Contract terms, fairness in contract law and breach

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Contents of a contract

Contracts may be made by words or conduct. This can be written or oral (question of fact, have to prove- burden on claimant) or a combination of both. Other words may be read in or implied. Implied terms are a very important source of terms. They may be included as gapfilling to supplement the intentions of the parties or added by operation of law eg Sale of Goods Act 1979.

a) Parol Evidence Rule- designed to reach finality, improve certainty and place obstacles in the way of fraud. It is harder to find rule applications than to find exceptions. Means that only the written contract counts, and words are inadmissable. Evidence of past dealings and ideas cannot be included either. Jacobs v Batavia and General Plantations 1924.

b) exceptions to the rule- these are far more numerous than the rule itself. There are 13 exceptions to the rule. Some are exceptions, some are means of avoiding PER and in others PER didnt apply anyway. Injustices are avoided via the exceptions. Couchman v Hill 1947, Shanklin Pier v Detel Products 1951, Brown v Sheen and Richmond Car Sales 1950, and Smith v Wilson 1832.

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Parol evidence rule

Proposals to abolish the rule- Law Comission Working Paper No154 1986 and 70 1976. Wedderburn 'Collateral Contracts' 1959- 'now a days its no more than a rebuttable presumption that a document which looks like a contract is to be treated as a whole contract.' He describes the PER as an obvious statement of the truth. 

c) entire agreement clauses- potentially unfair in consumer contracts where they must be subject to a fairness test and are not binding if they fail. Inntrepreneur Pub Co v East Crown 2000. 

d) precontractual negotiations are inadmissible- they cannot be used as evidence. The rule comes from Prenn v Simmons 1971 and was confirmed in Chartbrook v Persimmon Homes 2009. 

Implied terms: supplementing the contract by gap filling- can be written in by statute, by custom or by court of law. 

1) statutory implied terms: Sales of Goods Act 1979 s13, 14(2) and 14(3)  eg cant write out term of satisfactory quality. Consumer Rights Bill 2014

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Implied terms

2) implied terms at common law- The Moorcock 1889 (rule comes from here), Lister v Romford Ice and Cold Storage 1957, Liverpool CC v Irwin 1977, BP v President, Councillors and Ratepayers of the Shire of Hastings (has important rules) and AG of Belize v Belize Telecom 2009.

3) should there be an implied duty of good faith in commercial contracts? Yam Seng Pte v International Trade Corp 2013. 

Standard terms and conditions- Standard form contracts are drafted by one party in advance and used for all transactions and are now extremely commonm expecially in consumer contracts for goods, services, insurance etc. The terms are given on a take it or leave it basis without any negotiation. The idea of offer and acceptance doesnt really work here. Consumers dont have the time or inclination to read these terms which are often highly damaging to their interest and contractual rights. A survey by Which said consumers are baffled by these terms and called for them to be clear, concise and jargon free. Only 1 in 10 reads the terms of new contracts in the financial sector. Most were discouraged by the length. HSBC's terms were at the shortest 29'000 words long and took an hour and a half to read. Most other banks were the same. Same happens when buying online. This leads to what lawyers call 'inequality of bargaining power.' 

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Implied terms

Two attempts have been made to deal with this- The Unfair Contract Terms Act 1977 (in relation to exemption clauses in contracts and also in the tort of negligence) The Unfair Terms in Consumer Contract Regulations 1999  (on consumer contracts generally) about to be repealed by Consumer Rights Act 2014 s62- 70 (on unfair terms). 

Case study: L'estrange v Graucob 1934- 'when a document containing contractual terms is signed, then, in the absense of fraud, or I will add, misrepresentation, the party signing it is bound and it is wholly immaterial whether he had read the document or not.' Scrutton. Important case on signature. 

Areas of interest in L'estrange- the use of standard form contracts with many of the terms in small print, the well worn expression Terms and Conditions Apply. Exemptions and limitations on liability, the law is now a mixture of common law and UCTA. The classifcation of terms, conditions and warranties, and now intermediate terms from 1962. The use of implied terms, now in Sale of Goods Act 1979. Remedies for breach, rescission and damages. The relationship between written and oral terms in the same contract. Objective and subjective views of intention. Is the rational for the rule estoppel? The effect of signature on a contract. Incorporation of terms- the reasonable steps rule. Concepts i) inequality of bargaining power ii) fairness and iii) freedom of contract. 

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L'estrange v Graucob

L'estrange would probably win now, under the Unfair Contract Terms Act 1971 s6. Refers to contracts of sale. Need to be aware of terms and they need to be reasonable. 

Incorporation of terms- a) effect of signature on a document- important principle that underpins the whole of commercial world. L'estrange v Graucob 1934, and 'The Luna' 1920 and Tilden Rent a Car v Clendenning 1978 (Canadian).

