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  • Created by: Nikki
  • Created on: 28-04-15 11:44

What do terms do?

Define or regulate the parties' relationship for the duration of the contract

  • specify rights and obligations
  • place limits on liability
  • set out dispute resolution mechanisms
  • outline procedures if circumstances change

A party in breach of the terms will normally be able to claim damages

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Types of term


  • structurally fundamental role
  • engender most important obligations
  • breach = terminate performance/affirm contract; and claim damages
  • contingent conditions --> condition precedent/subsequent
  • promissory conditions


  • less fundamental role
  • breach = damages

'Innominate' terms --> a third type?

  • terms which could go either way --> look at consequenes of breach and form there determine how serious a role that term played in contract --> not confined to damages if breach has serious consequences 
  • policies at stake --> freedom of classification & certainty v flexibility & justice
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Express terms (1)

Set out in contract

Can be oral or in writing --> hierarchy --> provisions agreed to in writin gcannot normally be contradicted/varied by oral statements

Rectification --> if written document fails to conform to a prior oral agreement, court may rectify the written document

Parole evidence rule -->

  • parties generally barred from adducing extrinsic avidence to add to, vary or contradict a document which purports to record the parties' agreement (Jacobs v Batavia & General Plantations Trust (1924)
  • easily rebuttable presumption that document pruporting to be contract contains who contract
  • promotes certainty, predictability and avoids evidential difficulties
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Express terms (2)

Collateral terms and contracts

  • For D's assurance to amount to collateral term it must have induced C to consent to contractual document --> can't just be 'a' cause but must be 'but for' cause
  • used to be said that collateral term could only add to but not vary or contradict written document --> side-stepped by finding a whole other collateral contract --> now accepted perform same function
  • functions
    • confer remedial adv of action for breach over that for misrepresentation
    • overriding privity rule
    • overriding inconsistent terms in main written contract --> circumventing parole evidence rule to allow party to add to, vary or contradict a contractual document
  • entire agreement clauses --> expressly agreed parole evidence rule --> enforceable --> exclude liability for breach of collateral terms or agreements outside the written contract (SERE Holdings Ltd v Volkswagen Group UK Ltd (2004)) --> may not exclude liaiblity for misreprsentation 
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Incorporation of terms

Tems can be incorporated by: signature; serving of notice; through an exisitng framework of dealing/custom

Signed documents

  • person is bound by contents of contractual document he has signed whether or not he reads or understands it
    • even if did not read (Curtis v Chemical Cleaning (1951)
    • potential harshness demonstrated by L'Estrange v Graucob Ltd (1934) (would be decided differently today?)
    • justifiable on basis of certainty and adminstrative convenience
    • subject to very narrow exceptions
      • non est factum
      • misrepresentation
      • other vitiating factors
      • non-contractual nature of signed document (Grogan v Robin Meredith Plant Hire (1996))
    • many criticisms
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Incorporation of terms (2)

Unsigned documents

  • document containing terms may have simply been delivered by one party to another, displayed in a notic, or incorporated by reference
  • proffering party seeking to rely on terms must show that he gave adequate notice to other party
  • rationale that notice serves to warn other party of what he is consenting to and gives him an opportunity to renegotiate or withdraw

Notice must be -->

  • given at or before contract formation
  • in a document intended to have contractual effect
  • reasonable

Timing of notice

  • notice given after contract formation is not binding as an impermissible unilateral variation of the contract after formation --> Thornton v Shoe Lane Parking Ltd (1971); Olley v Malborough Court Ltd (1949)
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Incorporation of terms (3)

Contractual document or mere receipt?

