition - other photographic libraries charged less than £3.50 per week as a holding charge

    • Ruled that term would have only been incorporated if IPL had brought it sufficiently to their attention

Incorporation of Terms: By course of dealing or trade custom

Reasonable to assume that the contract operates on the same terms as previous ones: Hardwicke Game Farm v Suffolk AA [1969] 2 AC 31

Contract Interpretation

Legal issues in this area: How should the term be interpreted? What is the consequence of this?

It is important to determine what a contract term is saying

Terms define the parties’ obligations and they need to know what to do and whether they are in breach

Courts have methods of determining the meaning when it is unclear:

1. using the Literal meaning of a term

   • Using the literal or ordinary meaning - what a reasonable person might think it means

2. Gives meaning that reflects business intention

ONLY DISCUSS CONTRACT INTERPRETATION IF QUESTION SPECIFICALLY RAISES ISSUE

General rules of Contract Interpretation

Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896, Lord Hoffman:

• Where possible, the court should give words their ‘natural and ordinary meaning’: Arnold v Britton [2015] UKSC 36

• Court should interpret a document according to meaning words would convey to a reasonable person

  • Court will attribute the knowledge available to the parties at the time they entered the contract to the reasonable person

• Where there is an ambiguity (2 or more possible meanings) the court can give effect to the interpretation that best accords with the business sense of the contract: Rainy Sky SA v Kookmin Bank [2011] UKSC 50

• Courts may not have regards to parties’ prior negotiations: Chartbrook v Persimmon Homes [2009] UKHL 38

  • Pre-contractual documents given and created during negotiation stage were not admissible evidence (as it has nothing to do with how a reasonable person would interpret terms, and it would make litigation even more lengthy than it is)

Contract Interpretation: the contra proferentem rule

Where there is ambiguity in the meaning, the courts adopt the meaning that is most favourable to the party that did not draft the clause

Courts now indicate there is limited scope for this rule in commercial contracts - it can only be used when there is unequal bargaining power between the parties: Persimmon Homes Ltd v Ove Arup & Partners Ltd [2017] EWCA 373

^in this case, the parties had equal bargaining power

Contract Interpretation: Other rules of interpretation

Companies may attempt to exclude or limit liability for loss caused by their own negligence (e.g. Goodlife Foods)

This area is now regulated by statute

Rules of interpretation also restrict enforceability of such terms:

• Canada Steamships Lines v The King [1952] AC 192

  • If term expressly exempts liability for negligence, it will take effect (subject to statutory controls)

  • If it does not (expressly exempt negligence liability), but the clause is wide enough to cover negligence liability, it will exclude liability for negligence

  • UNLESS it can be interpreted as covering another type of liability

    • If ^ is the case, then the claimant will be able to get damages for breach of contract