Exceptions to the rule- i) if the term is an exemption clause may be subject to UCTA 1977 and either void or subject to reasonableness test (but this is only in relation to exemption clauses).

ii) non est factum- not my deed, means they didnt agree at all but this is very rare and almost extinct. Lloyds Bank v Waterhouse 1993. 

iii) misrepresentation or fraud- oral statements varying written terms (in relation to exemptions of liability)- Curtis v Chemical Cleaning 1951, J Evans (Portsmouth) v Andrea Merzario 1976 and Peekay Intermark v Austrailia and NZ Banking Group 2006.

iv) document signed is only a memorandum of oral agreement, not intended to be the full contract-

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Effect of signature

Roe v Naylor no 2 1919.  Document signed must be contractual Grogan v Meredith Plant Hire 1996. Objective approach to construction- Harvey v Ventilarorenfabrik Oelde 1989. Electronic Signatures are covered by the Electronic Commerce (EC Directive) Regulations 2002. 

b) special notice test- unusual and onerous terms- Interphoto Picture Library v  Stiletto Visual Programmes 1988 and Photolibrary Group v Burda Senator Verlag 2008. 

Unsigned documents- the question here is whether reasonable steps were taken- not a hard and fast rule need procedural fairness. There are 3 questions.

i) ticket cases- Parker v SE Railway Co 1897, Thorton v Shoe Lane Parking 1971, Chapleton v Barry UDC 1940, Olley v Marlborough Court Hotel 1949.

ii) 'consistent course of dealings' Spurling v Bradshaw 1956 and McCutcheon v David MacBrayne 1964. 

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Exemptions of liability

The control of exemptions of liability at common law- the control of exemption clauses at common law is now subject to the UCTA. In most cases the act supersedes the main common law doctrines but not entirely. Some contracts, between businesses not on standard forms, are outside of the scope of the act and therefore common law still applies in full. 

i) incorporation rules developed at common law- these are still highly relevant and discussed in the previous section. Largely they are resolved by questions of reasonableness eg signature, course of dealings etc. 

ii) the construction of contracts: the contra proferentem rule: this is no longer the vital weapon it once was.Lord Dennings famous device for striking down onerous or ambiguous exemption clauses. The old rules are still relevant in relation to limitation of liability clauses. Ailsa Craig Fishing v Malvern Fishing 1983. 

iii) third parties- the common law doctrine of privity of contract has been replaced where the Contracts (Rights of Third Parties) Act 1999 act applies. The parties may chooose to write the Act out of the agreement if they want. In relation to exemptions of libaility s1(6) and 7 (2). Where the common law does apply the rules remain complex and subject to exceptions and means to avoid the consequences of the doctrine of private. Adler v Dickinson 1955 and 

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Exemptions of liability.

NZ Shipping Company v Satterthwaite 1974. 

iv) the doctrine of fundamental breach- this was effectively abolished by the 1977 act s3 and 9. However some lingering echoes of the doctrine still remain. This was the main protection offered by the common law before the passing of the act. It did however contain many interesting aspects to it not least the distinction between a rule of law and a rule of construction. George Mitchell v Finney Lock Seeds 1983, The Suisse Atlantique 1967, Levison Patent Steam Carpet Cleaning Company 1977 and Photo Production and Securicor Transport 1980. 

The common law doctrine of fundamental breach in retrospect? 1) the originial doctrine was laid out by Lord Denning provided that fundamental breach was a rule of law in relation to exemption clauses. Such clauses could not be enforced by the party in breach of contract by operation of the rule of fundamental breach. Harbutts Plasticine v Wayne Tank and Pump Co 1970.

2) the HoL decided the doctrine was merely a rule of construction in other words fundamental breach could be excluded if the parties clearly intended it to be so, particularly in commercial contracts where there was equality of bargaining power. The Suisse Atlantique 1967 and Photo Production v Securicor 1980. 

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Fundamental breach

3) the UCTA 1977 s3, 9 and 11 adopted the approach of reasonableness and in the process fundamental breach was said to be laid to rest. 4) However since 1977 there have been various attempts to revive the doctrine which have never entirely gone away. 5) more recently there have been a few stirrings of the common law approach- a) England Internet Broadcasting Corp v MARL LCC 2009 (deliberate repudiatory breach triggers the doctrine) and Astra Zenica v Albemarle International Corporation 2011. 

b) Canada- seems to have lasted longer in Canada than in England. Prarie Petroleum Products v Husky Oil 2008. The SC of Canada ruled in 2010 that the doctrine should no longer be applicable in Canadian law in Tercon Contractors v British Columbia 2010 . The SC preferred the doctrines of unconsciounability and public policy with regard to serious breaches of agreements and the effectiveness of exemption clauses in negotiated business contracts. 

