TERMS OF CONTRACT NOTES

3 Terms and Representations

Before they entered into a contract the parties may have been involved in negotiation for sometime during the course of which they might have made many statements or promises. It does not follow that all such statements are terms of the contract. The statements and promises which form the integral part of the contract are the terms of the contract. Whereas precontractual statements which are not intended to become part of it are representations.  The distinction is important because if the statement is held to be a term then damages will be automatically available, whereas if it is merely a representation then the requirement of misrepresentation will have to be satisfied. We shall be discussing the topic of misrepresentation in a subsequence lecture. However, courts may sometimes incorporate a representation into the contract so that it becomes its terms.

Take Note

Pre-contractual statements which are not intended to be part of the contract are representations. While statements which are integral part of the contract are terms.

 

7.4 Incorporation of a Representation as a Term of the Contract

In case of incorporation of a representation into a contract, it is difficult to give any certain rule which may confidently be used to predict which representation will be incorporated and which will not. The test which is usually adopted to decide whether a statement is a contractual term or merely a representation is one of apparent intention of the parties. The precise test is looking at behavior of the parties would a reasonable man have thought the parties intended the statement to be a term or a representation. It can be difficult, even using this objective test to ascertain the party’s apparent intention. The courts have therefore developed some subsidiary tests as possible aids to help them in this task.

7.4.1 Importance of the Statements

If one party can show that the statement was of importance to his decision to enter into the contract, then the statement will be held to be term. In Bannerman v White (1861), D in course of negotiating for the purchase of hops, asked P, the seller if hops have been treated with sulphur while growing. D made it clear that he was not interested in buying if they had been. P answered that they have not been treated with sulphur. D thereupon bought them. Eventually some of the hops were found to contain sulphur, D when sued for the price claimed he was entitled to reject hops since it was a term of the contract that they should not be contaminated by sulphur. Held, PP‘s statement was understood and intended by both parties to be the part of the contract. was in breach of the term of the contract as

7.4.2 Interval between the Negotiations and the Contract

If the interval between the negotiations and the final entering the contract has been well marked, then it is likely to be held merely a representation. In Routledge v Mckay (1954), D while negotiating with P for the sale of his motorcycle, taking information from the registration book, told P on 23rd October that it was a 1942 model. On 30th October a written contract of sale for the motorcycle was made. There was no mention of the date of the model in the contract. It was found later that the actual date of the model was 1930. P sued D for damages. Held, P‘s action should fail since there had been a marked lapse of time between making of the statement and making of the contract.

7.4.3 Whether the Contract has been Reduced to Writing?

If the parties put the formal contract in writing, any representations not included in the written contract are likely to be construed as mere representations. The exclusion of an oral statement from the written contract may suggest that it was not intended to be a contractual; terms. The fact of Routledge v Mckay, state above, tends to suggest this construction. This is in conformity with the “parol evidence rule which we shall discuss shortly. But in other cases oral statements were considered as part of the written contract.

(See Birch v Paramount Estate Ltd, 1956).

7.4.4 Reliance by the Plaintiff

If one of the parties to the contract makes it clear that the other party may rely on his statement, this may indicate that the statement was intended to become a term of the contract.

In Schawel v Reade (1913), D advertised a horse for sale. P visited D‘s farm with a view to buy a stallion for stud purposes. Whilst P was inspecting a stallion, D interrupted him, saying ‘’you need not look for anything: the horse is perfectly sound”. P thereafter stopped examination of the horse and bought it.

The horse in fact suffered from a disease and was unfit for stud purposes, Held, D‘s statement over soundness of the horse was a term of the contract.

7.4.5 Special Knowledge Possessed by the Person who made the Statement

Where person making the statement is in a better position to know the facts or is more knowledgeable than the other, the courts may be more willing to infer an intention to make the statement a term of the contract. Such was position in Schewel v Reade, discussed earlier.

InOscar Chess Ltd v Williams (1957), D entered into a hire purchase transaction through P, a car dealer to acquire a new car. D offered a second-hand car in part exchange. The sum available on the second-hand car depended on its age. According to the registration book the car was first registered in 1948 and D, who subsequently bought, confirmed it in good faith. P then paid ₤290 for it and the hire-purchase contract was concluded. Later P found that the second hand car was

1939 model the current price for model was ₤175. P therefore sued D for recovery ₤115 in damages claiming that the age of the car was an express condition of the contract, or alternatively a warranty that the car was 1948 model. Held, the statement as to the age of the car was not a term of the contract since P being a car dealers possessed special knowledge and skills, who could have discovered in time the true age of the car.

InContrast, in Dick Bentley Production Ltd v Harold Smith (Motors) Ltd (1965), D, a car dealer represented to P and his wife that a car had done only 20,000 miles, when in fact it had done five times that much. P bought the car and the trouble began almost at once, P brought an action against D claiming damages for the breach of warranty as to mileage. Held, D‘s statement as to mileage was a term of the contract and that P was entitled to damages.

