substance of the contract

7/29/2019 Substance of the Contract

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Substance of the contract

Breach, rules of interpretation



What makes up a contract?

• Representations: when is a statement

incorporated into the contract

• Terms: what is the importance of the

– Conditions: fundamental importance

– Warranties: collateral/minor importance

– Innominate terms: when is the term major orminor?



Incorporation of the term into the contract



Importance of the statement • Bannerman vs. White [1861]

– Seller assured the buyer that the goods bought did not contain a particular ingredient.

– Statement was not true

– Pl. claimed the assurance formed part of thecontract.

• A major term (describing sale object).

• Court held the contract not binding –without the false statement there wouldhave been no contract.



Special knowledge by the offeror• Oscar Chess vs. Williams [1957]

– Private seller stated that the car was a 1948 Morris.This was not true and the car sold was worth much less.

– Court held the representation was not a term (did not have special knowledge).

• Dick Bentley Prod. Ltd. vs. Harold Smith(Motors) Ltd. [1965]– Representation (car had done 20,000 instead of

100,000 miles) held to be a term because the seller hadspecial knowledge. He should have known the accuracyof the statement, therefore intended it to be a part of the contract.



Inclusion of oral representation in a

written contract

• Heilbut, Symons & Co. Vs. Buckleton

[1913]– Must be clear evidence that representations

binding.

– In this case, the representation was made in

response to an enquiry. There was no intention

that this was to be contractually binding.



The Parol Evidence Rule• Henderson vs. Arthur [1907]:

– “Extrinsic evidence, especially oral evidence,may not be admitted to add, delete or vary theterms of a contract which has been put in

wr ng .– Served the interest of legal certainty. However,

can also create unfairness if it is obvious that other terms agreed but not put in writing.

– Nowadays, exceptions so significant that therule has ceased to be important in practice.



Exceptions to the Parol Evidence

Rule

• Rectification: equitable remedy, available in the

case of a transcription mistake (i.e. oral contract incorrectly written down).

• Collateral contract: an oral agreement which

exists in parallel to the written agreement – Must be clear evidence that it was intended to be

binding

• Written contract incomplete– Written contract not intended to be the whole contract



Writing not the whole agreement • J Evans & Son (Portsmouth) Ltd. v.

Andrea Merzario Ltd. [1976]– Pl. had had goods transported by Def. for a long

. .

– Def. wanted to change to containers (normally

stored on deck)

– Pl. agreed provided they were stored belowdeck as normal.

– This was not done and a container was lost.



Statement of the court • [The]… contact [was]… partly oral, partly in

writing and partly by conduct. In such a case thecourt does not require to have recourse to

lawyers’ devices such as collateral oral warranty

in order to seek to adduce evidence which wouldnot otherwise be admissible. The court is entitled

to look at and should look at all the evidence from

start to finish in order to see what the bargain wasthat was struck between the parties.”



Interpretation of a contract



Lovell & Christmas Ltd. vs. Wall

(1911)“If there is one principle more clearly establishedthan another in English law it is surely this: It isfor the court to construe a written document. It isirrelevant and improper to ask what the parties,prior to the execution of the instrument, intended

or un ers oo . . . . n ess e case can e rougwithin some or one of these exceptions, it is theduty of the court, which is presumed tounderstand the English language, to construe the

words used therein, and without reference toanything which previously passed between theparties to it .”



Rules of interpretation• The courts interpret a written contract

– not by reference to the intention of the parties– but rather accordance with the ordinary grammatical

meaning of the words

– and without reference to the contractual history• Reason for not referring to negotiations:

– Only the words of the final written contract embodies

the settled consensus.• Courts should try and save / give effect to the

agreement subject to evidence of intention.



Exceptions to the rules• Reference to extrinsic evidence can be made

where:– the contract is in a foreign language

–

• The terms used must obviously have more than one

meaning / be obviously ambiguous

– the parties’ conduct reflect particular business

practice



Primary Obligations of the Contract



Lay down primary obligations• Express / implied = breach of contract

– Secondary obligation• to pay compensation

•

– Three types

• Conditions: major primary obligation

• Warranties: minor primary obligation

• Innominate terms: either or.



Types of conditions• Condition precedent

– Contractual liability dependent on the existenceof a state of affairs / event

• Condition subse uen

– An event that cause existing contract toterminate

• Promissory conditions

– Parties agree that a certain result will beachieved. Otherwise = breach of condition



When is a term a “condition”?

• L. Schuler AG v. Wickman Machine Tools

Sales Ltd. [1973]

“Use of the word ‘condition’ is an indication –

even a strong indication – of such an intention

ut t s y no means conc us ve. e act t at aparticular construction leads to a very

unfavourable result must be a relevant

consideration. The more unreasonable the

result, the more unlikely it is that the parties can

have intended it.”