In October 2015, the UCTA will lose all the provisions relating to consumers when the Consumer Rights Act becomes law (approx half of it will go). This leaves only negligence s2, non consumer sales s6, and transfers of posessions s7,  commercial contracts for services in standard form s3 and the meaning of reasonableness s11 in the residual part of UCTA. Consumer protection is enhanced in the new act. They are however in different statutory form and sections. There have been doubts about UCTAs application to freely entered into business contracts and it is not impossible that it could be repealed. 

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Unfair Contract Terms Act 1977

Claimed to be one of the most important pieces of legislation in contract law. The Act is subject to numerous amendments as a result of Consumer Rights Bill 2013-4. The existing law therefore must be treated with extreme caution. The aim of the new act is to consolidate consumer rights in one statute, in the process of removing consumer sections from UCTA. 

Words and phrases in the act of significance- 1) 'business liability' 2) 'dealing as a consumer' (replaced in 2014 bill) 3) 'written standard terms of business'. 

Two most essential concepts- what is an exemption of liability? How should reasonableness be defined? 

1) business liability- S14 UCTA - St Albans City and District Council v ICL 1995

2) dealing as a consumer- Feldaroll Foundary v Hermes Leasing (London) 2004. 

3) written standard terms of business- St Albans City and District Council v ICL 1995.

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4) what are the exemptions to liability? The act lists 8 types of disclaimer. Tudor Grange Holdings v Citibank NA 1991. 

a) defence to action- Owners of Istros Steamship Steamship v FW Dahlstrom 1931

b) qualifying an obligation- Photo Production v Securicor 1980

c) but for test- Smith v Eric Bush 1990

d) purpose of the term- Thompson v T Lohan 1987

e) reasonable expectations test

The idea of reasonableness is meant to denote flexibility. The court is free to determine this as a mixed question of fact and law. This involves a mixture of factors and higher courts are reluctant to overturn such a finding on appeal. Every case is to be judges on its own merits, reasonableness isnt a matter of precedent. 

a) s11 and Schedule 2 of UCTA.

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b) judicial interpretations of reasonableness- George Mitchell v Finney Lock Seeds 1983, Smith v Eric Bush 1990 and Watford Electronic v Sanderson CFL 2001. 

Factors to be taken into account to judge reasonableness- the underlying principle is equality of bargaining power- Was it reasonable to incorporate the clause? Was it reasonable to rely on the clause? Was the contract take it or leave it (standard form)? Does the party have a choice? Were alternatives offered? Did one party deal as a consumer? Burden of proof. Knowledge and awareness of the term. Course of dealings. Insurance by either party of the risk. Allocation of risk by the contract itself. Resources available to meet liability. The consideration or price of the contract. Differential pricing. Special rules applicable to negligence. Amount of the limitation clause. Reasonableness at the date of the contract. Reasonableness does not have to be pleaded by the injured party. Exclusion not wide enough to include a fundamental breach.

a) reasonableness and the common law doctrine of fundamental breach- Levison v Patent Steam Carpet Cleaning 1978 and George Mitchell (Chesterhall) v Finney Lock Seeds CoA. 

b) privity of contract and the Contract (Rights of Third Parties) Act 1999- the act allows parties to supercede the common law rule that parties may not confere a benefit on a third party. However under s7(2) of the 1999 act the test of reasonableness is applicable from UCTA s2(2).

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Consumer rights act

Also s2(1) will be applicable. The act can be written out of a contract ie a default set of rules, not mandatory. If so the common law rules on privity, including the numerous exceptions and means of avoiding the rule devised over the last 150 years, continue to be available. 

The Unfair Terms in Consumer Contracts Regulations 1999 will be replaced and repealed by sections in the Consumer Rights Act 2014. 

The Consumer Rights Act 2014- This is intended to consolidate and review consumer law in many different ways. As far as contract law is concerned, consumer contracts for sale of goods and services are both substantially revised. This is an important are of law for businesses as well as consumers. Commercial law firms often now have retailing law departments who act as specialist advisers in modern commercial practise. Under the act a consumer is defined as being 'an individual acting for purposes that are wholly or mainly outside that individuals trade, business, craft or profession.' Trader means a 'person acting (personally or through an agent) for purposes relating to that persons trade, buiness, craft or profession.'          The act covers, where one party is a consumer, statutory rights under goods contracts, consumer rights with digital content, consumer contracts for services, unfair terms in consumer contracts, there are also new powers relating to enforcement of consumer rights through regulatory law.

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Consumer rights act

In the course of implementation the legislation there are numerous consequential amendments to the Sale of Goods Act 1979 and UCTA 1977. There is also a substantial repeal of the Sales of Goods and Services Act 1982. 