 

7.4 Incorporation of a Representation as a Term of the Contract

In case of incorporation of a representation into a contract, it is difficult to give any certain rule which may confidently be used to predict which representation will be incorporated and which will not. The test which is usually adopted to decide whether a statement is a contractual term or merely a representation is one of apparent intention of the parties. The precise test is looking at behavior of the parties would a reasonable man have thought the parties intended the statement to be a term or a representation. It can be difficult, even using this objective test to ascertain the party’s apparent intention. The courts have therefore developed some subsidiary tests as possible aids to help them in this task.

7.4.1 Importance of the Statements

If one party can show that the statement was of importance to his decision to enter into the contract, then the statement will be held to be term. In Bannerman v White (1861), D in course of negotiating for the purchase of hops, asked P, the seller if hops have been treated with sulphur while growing. D made it clear that he was not interested in buying if they had been. P answered that they have not been treated with sulphur. D thereupon bought them. Eventually some of the hops were found to contain sulphur, D when sued for the price claimed he was entitled to reject hops since it was a term of the contract that they should not be contaminated by sulphur. Held, PP‘s statement was understood and intended by both parties to be the part of the contract. was in breach of the term of the contract as

7.4.2 Interval between the Negotiations and the Contract

If the interval between the negotiations and the final entering the contract has been well marked, then it is likely to be held merely a representation. In Routledge v Mckay (1954), D while negotiating with P for the sale of his motorcycle, taking information from the registration book, told P on 23rd October that it was a 1942 model. On 30th October a written contract of sale for the motorcycle was made. There was no mention of the date of the model in the contract. It was found later that the actual date of the model was 1930. P sued D for damages. Held, P‘s action should fail since there had been a marked lapse of time between making of the statement and making of the contract.

7.4.3 Whether the Contract has been Reduced to Writing?

If the parties put the formal contract in writing, any representations not included in the written contract are likely to be construed as mere representations. The exclusion of an oral statement from the written contract may suggest that it was not intended to be a contractual; terms. The fact of Routledge v Mckay, state above, tends to suggest this construction. This is in conformity with the “parol evidence rule which we shall discuss shortly. But in other cases oral statements were considered as part of the written contract.

(See Birch v Paramount Estate Ltd, 1956).

7.4.4 Reliance by the Plaintiff

If one of the parties to the contract makes it clear that the other party may rely on his statement, this may indicate that the statement was intended to become a term of the contract.

In Schawel v Reade (1913), D advertised a horse for sale. P visited D‘s farm with a view to buy a stallion for stud purposes. Whilst P was inspecting a stallion, D interrupted him, saying ‘’you need not look for anything: the horse is perfectly sound”. P thereafter stopped examination of the horse and bought it.

The horse in fact suffered from a disease and was unfit for stud purposes, Held, D‘s statement over soundness of the horse was a term of the contract.

7.4.5 Special Knowledge Possessed by the Person who made the Statement

Where person making the statement is in a better position to know the facts or is more knowledgeable than the other, the courts may be more willing to infer an intention to make the statement a term of the contract. Such was position in Schewel v Reade, discussed earlier.

InOscar Chess Ltd v Williams (1957), D entered into a hire purchase transaction through P, a car dealer to acquire a new car. D offered a second-hand car in part exchange. The sum available on the second-hand car depended on its age. According to the registration book the car was first registered in 1948 and D, who subsequently bought, confirmed it in good faith. P then paid ₤290 for it and the hire-purchase contract was concluded. Later P found that the second hand car was

1939 model the current price for model was ₤175. P therefore sued D for recovery ₤115 in damages claiming that the age of the car was an express condition of the contract, or alternatively a warranty that the car was 1948 model. Held, the statement as to the age of the car was not a term of the contract since P being a car dealers possessed special knowledge and skills, who could have discovered in time the true age of the car.

InContrast, in Dick Bentley Production Ltd v Harold Smith (Motors) Ltd (1965), D, a car dealer represented to P and his wife that a car had done only 20,000 miles, when in fact it had done five times that much. P bought the car and the trouble began almost at once, P brought an action against D claiming damages for the breach of warranty as to mileage. Held, D‘s statement as to mileage was a term of the contract and that P was entitled to damages.

 

7.5 The Parol Evidence Rule

The parol evidence rule states that extrinsic evidence, especially oral evidence cannot be admitted to add, vary or delete the terms of a written contract. In Angell v Duke (1875), P and D entered into a written contract for lease of a house belonging to D together with the furniture in it. P later argued that D had previously agreed to provide additional furniture not mentioned in the written contract. Held P could not be permitted to contradict the terms of the written agreement which he himself had signed.