  • if party does not, and cannot reaosnably be expected to know that the document he is given contains contractual terms, he is not bound by its contents --> Chapelton v Barry UDC (1940)
  • e.g. --> non-contractual documents that couldn't incorporate terms contained =
    • cheque book cover (Burnett v Westminster Bank Ltd (1966))
    • ticket for public bath house (Taylor v Glasgow Corp (1952)
    • ticket for deck chair/mere receipt (Chapelton v Barry UDC)
  • BUT commercial or consumer practices may indicate contractual nature of document in question --> e.g. Alexander v Railway Executive (1951)

Reasonable notice

  • Parker v SE Railway Co
  • Thompson v LM & S Railway Co (1930) --> shows how little notice --> 'for conditions see back' --> C illiterate but D could still rely on terms --> BUT if D ha dknown or should ahv eknown that C was illiterate, he cannot siimply rely on printed form to satisfy notice requirement (Geier v Kajawa, Weston and Warne Bros (Transport) (1970))
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Incorporation of terms (4)

Examples of insufficient notice to incorporate a document

  • ticket made no reference to existence of conditions on back (Henderson v Stevenson (1875))
  • ticket was folded over and onditions partially obscured by a red ink stamp
  • relevant clause obscured by dte stamp
  • reference to terms 'on the back' of faxed document but back page was inadvertently not sent 

Onerous/unusual require additional steps to bring significance to other party's notice

  • Denning's 'red hand' rule (Spurling Ltd v Bradshaw (1956))

Previous dealing and custom

  • may be incorporated by a consistent course of previous dealing between parties or by the custom of the relevant trade
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Implied terms (1)

Should not contradict express terms, except when implied by statute

Arises when contract does not expressly provide for what is to happen when some event occurs --> where reasonable addressee would understand the instrument to mean something else 

New criterion of reaosnableness

But the implication of the term is not an addition to the instrument --> it only spells out what the instrument means  --> AG of Belize v Belize Telecom Ltd (2009)

For implied terms

  • to save on transaction costs
  • to allocate risks better
  • to improve fairness

Against implied terms

  • temptation to interfere with contracts negotiated by parties supposed to be autonomous individuals
  • potential for abuse of power by courts
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Implied by custom

  • custom of market, trade or locality
  • Requirements set out in Cunliffe-Owen v Teather & Greenwood (1967)
    • certain --> calealry established in case law or otherwise identifiable and consistent
    • notorious --> well known by those doing business in particular trade or place and such that an outsider making inquiries could discover
    • recognised as binding --> compliance withit comes from a sense of legal obligation rather than a matter of choice or commercial convenience
    • reasonable
    • consistent with express terms of contract

Justification = need for certainty and protection of reasonable expectations

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Implied by custom

  • custom of market, trade or locality
  • Requirements set out in Cunliffe-Owen v Teather & Greenwood (1967)
    • certain --> calealry established in case law or otherwise identifiable and consistent
    • notorious --> well known by those doing business in particular trade or place and such that an outsider making inquiries could discover
    • recognised as binding --> compliance withit comes from a sense of legal obligation rather than a matter of choice or commercial convenience
    • reasonable
    • consistent with express terms of contract

Justification = need for certainty and protection of reasonable expectations

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Implied in fact

Implied by factual context to give effect to parties' unexpressed intention

Justification = whehter through forgetfulness, lack of time, or bad drafting, parties have failed to include a term which thye would have done, had they though about it or had the time to draft properly

Test for implication in fact --> 3 overlapping tests, all emphaising hgh threshold for implying terms in fact:

  • business efficacy --> term sought to be implied must be necessary to give transaction such business efficacy as parties must have intended (The Moorcock (1889))
  • 'Officious bystander' --> term implied in fact 'is something so obvious that it goes without saying --> so that if whilst parties were negotiating an officious bystander wee to suggest some express provision for it in agreement, they would testily suppress him with 'Oh, of course!' (Shirlaw v Southern Foundries (1926) Ltd (1939)
  • cumulated test --> must be reasonable and equitable, necessary to give business efficacy (no term will be implied if contract is effective without it), so obvious that it goes without saying, capable of clear expression an don't contradict any express term of the contract 
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Implication by common law

Term being implied into all contracts of a particular type

Courts consider (Crossley v Faithful & Gould Holdings Ltd (2004))

  • whehter the proposed term is consistent with the existing law
  • how it would affect the parties
  • wider issues of fairness in society

Parties cannot agree to exclude some terms implied by law

Court's power to imply terms by law is limited:

