week 6 contract construction

7/22/2019 Week 6 Contract Construction

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Foundations of Business Law

Week 6Contract Construction


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Chapter 19: Construction of the Contract

Now that we have a contract, there may be

some question about whatthe part ies have

actual ly agreed to .

INCORPORATION: what terms were agreed?

INTERPRETATION: what did the terms mean?


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Terms of the contract


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What do we cover today?

1. Termsand representations

2. The Parol Evidence Rule

3. Collateral Contracts4. Conditionsand Warranties

5. Incorporation of Implied Terms

6. Exclusion Clauses


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1. Terms or representations?

A statement in and around a contract could be:

A termwhich will create contractual obligationsbetween the parties, a breach of which will

result in the unhappy party being able to sue.

OR

A mere representation which may haveinduced an offeree to enter into the contract but

was never intended to be part of the contract.


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What did the parties agree to?

Whether something is a termand nota mere representationis determined

via anobjectivetest What would a reasonable person,

aware of the circumstances of the

case, believe to be the partiesintentions regarding the contractual

force of the statement?


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There is no remedy in the event of abreach of a representation(unless there

has been some misrepresentation, in

which case there may be a remedy under

the Misrepresentation Act 1972 (SA)).


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Breach of a termmeans a breach ofthe contract, and the more serious

the breach the greater the remediesavailable to the aggrieved party (nextweek).

Its time to look at some cases, all ofwhich involve expressterms


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Hopkins v Tanqueray (1854) 15 CB 130

Seller of horse (T) saw the purchaser (H)

inspecting the horse before auction.Seller: He is perfectly sound in every

respect.

T later bought the horse at auction. Horse notgood. Could the buyer get out of the sale?

Held: statement was just a representation.


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Ross v Allis-Chalmers (1980) 32 ALR 561

Purchaser of harvester wanted an

assurance of the capability of theharvester.

Seller: In my experience the best this one

could do is 90 acres per day.The harvester failed to do 90 acres per day.

Could the buyer sue?


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Ross v Allis-Chalmers (1980) 32 ALR 561

No.

Held: The 90 acre comment was not a term.Just a representation; a statement of

opinion not meant to be binding.


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Oscar Chess v Williams [1957] 1 All ER 325

Purchaser of car (a dealer) thought he was

getting a 1948 model when in fact it was a1939 model.

Was the age of the car a TERM or a

representation?Held: a representation. The dealer should

have known, as he had some expertise.


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Terms

When does it become more like a

TERM?

Time lapse? Could the innocent party have checked?

How important was it to the overall result?

Did one of the parties have specialknowledge?


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Terms

Dick Bentley v Harold Smith [1965] 1 WLR

623

A dealer sold a car stating that it had onlydone 20,000 miles. Had actually done

100,000 miles

Was the mileage a TERM or arepresentation?

Held: a TERM, therefore a breach of

contract. The dealer should have known.


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Terms

Allied Express Transport v Hill (unrep NSWSC

1997)

Hill was to be paid up to 800 km per week forhis driving duties.

What if there are more? There wont be.

Hill found he was doing many more than 800kms per week. Was the comment meant to

be just an opinion (representation) or did it

amount to a term?


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Terms

Allied Express Transport v Hill (NSWSC 1997)

Held: The statement was more than a

representation; it was a term.Hence, compensation was payable to Mr Hill

for all his travel over 800 kms.


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2. Theparol evidence rule

A rule of evidence: the words rule

A written document expresses the whole

contract (contains all of the applicable terms)and thus other oral words, said in

negotiations, are not terms.


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Theparol evidence rule

There are a number of exceptions:

Partly written/partly oral contracts

Or if an oral assurance is given immediatelyprior to the written agreement being entered

into.


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Van den Esschert v Chappell [1960] WAR 114

At the time of signing of a written contract forthe sale of a house the purchaser asked theseller any white ants? No.

Contract then signed.

Held: A verbal assurance that there were no

white ants could beincorporated as a term ofcontract.


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The parol evidence rule

Theparol evidence rule is usually re-stated in

written contracts by parties putting in an

entire clause, this document contains theentire agreement between the parties andnothing has been agreed that does not appear

in this written agreement.

If an entire clause appears, it is very difficultto assert that any oral statements have

become terms.


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3. Collateral contracts

Oral promises made by the parties prior to entry

into the main contract, which are not terms, may

form collateralcontracts.

Sit SIDE BY SIDE the original contract.

They must be a contract in themselves, and the

consideration is the entering into the main contract.


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Collateral contracts

de Lassalle v Guildford [1901] 2 KB 215

Lease agreement. Question asked about drains.

No worries was the answer, but then the houseflooded.

Held: the promise about the drains was contained

in a collateral contract.