When is a term a “condition”? (2)

• Hongkong Fir Shipping Co. Ltd. vs. Kawasaki

Kisen Kaisha [1962]“Breach must give rise to an event which will the partynot in default of substantially the whole of the benefit which it was intended he should obtain from the

contract”.• Barber v NWS Bank Plc [1995]

“This term is not one which admits of different breaches, some of which are trivial, for which damagesare an adequate remedy, and others of whichsufficiently serious to warrant rescission. There is hereone breach.”



Time is of the essence –

regardless of the effects of breach• Bunge Corpn. v. Tradax Export SA

“[I]n mercantile contracts, stipulations as totime […] usually are […] treated as being of theessence of the contract, even though this is not

would follow that in a mercantile contract it cannot be predicated (i.e. claimed) that, fortime to be of the essence, any and every breach

of the term as to time must necessarily causethe innocent party to be deprived of substantially the whole benefit which it wasintended that he should have”.



Even minor breaches of time

clauses lose the contract!• Union Eagle Ltd. vs. Golden Achievement

Ltd [1997]– The contract for the sale of a flat: completion for

the transaction was 5 m. Clause in the contract

said “time was of the essence”: late completionwould lead to rescission and loss of deposit.

– Pl. were 10 minutes late. Claimed specific perf.

– Court rejected claim of specific performance

and enforced the clause strictly, saying

certainty was needed in commerce.



Breach of a condition• Allows the non-breaching party to treat the

contract as repudiated.• Excuses him from further performance

• However, ot er secon ary terms may stiapply: they will not be extinguished by the

breach of a condition

• Pl. can however choose to continue thecontract



Secondary terms of the contract

survive breach• Photo Production Ltd. vs. Securicor

Transport Ltd. [1980]– The Court of Appeal held that breach of a condition

would end the contract and extinguish all other

obligations under the contract.– Rejected by the House of Lords which stated that an

exclusion clause (“which excluded liability for injurious

act or default by any employee”), still applied.

– Held that the exclusion clause ruled out liability even if

injury was caused intentionally.



Election: perform or terminate• Right to repudiate is lost if contract is affirmed in

awareness of right to treat it as repudiated.• In either case, the breaching party will be obliged

to pay damages for breach.

• Affirmation of contract is a question of fact.

– May be difficult to ascertain if the non-

breaching party does nothing.

– In this case, the non-breaching party may lose

the right to repudiate on grounds of estoppel.



Warranties• Breach = secondary obligation to pay

damages• Do not justify termination of the contract

• T e ecision w et er a term is a con itionor warranty depends on the case and the

judge

– E.g. turning up for rehearsals or training

– Effects of breach not taken into account if the

term is expressly classified a warranty.



Innominate terms

• Hongkong Fir Shipping Co. Ltd. vs. Kawasaki

Kisen Kaisha Ltd. [1962]

[S]ome breaches will, and others will not, give rise to an

event which will deprive the party not in default of

substantially the whole benefit which it was intended

that he should obtain from the contract; and the legalconsequences of the breach of such an undertaking,

unless provided for expressly in the contract, depend on

the nature of the event to which the breach gives rise

and do not follow automatically from a priorclassification of the undertaking as a condition or

warranty.



Effect of breach of innominate

terms• This is determined by the nature of the

breach– E.g. breach of a clause relating to delivery may

,

circumstances.

– If the result of the breach is substantially to

deprive the non-breaching party of the benefit

he was to receive under the contract, then theterm = condition.



Implied Terms• Impossible for the parties to provide for all events

in the contract • Implied terms fill the gaps in the contract

•

courts and parliament use implied terms to pursuetheir own aims.

– E.g. Quality of the goods, consumer protection.

• Divided into terms implied as fact and terms

implied in law



Terms implied as fact • This is where the parties have forgotten to

include a term.• The term must be necessary

• T e courts wi i t e gap wit re erence tothe circumstances of the contractual

relationship.

• Therefore, aims to reflect the intention of the parties.



Test for term implied as fact • Shirlaw v. Southern Foundries [1926]

“Prima facie that which in any contract is left to beimplied is something so obvious that it goes

without sa in so that if while the arties were

making their bargain an officious bystander wereto suggest some express provision for it in their

agreement, they would testily suppress him with a

common ‘Oh, of course!’”



Terms implied in law• Other terms are implied regardless of the

intention of the parties and without reference to the contractual relationship.

.

– H.L. Implied a term that the council was under

an obligation to maintain the building

– Test: the term must be a necessary result of thecontractual relationship.



Spring vs. Guardian Assurance

plc. [1994], Lord Woolf “This being the nature of the engagement, it is

necessary to imply a term into the contract that the employer would, during the continuance of the

engagement or within a reasonable time

thereafter, provide a reference at the request of aprospective employer which was based on facts

revealed after making those reasonably careful

inquiries which, in the circumstances, areasonable employer would make.”



Terms implied by statute• Most important:

– Standard of the production of goods or deliveryof services

–

(2) Where the seller sells goods in the course of abusiness, there is an implied term that the goods

supplied under the contract are of satisfactory

quality.(2A) [G]oods are of satisfactory quality if they meet

the standards that a reasonable person would regard

as satisfactory

substance of the contract

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