  • proposed implciation must fit the generaltiy of contract of that lcass and not only particular instances of it (Reid v Rush & Thompkins Group plc (1990))
  • relevant contract must approximate to a recognised class of contract (Shell UK v Lostock Garages (1976) --> BUT courts have considerable latitutde in level of detail that they are prepared to go to inprescribing the relevant class of contracts
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Implied by statute

Of enormous importance in many specific areas of law --> eg Sale of Goods Act 1979

Effect of these terms is to reverse the presumption of caveat emptor ('let the buyer beware')

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Interpretation of terms

Meaning of terms dependso n precise words used in particular context in which contract was made --> precedents are of limited value

Literal to contextual interpretation

  • traditional method = literal stance = contract meaning discoverable within 'four corners' of document without reference to extrinsic evidence
  • change of emphasis --> agreements hsouldnot be seen in isolation from circumstantial facts and interpreted solely on linguistic considerations
  • Consolidated by Hoffman in Investors Compensation Scheme v West Bromwich
    • princple 1 --> overall aim of interpretation
      • 'ascertainment of the meaning which the document would convey to a reaosnable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract'
    • principle 2
      • 'subject to requirement that it should have been reasonably available to the parties and to the excption to be mention..., it includes absolutely anything which would have affected the way in which the language of the document owuld have been understood by a reasonable man' 
      • anything a reasonable man would have regarded as relevant' (BCCI v Ali (2001))
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Interpretation of terms (2)

  • Admitting a larger volume of relevant information
  • increases cost and prolongs lititgation
  • generates uncertainty since multiple and contradictory, but all reasonable, meansings may emerge
  • may smack of judicial rewriting of contracts
  • contract can end up meaning one thing to the parties aware of factual matrix and another to third aprties who can rely on wording of the contract

Something must have gone wrong with the language

  • aim not to ascertain meaning of words but meaning of person using them
  • no 'limit to the amount of 'red ink' or verbal rearrangement or correction court is allowed
  • should be clear that something has gone wrong witht he language and that it should be clear what a reaonsable person would have understood the parties to have meant
  • presumption against unreasonable results
  • interpretation of commercial contracts should generally favour the commercially sensible construction and courts should resist literalism
  • expansion of scope means operation will overlap with rectiication and implied terms
  • more relaistic, more accurate and fairer approach 
  • courts can depart from orinary meaning of words where meaning is inconsistent with parties' intention as evinced by context; would render the contract ineffective, inconcsistent with rest of document, or absurd; would lead to very unfair results
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Interpretation of terms (3)

Inadmissibility of previous negotiations and subsequent conduct

  • Hoffmann - exclusionary princple --> what cannot be taken into account in interpreting contractual doment is evidence of the previous negotiations of parties
  • unermines general aim of contextual interpretation
  • but since parties are free to change bargaining positions until contract finalised by formal acceptance of offer, all a court can do is jduge the final contract
  • in Chartbrook, H conceded that exclusionary rule did not apply to evdience of negotiations as evidence 'to establish a fact which may be relevant as background known tot he parties, or to support a claim for rectification or estoppel --> said they weren't exceptions but operated outside it
  • further doubt cast on exclusionary  rule by SC in Oceanbulk Shipping and Trading SA v TMT Asia Ltd (2010)
  • If it was admissible, meaning of contract could change over time
  • but they are hard to justify
  • reasons against exclusions
    • injustice; it is some of best evidence; already many 'exceptions'; transparency; uncertainty; comparative law
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Interpretation of exemption clauses

'secret weapon' of 'true construction of contract' (Denning in George Mitchall (Chesterhall))

less need to use judicial contortions now that legislation such as UCTA and UTCCR has reduced the need

fundamental breach 

  • parties prohibited from relying on clauses which exclude liability for breach which is fundamental in sense that it 'goes to the very root' of the contract

contra proferentem

  • requires any ambiguity in contractual term to be construed against the party who introduced it
  • words alleged to shield contract-breaker from liability are given the narrowest possible interpretation, conferring the smallest possible protections from the liability in question
  • 'peas not beans' rule
  • exemption clause protects from defective performance, not from non-performance --> thin distinction illustrated by decisions in George Mitchell v Finney Lock Seed (1983)
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Interpretation of exemption clauses (2)