Over the years, however, the parol evidence rule has been made subject to many exceptions, which undermine its status as a rule. The most importance exception are:

  • Where it had been previously agreed to suspend operation of the written agreement until the

operation of some event, such as approval of a third party, and that this event had not yet taken place. In Pym v Campbell (1856), P and D entered into a written agreement for the sale of an invention. When P sued for breach of this agreement, D were permitted to give evidence of an oral agreement to the effect that the written agreement was not to operate until a third party had approved the invention and that the third party had never approved it. The effect of such extrinsic evidence is not to add, vary or contradict the terms of a contract, but to make it clear that no contract has yet become operative.

  • Parol or extrinsic evidence may be received to show that the written contract was executed by

both parties under a common mistake, and does not really record the parties’ true agreement. This is known as rectification of written agreements. In Joscelyne v Nissen (1970), P made a proposal to D, his daughter to take over his car hire business. During the ensuing conversation, it was made clear that if the proposal is accepted D should pay all household expenses, including electricity, gas and coal bills. P and D subsequently entered into a written contract which placed no liability upon DD after honouring the bargaining for a time, refused to pay electricity, gas and coal bills, though she continued to take profit of the business. Held, the written document should be rectified so as specifically to include D‘s liability for electricity, gas and coal bills. to pay house hold expenses.

  • The courts will sometimes hold that a written contract does not include the whole of th

agreement between the parties. In J. Evans & Sons (Portmouth) Ltd v Andrea Merzario LtdP shipped goods on trailers with D, the trailers always being stored below decks on the ship. Subsequently D decided to change over to transportation in containers. P were orally assured by DD complete freedom in the handling and transportation of the goods. Once container stored on desk, and while in transit fell into the sea. Held, there was a valid agreement to store the containers safely below desk since there was a single contract, partly written and partly oral and a further part was implied from past relations between the parties. Thus an oral agreement may be read with the written instrument so as to form one comprehensive contract. Lord Denning MR, however, analyzed the oral assurance in the above case as amounting to a collateral contract. (1976) that their goods would be carried below the deck, but this was not incorporated in the written contract. The written contract purported to allow

Activity 7.1

Explain the parol rule and its exceptions

 

  • The court a sometimes deems a statement which is not incorporated within a writte contract to

be part of another connected or collateral contract standing side by side with the main contract. An action for breach of contract may then be brought on the collateral contract.

In De Lassalle v Guildford (1901). D was negotiating to let his house to P. P refused to hand over his counterpart of the lease until he was assured that the drains were in order. D gave such assurance and P then delivered the counterpart. The drains were not in order. Held, P was entitled to recover damages for a breach, not of the contract for lease but on collateral contract that the drains were in order. Similarly, inCity and West Properties (1934) Ltd v Mudd, D had been the tenant of P‘s shop where in fact he had also been living. Subsequently, when he was negotiating for a new lease, P inserted a new clause restricting the use of the premises for business purposes only. D was, however, given an oral assurance by P that he would be allowed to continue living at the premises. On this understanding D signed the lease. P then brought an action for forfeiture of the lease for breach of the covenant. Held, although D was in breach of the covenant on lease, the oral assurance gave rise to a collateral contract which allows D to reside on premises let.

A recent example of the use of the collateral contract is to be found in Barry v Heathcote Ball & Co (Commercial Auctions) Ltd (2001). In that case, A, the auctioneers advertised that a sale of two new engine analyzer machines would be held without reserve. The manufacture’s list price for each machine was ₤ 14,521. X made the only bid of ₤200 for each of the machine, but A purported to withdraw the machine from the sale. Held, the promise to hold the auction without reserve was an offer of a collateral contract which was accepted by X when he made his bid.

It is worth noting that the collateral contract doctrine not only bypasses the parol evidence rule, it also bypasses the mere representation argument, that is, a statement which is not a term of the main contract is nevertheless not a mere representation, because it is a term of a collateral contract.

7.6 Express Terms

 

The words, whether spoken or written, which the parties use in formulating their agreement are express terms of the contract. If the contract is wholly, by words of mouth, the main task of the court is to decide what words were used. It must be found as a fact what it was that the parties said. If the contract is wholly in writing, to decide what was written normally present no difficulty and its interpretation is a matter exclusively within the powers of the court.However, problems may arise when one party insists that certain other matters, not included in the written contract, were nevertheless agreed by the parties and intended to be terms of the contract. The parol evidence rule restricts the extent to which oral evidence may be admitted to add to vary or contradict a written contract or deed. But this rule as we have discussed earlier is subject to a number of exceptions.