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For a collateral contract to exist:

Requirements:

PromissoryNot inconsistent with the main contract

Not something you would expect to find in themain contract


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Evans v Andrea Merzario Ltd [1976] 2 All ER 930

Cargo not put in the hold as promised. Container

swept overboard. Did the exclusion clause protect

the shipper?


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Held: NO. The location of the container

was guaranteed by the collateral

contract. Thus the exclusion clause(which was contained in the main

contract) did not apply to the collateral

contract.


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4. Classification of Terms

Conditions and warranties

A conditionis a term that is vital to the contract.Breach of a condition entitles the affected party to set

aside the contract and sue for monetary

compensation.A warrantyis a term that is of lesser importance tothe contract. If breached, the affected party can claim

compensation but they cannot get out of the contract.

Whether a term is a condition or a warranty dependson the intentionof the parties. The parties should

make their intention clear, otherwise the court will

apply an objective test to decide for them.


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Conditions

Assoc iated Newspapers L td v Bancks

(1951) 83 CLR 322

Cartoonist

Always had his cartoon on the front page, as agreed.2 years later it was moved to page 3 and after a few weeks Bancks

claimed breach of contract and signed with another publisher.

Was the position of the cartoon a CONDITION or a WARRANTY?

IF THE FORMER . He could shift to the other publisherIF THE LATTER . He couldnt and could only claim (nominal)compensation.


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Conditions

Assoc iated Newspapers L td v Bancks

Held: Front page was a condition. Bancks would not

have entered into the contract if there had not been

this promise of location.


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Warranties: opera singers!

Poussard v Spiers & Pond[1876] 1 QBD 410

Poussard hired to sing, and she promised to perform,

but the music was late, and then she fell ill. She

would only be available after the first week.She was replaced. Was her failure to make the first

night a breach of a condition or warranty?

If the former: she could be replaced.If the latter: she could rejoin the show.


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Warranties: opera singers!

Poussard v Spiers & Pond[1876] 1 QBD 410

Held: her promise to perform was a condition; her

failure to perform was therefore a breach of condition

and she could be replaced.


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Warranties

Bett ini v Gye [1876] 1 QBD 183

This time the singer promised to rehearse for 6 days,

but due to illness could only make the last 2 days of

rehearsals.Gye tried to repudiate the contract for breach of

condition.

Was the late arrival a breach of a condition orwarranty?


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Warranties

Bett ini v Gye [1876] 1 QBD 183

Held: a breach of warranty only.

Why different?

Depends on looking at the contract as a whole availability for a season / replacement is more crucial

than missing a few rehearsals.


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Innominate terms

Some judges think that trying todistinguish between conditions andwarranties is artificial far better simply

to determine whether the innocent partyhas missed out on a substantial benefitof the contract.

If so, it is a breach of contract leading tothe end of the contractLets look at 2 cases:


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Innominate terms

Ankar v National Westminster (1987) 162CLR 549Contract to hire machinery.

The owner of the machinery required the hirerto provide a surety and agreed to notify thesurety if the hirer was in default (in which casethe surety would confer with the hirer). The

hirer defaulted but the surety was notcontacted.

Did this allow the surety to be discharged fromhis obligations?


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Intermediate or innominate terms

Ankar v National Westminster (1987) 162CLR 549

Held: yes.

The requirement under the contract toadvise the surety was a condition (eventhough it was not called a condition): it

was a substantialand important part ofthe whole surety process.


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Hong Kong Fir v Kawasaki [1962] 2 QB26

Ship sale. But promises about its

readiness were not fulfilled. Were thesepromises a substantial part of the benefitof the contract?


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Hong Kong Fir v Kawasaki [1962] 2 QB26

No. The ship was still delivered. It was

just delivered late. The only remedy wascompensation, not repudiation of thewhole contract.


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Condition precedent

Another way of determining conditionsand warranties is to look at whether if thecontract can still go ahead if the promise

is not fulfilledPerri v Coolangatta (1982) 149 CLR 537

Sale of house where it was bought

subject to sale of their other house.Time passed! Seller sought to terminatethe agreement (and keep the deposit)because of the failure of a condition

precedent.


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Condition precedent

Perri v Coolangatta (1982) 149 CLR 537

Held: Contract validly terminated.

Reasonable time had passed, and theamount of time was a condition.


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Condition subsequent

Head v Tattersall [1871] LR 7 Exch 7

Horse purchased, but the contract saidthat if the horse could not hunt with

hounds then it could be returned.The horse was injured BUT thepurchaser then found out that it had

never hunted with hounds anyway.Was the contract able to be repudiated?


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Condition subsequent

Head v Tattersall [1871] LR 7 Exch 7

Held: the horse didnt match thedescription and that was a condition, and

thus the contract was at an end!