Limitation-exclusion distinction

  • less hostile towards clauses to limit instead of exclude --> more liekly to agree to think because limitation can play legitimate role in risk allocation
  • presumptively valid
  • disntinction is artificial since exclusion clauses may represent legitimate risk allocation while limitation clauses may be so severe as to amount, in substance, to a total exclusion
  • UCTA and UTCCR do no dinstiguish between their contorls of these terms
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Interpretation of exemption clauses (3)

Exemptions of negligence liability

  • hostility
  • 3 rules set out in Canada Steamship Lines Ltd v The King (1952)
    • express exemption for neglgience --> will only cover negligence liability if expressly exempts such liability
    • no express exemption for neglgience
      • absent express words, question is whether words used are wide enough in ordinary meaning to cover against negligence liability (any doubt being resolved against party relying on the clause)
        • if not exemption will not cover negligence liability
        • if so, and clause only limits rather than excludes term is effective
        • if so and totally excludes, another question arises
    • can exemption cover liability other than negligence?
      • if not, and contract-breaker's only possible liability is for neglgience then exemption is effective
      • if clause can apply to liability other than neglgience, it will only exempt from non-neglgience liability and not negligence liability
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Interpretation of exemption clauses (4)

Critciisms of the rule

  • may contradict parties' intentions if they do intend a clause to exclude both neg and other liability
  • applicable where neg is not expressly exempted makes conflicting demand, simultaneously requirring exemption to be drafted widely enough to cover neg but narrowly enought to exclude all otherpossible liability

Exemptions from 'indirect and consequential loss'

  • restrictively interpreted
  • often used in commercial contract to confine potential liability for pure economic loss
  • suppliers unable to rely on clause excluding liability for 'any indirect or consequential loss' as losses were held to be direct --> Hotel Services Ltd v Hilton International Hotels (UK) Ltd (2000)
  • interpretation appears to be inconsistent with ordinary meaning of consequential loss --> all loss of profit is loss consequential on breach and this seems clearly covered by a term dealing with 'any direct or consequential loss'
  • rather than distorting natural meaning of words, would be perferable to control unfairness through UCTA or UTCCR
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Standard form contracts

  •  printed documents containing terms of contract/clearly purporting to be contract
  • put forwad by comercial party who makes many contracts of same type
  • presented to other party explicitly or implicitly on a take-it-or-leave-it basis 
  • signed or accepted by the adhering party who may enter few such contracts

Advantages --> clearly weighted in favour of proffering party

  • reduces proffering party's transaction costs and increases profits
  • theoretically reduces price to adhering party
  • allows senior management in large operations to maintain control over consistency of contractual arrangements made by subordinate sales staff
  • allows proffering party to set terms advantageous to itself .eg. by
    • narrowing its obligations
    • increasing adhering party's obligations
    • strengthening and facilitating its remedies against the adhering party
    • excluding or limiting claims against itself
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Standard form contracts (2)


  • dangers of exploitation to adhering party
    • commercial --> generally binding --> extnesive negotiations
    • can be significant inequality of bargaining power even amongst commercial parties (UCTA)
    • consumer --> risk of exploitation magnified
  • lack of comprehension
  • lack of negotiability
  • substantive unfairness
  • concerns are magnified in respect of terms that exclude or limit proffering party's liability for breach ('exemption clauses') --> danger of leaving other party without remedy when reasonable expectation arising from contract defeated

Law can limit unfair terms by

  • collateral or implied term in favour of adhering party
  • insufficient notice has been given of onerous or unusual standard term in unsigned document
  • unfair term, properly interpreted, is not sufficiently wide to cover situation in question
  • unfair eterm is unenforceable under common law or statutory rule
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Mistake as to terms

Objective test 

  • prevents reliance on mistakes
  • one cannot normally say 'oh that was a mistake!'

Apparent exceptions

  • snapping up an obviously mistaken offer (Hartog v Colin and Shields)
  • negligence causing misunderstanding

Misunderstanding about the scope of promises (Thake v Maurice)

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