7.7 Implied Terms

 

So far we have considered terms agreed to by the parties themselves, that is, express terms. But the express terms do not always constitute the whole contract, although they usually contain the main obligations of the parties. Terms, however, may also be implied into a contract. When parties enter into a contract, they often fail to deal specifically with every eventuality which could arise under it or they may have considered something too obvious to state. Hence the device of the implied tem is used to fill the gaps in the parties contact. There are various ways in which terms may be implied into a contract, namely: (1) terms implied by custom, (2) terms implied by statute, and (3) terms implied by the courts.

Whatever way a term is implied into a contract, it is clear that an implied terms cannot overside an express terms.

7.7.1 Terms Implied by the Customs

These may be contractual terms which are sanctioned by customs, whether commercial or otherwise, in a particular trade, profession or locality. These customary terms will be implied into a contract unless expressly excluded. In Hutton v Warren (1836), by a local custom, a tenant of agricultural tenancy was bound to farm according to a certain course of animal husbandry and that when given a notice he was entitled to receive some allowance for seeds and labour already expanded. Held, a term to that effect must be implied in the tenancy agreement. In Fleury & Kning v Mohamed Wali & Co, X agreed to buy 1,000 dozen handkerchiefs from Y. Y delivered the total quality but each pack contained thirty handkerchiefs. X claimed that there was a trade custom in Zanzibar that handkerchiefs must be delivered in twelve and therefore he was entitled to the reduction in price Held, such a trade custom may be implied into the contract.

7.7.2 Terms Implied By Statute

Some statutes dictate that certain terms should be implied into a contract. Such terms are implied, unless the circumstances show a different intention of the parties. The well known examples are the terms implied by the Sale of Goods Act and by the Hire Purchase Act. The former implies the following terms in every contract of sale:

(i) Implied terms as to title

That the seller has the right to sell and that buyer should enjoy quite possession of goods and the goods must be free from any charge or encumbrance.

(ii) Implied term as to description

That in a sale by description the goods shall correspond with the description.

(iii) Implied term as to merchantable quality

That the goods supplied are of merchantable quality, i.e., they are as fit for the purpose or purposes for which goods of that kind are commonly bought.

(iv) Implied term as to fitness for purpose

That the goods supplied are fit for the particular purpose for which the goods are being bought.

(v) Implied terms as to sale by sample

That the goods are sold by the sample the bulk must correspond with the sample in quality.

Similar terms are implied by the Hire Purchase Act. These Acts will be considered in more detail in Business Law II lectures in the next semester.

7.7.3 Terms Implied by Courts

The courts may imply two types of terms into contract. Firstly, they may imply terms which are called terms implied as fact into a contract so as merely to give effect to the unexpressed intention of the parties. A term will be implied in this way if it is necessary to give the transaction such business efficacy as the parties must have intended. In The Moorcock (1889) D were wharfingers who contracted to allow P, a ship-owner, to discharge his ship at their jetty. Both parties realized that the ship must ground at low water. When tide ebbed and the ship took the ground, it stuck a ridge of hard ground beneath the mud and was damaged. Held, there must be implied into the contract an undertaking on the part of D that the river bottom was, so far as reasonable care could make it, in such a condition as not to endanger the ship. Accordingly, D were held liable to pay damages to P.

Secondly, the terms which are implied by the courts consist of legal obligations generally imposed on one of the parties in a common contractual relationship, even though the parties may not have intended them to be included. There are called terms implied in law. Terms are only implied in law in respect of contracts of a defined type, such as contracts for sale of goods, employment contracts and tenancy agreements. In Liverpool City Council v Irwin (1977), the Liverpool City Council let flats and maisonettes in a tower block to tenants. The amenities of the block were seriously impaired so that the lift and rubbish chutes constantly broke down and the stairs were mostly unlit. There was no formal tenancy agreement, but the Council and the tenants signed a list of obligations on tenants. The list was, however, silent about the obligations of the Council for the maintenance of the building. The defendants (tenants) withheld payment of rent in protest at the Council’s failure to maintain the building properly. The Council brought an action to obtain possession of the defendant’s maisonette and the defendants’ counter-claimed for breach of implied terms of the contract of tenancy to keep the building in proper repair. The Council agued that there were no implied terms. Held, since it was not possible to live in such a building without access to stairs and provision of a lift service it was necessary to imply terms as to these matters, however , there was no absolute obligation on the landlords to maintain these services. It was sufficient to imply an obligation of the landlord to take reasonable care to keep in reasonable repair the common parts of the building.

In Hassanali Issa & Co v Jeraj Produce Shop (1967), P repaired D‘s motorcycle and then stored it for a quite sometime as D did not collect it within a reasonable time. P, therefore claimed storage charges but D argued that there had been no contract with regard to the storage charges. Held, there was an implied term in the agreement that the person who undertook storage was entitled to a reasonable sum in respect of storage, Where the object remained on the repair’s premises considerably in excess of the time it took to complete the repairs.