Statutory rights of consumers in sale of goods- s3-18- goods to be of satisfactory quality, reasonably fit for particular purpose, goods to be as described, other pre contractual information included in the contract, goods to match sample, goods to match model seen or examined, and installation as part of conformity with the contract. 

Contracts for services- Unfair Terms In Consumer Contracts s48-57- clause 68 bars exclusion or restriction of liability for death or personal injuries in a consumer contract resulting from negligence. 

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Express terms

This subject is of importance as the nature of the term broken determines the remedy of the breach of contract. The word condition may have different meanings: 1) an essential, as opposed to subsidiary promise in a contract or 2) a fact or event on the occurence of which the duty to perform a contractual promise depends. These are either conditions precedent or subsequent depending on when they are effective. A condition may be described as either 1) promissory or 2) contingent. Head v Tattersall 1871. 

A condition is a term of a contract which goes directly to the root of the contract or is so essential to its very nature that if the circumstances become inconsistent with the condition, all executory obligations under the contract may be treated as discharged by the party who is not in default. Conditions are usually contrasted with warranties which are collateral to the main purpose of the contract ie they are not so vital as to effect a discharge of the contract. Schuler v Wickman Machine Tools Sales 1973. It is open to the parties to stipulate the consequence to attach to any particular breach. The use of the word condition is not decisive. Schuler confirmed as general pricniple that in construing a contract the conduct of the parties subsequent to the execution of the contract cannot be taken into account. Poussard v Spires and Pond 1876, Bettini v Gye 1876 and Re Moore and Landauer 1921. 

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Express terms

The right to repudiate can be lost or waived. Ususally depends on the election or the party not in default. Obligation may become an 'ex post facto warranty' whereby the only remedy is damages, although term remains a condition. The Mihalis Angelis 1970, Lombard North Central v Butterworth 1987, Hong Kong Fir 1962, the Hansa Nord 1975, the Gregos 1994, The Chikuma 1981 and Bunge Corporate Tradax SA 1981. 

Breach of contract- absolute and qualified contractual obligations- a) duties are strict eg Sale of Goods Act 1979, b) reasonable care. Liabilty for breach is strict, it is not a defence to say its not your fault even if you couldnt predict it.

Nature of the breach- Photo Production v Securicor Transport 1980

Breach of contract- refusing to perform or saying one does not intend to perform (anticapatory breach), defective performance, breach of conditions, disabling oneself (putting it out of your power to perform it) and incapacitating performance. 

Breach and lawful termination- Bridge v Campbell Discount co 1962. 

Failure of condition precendent, happening of condition subsequent- Omnium DEnterprises v Sutherland 1919. 

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Express terms

The effect of breach of contractual terms- Hong Kong Fir Shipping 1962

Repudiation and acceptance- The Gregos 1994 and Woodar Investments v Wimpey Construction 1980.

Affirmation- The Simone 1988.

Termination- Vitol SA v Norelf 1996. 

Anticipatory breach of contract- Horchster v De La Tour 1853. Doesnt have to be the main reason for stopping the contract, any breach will do. White and Carter (Councils) v McGregor 1962.

Post White and Carter- Clea Shipping Corp v Bulk Oil International 1984 and Golden Strait Corp v Nippon Yusen Kaisha 2005. 

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Remedies for breach

Remedies may be classed as a) non judicial or self help remedies or b) judicial

Self help: rescission or termination for breach is the main non judicial remedy in contract law. Found in relation to misrepresentation as well as contract breach, but the meaning in relation to breach and misrepresentation is very different. Contract is voidable for rescission but for breach is a good contract until terminated, the effects mainly being in relation to future obligations. 

Judicial remedies- may either be a) common law or b) equitable. The leading common law remedy for breach of contract is damages. Equitable are remedies that dont exist in common law eg injunction, specific performance, rectification. 

a) damages for breach of contract- these substitute for the performance owed. The expectation principle- Barry v Davies 2000 and Ruxley Electronics v Forsyth 1996.

Reliance principle- McRae v Commonwealth Disposals Comission 1951

Performance principle- Farley v Skinner 2002.

Remoteness of damage- Hadley v Baxendale 1854, Victoria Laudaries v Newman Industries 1949.

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Remedies for breach

The Heron 11 1969 and The Achilleas 2008.

In contract damages are traditionally for pecuniary losses- Addis v Gramophone 1909.

Non pecuniary losses ie for mental distress and loss of enjoyment or pleasure (if that was the aim of the contract)- Jarvis v Swan Tours 1973 and Jackson v Horizon Holidays 1975. 

B) Equitable remedies- specific performance is available but exceptional. Usually only available when damages are an inadequate remedy. This is in contrast to European legal system where specific performance is the main remedy for breach of contract. Injunctions both prohibitory (enjoined to desist from conduct) and mandatory (means ordered to do something) 

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