Take Note

Express terms are those terms which the parties by their words spoken or written formulates the contract. In certain circumstances terms may be implied into a contract by custom, statute or court.

 

7.8 The Classification of Terms

In a contract it is unlikely that all the terms will be equal importance. The courts recognize this inequality and classified the terms into conditions, warranties or innominate terms.

(i) Condition

A condition is a more important term in a contract the breach of which may give rise to a right to treat the contract as repudiated. A condition may thus be described as a major or main obligation in the contract. It is a vital term going to the root of the contact. It is the essence of the contract.

In Poussard v Spiers (1976), an actress was hired to play a leading part a French Operatta during its entire run. Owing to illness she did not arrive until one week after the season started, when a substitute had been taken on. The producers then refused her service. Held, the actress’ inability to perform from the first night was a condition, which went to the root of the matter, which justified the producers to rescind the contract.

(ii) Warranty

A warranty is a less important term, the breach of which may give rise to a claim for damages but not to a right to treat the contract as repudiated. A warranty is thus a term which is collateral to the main purpose of the contract. In Betteni v Gye (1876), B, a singer was hired by G, the Director of an Italian Opera to sing at concerts as well as in operas during certain dates. He undertook to arrive six days in advance for the purpose of the rehearsals but was three days late. GB’s breach did not allow the contract to be treated as repudiated, but G could only claim damages for any loss he has incurred. Similarly, in Kampala General Agency (1942) Ltd v Mody’s (E.A) Ltd(1963), P under a contract of sale agreed to supply goods to D at certain railway station. P sent the goods to another station on discovering that it was nearer to D‘s ginnery. D refuse to take delivery alleging that P by changing the station was in breach a contractual condition, Held, failure to supply goods at the agreed railway station was not central to the main purpose of the contract so as to entitle D to repudiate the contract. On the other hand, it was a breach of warranty and therefore D was entitled to damages. on this ground sought to terminate his contract. Held, the clause relating to rehearsal was not central to the main purpose of the contract and therefore It should be noted, however, that the use of the term ‘’condition” or ‘’warranty” by the parties is not conclusive. If the breach of the term expressed to be a condition only produces a very small loss it may be held that the breach will not justify repudiation.

(iii) Innominate Term

A third term type of term is an innominate or intermediate term. Such terms remain unclassified until the seriousness of a breach can be judged. They lay somewhere between conditions and warranties in terms of relative importance in so far as in some events the breach of them may entitle the innocent party to repudiate the contract and in other events the breach entitles him only to claim damages but does not entitle him to repudiate the contract. Thus the remedy available for breach depends upon the actual result of the breach. In Hong Kong Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd (1962), D contracted for the charter of a vessel for a period of twenty four months and described the vessel as ‘’being every way fitted for ordinary cargo service”. When delivered the vessel was unseaworth. It took seven months to make her seaworthy and DP sued for breach of contract and claimed damages for wrongful repudiation. The question for the court was whether the breach entitled D to treat the contract as repudiated, or only entitled them to damages. Held, the breach of contract by P did not entitled DD could only claim damages for the breach. repudiated the contract. to repudiate the contract since the vessel was available for seventeen months out of twenty four months. Accordingly, D could only claim damages for the breach.

Take Note

Terms may classify into conditions,warranties and innominate or intermediate terms.

 

7.9 Exemption Clauses

An exemption clause is a term in a contract which tries to exclude or limit liability of one of the parties for possible breach contract, or liability arising by way or tort or statute. Exemption clauses are used frequently in the course of business. Exemption clause may be divided into two broad categories: exclusion and limitation clauses. Exclusion clauses attempt to exempt all liability. For example, a notice at a car park station: “the owners of the car park will not be liable for any loss or damage to the car or its contents“. Limitation clauses, on the other hand, attempt to limit liability to a set sum. For example, the ticket states that ‘’ the railway company’s liability for any loss, damage or injury is limited to Shs.10,000.

By such clauses a party to the contract exempt his liability which would otherwise be his.

In Kenya there is no specific statute to control exemption clauses, but the use of such clauses is controlled by the rules of common law. Common law control can conveniently be discussed under two headings: incorporation of the terms into the contract and construction of the terms.

 

7.10 Incorporation into the Contract

An exemption clause may become a term of the contract in three ways, namely by signature, by notice, or by a consistent course of dealing.

7.10.1 Incorporation by Signature

The general principle is that a person who signs a contractual document is bound by its terms even though the document has not been read. In L’Estrange v F. Graucob Ltd (1934), P bought an automatic machine from D and signed without reading a document described as a” sale agreement” which contained terms of the agreement, including special terms in small print but quite legible. One of such terms was ‘’ any express or implied condition, statement, or warranty, statutory or otherwise not stated herein is hereby excluded”. The machine did not work properly and P bought an action against D claiming breach of implied term that the machine was fit for the purpose for which it had been sold. D pleaded exclusion of all implied terms. P replied at the time she signed the contract she did not read it and knew nothing of its contents. Held, as P had signed the written contract, she was bound by the terms of the contract and it was wholly immaterial whether she had read it or not.

To this rule however, there is one clear exception that where the nature of terms have been misrepresented to the party who is bound by the exemption clause. This means that an exemption clause in a contractual, document will be ineffective if a party to it has signed it due to fraud or misrepresentation by the other party.

7.10.2 Incorporation by Notice

If the contractual document is not signed, the question of notice may arise. In order that a clause to be incorporated by notice a number of criteria must be satisfied.

  • The court must be satisfied that the particular document relied on as containing notice of the excluding or limiting terms must be of a contractual nature and not as a mere  acknowledgement of payment. In Chapelton v Barry UCD (1940), P hired two desks chairs  from a pile kept by D, the defendant Council on its beach. He was handed two tickets for a  certain amount. On the back of the ticket it was printed that the Council would not be liable  in the event of any accident or damage arising from the hire of the chairs. When P sat on  one of the chairs, it collapsed as a result he was injured. Held, the Council was liable since  the ticket was not a contractual document but was mere receipt for the payment.
  • The written term which have not been signed by the other party may still be incorporated

into the agreement provided it was bought to his attention before or at  the time of the contract was made. It will not suffice to show the other party an exemption  cause or any other contractual term after the contract has already entered into. In Olley v Marlborough Court Hotel (1949) the plaintiffs, a husband and wife arrived at the

defendant hotel as guests. After checking in at the reception, they were shown to their room. On one of walls of the room there was a notice which purported to exclude the defendant’s liability for articles lost or stolen unless handed to the manageress for safe custody. Valuable furs were stolen from their room and the hotel sought to exclude any a liability for the loss. Held, the contract had already been completed at the reception desk when the couple checked in and therefore the notice could not have formed any part of the contract. The defendant hotel was therefore liable for the loss.

  • The party seeking to rely on the clause must give the other party reasonable

notice of the term. In Parker v South Eastern Railway Co (1877) P left a bag in a railway clock room and paid for a ticket. On the back of the ticket was a clause stating “The company will not be responsible for any loss of package exceeding the value of ₤10”. P lost his bag and claimed the value of the bag which exceeded ₤ 10. Held, the clause on the ticket was sufficient to limit the company’s liability as stated. In this case three questions were posed which need to be asked in all ticket cases;

(a) Did the plaintiff know that there was printing on the ticket?;  (b) Did he know that the ticket contained or referred to conditions?; and

  1. c) Had the defendant done what was sufficient to draw the plaintiff’s attention to the relevant condition?

7.10. 3 Incorporation by a Consistence Course of Dealing

A final method of incorporation is whether a previous course of dealings between the parties incorporates the clause into the contract. There must, however, be a consistence course of dealing between the parties. In such cases the courts will not demand that reasonable notice of the exemption clause be available to the other party on each and every occasion for it to be incorporated into the particular contract. In Henry Kendal & Lilico & Sons Ltd D sold to P groundnutextract on a regular basis. They always made contract orally on telephone, but followed it up by a written contract containing standard terms which included a clause exempting D from liability for latent defects. This time the groundnut extract supplied was unfit for animal consumption which poisoned P‘s poultry to which it was fed. Held, the exemption clause incorporated into the contract because of the consistence previous dealing between the parties. Accordingly, D were held not liable.

In-text Question

Discuss how an exemption clause is incorporated into a contract?

 

7.11 Construction of Exemption Clauses

Construction of exemptions clauses means interpretation of these clauses. As a general rule, the court will apply strict rule of construction in relation to exemption clauses. It is not possible here to go into all the rules of construction, but the following rules are of particular importance in construing exemption clauses.

7.11.1 Strict Construction

The courts will not imply any exemption greater than that contained in the words used. In Andrews Bros v Singer & Co Ltd (1934) P contracted to buy ‘’ new Singer cars” from D. There was a clause in the written contract excluding ‘’ all conditions, warranties and liabilities implied by common law, statute or otherwise. One of the cars, when delivered, was found to be a used car. When P brought an action for damages, D pleaded the exclusion clause in the contract. Held, the exclusion clause did not protect D since it excluded only in implied conditions, warranties and liabilities and liabilities, while the term ‘’new car’ was an express condition of the contract.

7.11.2 Contra Proferentum Rule

The courts in this area apply what is known the contra proferentum rule, that is, the courts will construe clause against the person seeking to rely on it. This rule is to effect that any ambiguity, or other doubt, in an exemption clause, the courts will adopt the meaning which is unfavourable to the party seeking to escape liability by virtue of clause. In Kenya Trading Corporation v Algemene Bank Netherland N. V(1971) D, a bank by a letter had guaranteed to pay P Shs 48,806 as a price of 350 bags of sugar railed to D‘s customers, provided D had received railway bill evidencing dispatch of 350 bags of sugar. The validity date of the guarantee was until September, 30. After sending the sugar, P posted the railway bill on September, 18, which was received by D only on October,10, D refused to pay by arguing that in terms of the letter they must have received the railway bill by September, 30. Held, the letter had to be construed as meaning that the railway receipt was merely evidence that P had dispatched the sugar by that date.

7.11.3 Negligent Acts

An important aspect of the contra proferentum rule is that the liability for negligent acts can only be exempted, where the wording clearly shows that such was intention.

7.11.4 Repugnancy to the Main Object

If an exemption clause is repugnant to the main object and intent of the contract, the court will not give effect to it. In Sze Hai Tong Bank Ltd v Ramber Cycle Co Ltd (1959), R had contracted to deliver a consignment of bicycle to Singarepore to be delivered to sub-purchaser on production of correct documentation. The carriers released the consignment to the original buyers without production of proper documentation, rather than to sub-purchaser. As a result R werenot paid. R‘s contract with the carriers provided that the carrier’s liability would cease absolutely once the goods were discharged from the ship. It was argued on behalf of the carriers that this clause in effect excluded their liability for the wrongful delivery of bicycles. Held, the clause was repugnant to the main object and intent of the contract because it absolved the carrier from liability, if he delivered the person unable to produce correct documentation. The clause was, therefore, invalid.

7.11.5 Fundamental Breach

If a party commits a fundamental breach of his contract, he is not entitled to rely on any exemption clause in the contract. In Alexander v Railwat Executive (1951) P, a stage performer deposited three trunks containing his property in the parcel office at a railway station. He paid certain charges for the deposit and obtained receipts for each. He told the railway employee that he will be sending instructions for the dispatch of those trunks. X an assistant of P persuaded the railway clerk by telling many lies to allow him to open the trunks and remove several articles. The railway clerk ultimately allowed him to do so. P then sued the railway company for breach of contract. The railway company pleaded the following exemption clause: ‘not liable for loss, misdelivery or damage to any articles which exceed the value £5 unless at the time of deposit the true value and nature thereof have been declared by the depositor and an extra charge paid. There was no such declaration or payment. Held, the railway company was guilty of a fundamental breach of contract in allowing X to open the trunks and remove their content and that the exemption clause did not cover the fact of the case since the word ‘’ misdelivery” did not mean a deliberate delivery to the wrong person.

However, in more recent cases the courts held that there is no rule of law than an exemption clause can never apply where there has been a fundamental breach; it is simply a matter of construction of the contract. In Photo Productions Ltd v Securicor Transport Ltd (1980) P entered into a contract with D, a security company under which D were to make patrol visits at night and at weekends to the factory premises of P. The contract contained a clause exempting D from liability for any injurious act of its employee unless such act could have been foreseen and avoided by the exercise of due diligence on the part of D as his employer. One night the duty patrolmen lit a small fire inside the factory, the fire got out of control, and as a result the factory and its stock were completely destroyed. Held, the exemption clause was clear and unambiguous and it protects D from liability.

Thus, it is possible for a party to a contract to exclude liability for breach of fundamental terms or breach which has serious consequence if the exemption clause clearly covers the events which occurred.

7.12 Standard Form of Contracts

In modern complex industrial society most businesses use what is termed as standard form of contracts, large business organizations have found it useful to adopt a series of standard forms or

uniform documents which must be accepted by all who deal with them. Although agreement is a basic element of every contract, in many instance it is more notional rather than real. In theory both sides are free to negotiate whatever terms like. If a term is harsh or unfair the other party can reject it. However, where there is inequality of bargaining power, one party may impose standard terms on the other and the other party has no real choice but to accept those terms. For example, if X want to travel by bus, his agreement with the bus company is just notional. The bus company will exclude its liability for injury suffered by the passengers, X has no choice but to accept the terms offered by the bus company, because other transport companies will also impose similar exemption terms. Such terms make a mockery of the principle of freedom of contract because they are not open to negotiations.

The concept of standard form of contracts was captured by Lord Diplockin

SchroderMusicPublishing Co. Ltd v Macaulay (1974) when he pointed out that the terms of the modern ‘’standard form contracts have not been the subject of negotiations between the parties to it, or approved by any organization representing the interest of the weaker party. They have been dictated by that party whose bargaining power either exercised alone or in conjunction with others providing similar goods or services, enable him to say: if you want these goods or services at all, these are the only terms on which they are available. Take it or leave it”.

Standard terms are usually imposed by a party who holds a monopoly or near monopoly position, or by a party who belongs to a group of undertakings which has collectively agreed either expressly or tacitly to put forward identical terms in their dealing with other parties. Such contracts are known as contracts of adhesion.

Standard form contracts, particularly those containing exemptions clause are widespread in all industrial and trades, but their impact is particularly felt in sectors such as travel, carriage of goods and insurance

In Kenya standard form contracts containing exemption clauses are purely governed by the common law rules discussed above.

7.13 Summary

Summary

In this lecture we examined the rules to determine extent of rights and obligations created by a contract. In order to do that, it is necessary to ascertain the terms of the contract in question. Prior to entering into a contract, the parties may have made several statements but not all of them may become a part of the contract. Statements which are not part of the contract are representations, while statement which form the integral part of the contract are terms. Whether a statement is merely a representation or a term of the contract is one of the apparent intentions of the parties. However, the courts have developed a series of indicators to ascertain the parties’ apparent intention.

The existence of the necessary intention is a regarded as a question of facts but some guiding principles to decide emerge from examination of  the cases. The guiding principles to decide whether a particular statement is a term or a representation include such indicators as, importance of the statement, interval between the negotiation and the contract, reliance by the plaintiff, special knowledge possessed by the person who made the statement and whether the contract has been reduced to writing?

We have also examined in this lecture, the parole evidence rule which states that extrinsic evidence, , especially oral evidence may not be admitted to add, to vary or contradict the terms of a written contract or deed. Parole evidence rule, however is subject to many exemptions.

Contractual terms may be express or implied. Express terms is a term agreed by the parties by words whether spoken or written. However, express terms do not always make up the whole contract. The parties may not provide for every contingency or may not express all the primary obligations in the contract. In that case certain terms may be implied by custom, by statute or by the courts.

The terms of the contract are classified into conditions, warranties and ‘’innominate” terms. These terms are distinguishable from each other by the legal consequences which flow from the breach of any of them.

A condition is a term which goes to the root of the contract, a breach of which entitles the injured party to repudiate the contract and/or sue for damages. A warranty is a term which does not go to the root of the contract, a breach of which gives the injured party a right to claim damages but he can not repudiate the contract. An innominate term is an intermediate term which lay somewhere between a condition and warranty in terms of relative importance. The remedy available for the breach of innominate terms depends

upon the factual consequences which flow from its breach. Thus, where the result of the breach is such as to deprive the innocent party of the benefit he was intended to obtain from the contract, he is entitled to treat the contract as repudiated. On the other hand, if the breach is relatively minor, the innocent party is only entitled to damages and has no right to repudiate the contract.

This lecture also considers the circumstances in which exemption clauses will be legally effective. An exemption clause is a term in a contract which excludes or limits liability for breach of contract, or liability arising in tort or by statute.

Exemption clauses are governed by the common law. In the first place, the courts consider whether the exclusion or limitation clauses have been incorporated by signature, by notice or by previous dealings between the parties.

Once it has been established that the exemption clause has been incorporated into the contract, then the next step is to construe it. Three rules are of particular importance in construing exemption clauses: (1) the contra proferentum rule under which any ambiguity in the wording of the exemption clause shall be construed against party seeking to rely on it. (2) the main purpose rule under which there is a presumption that the exemption clause was not intended to defeat the main purpose of the contract, and (3) the doctrine of fundamental breach under which if a party committed a fundamental breach of the contract, he was not entitled to rely on any exemption clause in the contract. The doctrine, however, is not a rule of law, but merely one of construction. Exclusion clauses are usually contained in standard form contracts imposed by a party having superior bargaining power setting its own terms on the other party. Such contracts are not the result of any negotiations between the parties but are dictated by superior party. Standard form contract are governed by the common law rule discussed in this lecture.

 

Activity 7.2

1.     Distinguish between terms and representations. Explain the ways in which a statement may be incorporated as a term into a contract.

2.     Distinguish between express and implied term. Discuss various ways in which terms may be implied into a contract.

3.     Explain various classifications of terms of a contract and remedy provided for their breach.

4.     Critically examine the rules developed by the courts to construe exemption clauses.

5.     Kemboi booked a hotel in Mombasa on telephone and paid deposit by visa card. While registering at the hotel the receptionist pointed out an exclusion clause which was conspicuously displayed at the reception desk. The clause stated: The Hotel Management will not hold themselves responsible for articles lost or stolen in the hotel premises. Kemboi’s two suits cases and a cash of Kshs 10,000 were stolen from his room in the hotel.

Advise Kemboi

6.     Kabiru, a car dealer sold a second-hand car to Ouma. During the negotiations before the sale Kabiru told Ouma that the car is in perfect condition and there is no need for it to be checked by a mechanic. Ouma relying on this statement decided to buy the car. In a few days the car became completely unroadworthy. Ouma sued Kabirui for breach of contract, but Kabiru argued that there was no term in the written contract of sale to the effect that the car was roadworthy.

Advise Ouma.

 

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