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4. Incorporation of implied terms

Not expressed, but still intended to bepart of the contract. Term will be impliedto give commercial meaning to the

contract where it would be just and equitable to do so it goes without saying it can be clearly expressed it does not contradict any express

term


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Dockside Fitness v Brian Woods (unrep SCTas) 1996

DF agreed to sponsor BWs yacht if a son of DF couldbe included as crew.

Son was sea-sick, so taken off BW yacht. Dispute

arose about the consequences of this for the

sponsorship.

Could DF imply a term that said no crew, no $?Held: Yes, hence sponsorship could be withdrawn.

Nothing was said but it was IMPLIED that if the son

couldnt stay on, then the money would not be paid.


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Implied terms

The courts will imply a term into a contract by

custom or trade usage:

Pelly v Royal Exchange Assurance (1757) 97

ER 342

P put tackle into storage where it was destroyed by

fire. Was it covered by insurance?

Held: Putting of the ships tackle in a warehouse isa normal mercantile practice (usage) of

shipmasters and understood.


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Implied terms by statute

The Sale of Goods Act 1895 (SA) and theAustralia Consumer Law imply statutory

terms that protect the buyer in contracts

for the sale of goods, and some contracts

for services. These terms include

merchantable quality and the fitness for

purpose of goods supplied

Cannot be excluded even by agreement.

T i li d b t f i


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Terms implied by court: fairness

Implied promise that the parties will

act in good faith, honestly and

reasonably.

Burger King Corporation vHungry Jacks Pty Ltd(2001) 69

NSWLR 558

Burger King tried to engineer their

arrangements with Hungry Jacks in

a manner that was most unfair. The

court said that they could not.

Terms implied by courts to give business


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Terms implied by courts to give businessefficacy

To cure an obvious oversight which, if left

uncorrected, would defeat the presumed intentions

of the parties.

The Moorcock (1889) 14 PD 64

Ship damaged when it hit riverbed when tide went

out.

Held: it was reasonable to imply that the partieswould expect the wharf would be safe for ships to

dock at even at low tide, although this term was

not expressly stated in the contract.


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Codelfa v SRA NSW (1982) 149 CLR 337

C contracted with SRA to excavate tunnels.

Both parties assumed C would be able to work3 shifts per day, 7 days a week. Local residents

were annoyed with the noise. C was restricted

to working 2 shifts, thus Cs costs increased

C claimed that there was an implied term that,if C was prevented from working as planned,

SRA would indemnify these costs.

Implied terms: business efficacy


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Held: it must be necessary to imply a

term to give business efficacy to the

contract. In this case, it did not gowithout saying and would havehampered the SRAs ability to get the

tunnels built. So the term could notbeimplied. C had to meet the contractual

demands within its tender price.

U t i t i d li


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Uncertain terms: previous dealings

and standard dealings

Hillas & Co Ltd v

Arcos Ltd (1932) 147

LT 503

Agreement (option) to buyextra timber. But no

agreement as to shipment

of the extra.

Held: contract went aheadon terms as per standard

dealings in the trade.

Option was enforceable.


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The court will imply into thecontract a term of which the

parties are deemed to be aware

as a result of prior dealings:

Balmain New Ferry Co Ltd v

Robertson (1906) 4 CLR 379

Mr R had travelled on the ferrymany times before so he was

bound by the terms of the

conditions of travel.


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Vague terms

General rule is that words will be given theirordinary meaning in the context of thecontract at the time of making the contract

Courts will try to save an agreement as longas the common intention of the parties canbe maintained

But could not save vague hire-purchaseterms see Scammell v Ouston[1941] 1 All ER 14

M i l t


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Meaningless terms

If the term has no meaning, the courts will severit if at all possible and leave the rest of the

contract valid:

Fitzgerald v Masters (1956) 95 CLR 420

The contract referred to the usual conditions of

sale from the NSW REI but they didnt exist. Sothat clause was severed from the contract (and

the contract was able to survive).


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Clauses which limit or excludealtogether the liabilityof one party for

breach of an express or implied term For example, no liability for any

damage, however caused.

When will they apply?

How will they be interpreted?

6. Exclusion clauses


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We begin with

The rule in LEstrangev Graucob[1934] 2 KB 394

Sale of vending machine. The

signatory was deemed to haveread, understood & agreed to the

terms of the contract

It is called constructivenotice. It is

irrelevant that the signatory has

not read the document.

If the words are clear, then the

parties are bound by the clause.


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Photo Production v Securicor [1980] AC

827

PP burnt down by S agent

Could S rely upon the clause?

Held: Yes. The clause was precise and had

been cleared by PPslawyers.


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Incorporation of terms

Toll P/L v Alphapharm P/L (2004) 210 CLR

165

Document said that the agreement was

subject to terms on the reverse side.

The representative didnt turn the page over.Was he bound?

Held: Yes. His attention was drawn to the

terms. His choice to ignore them was his

alone.


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Hutchins v Australian Grand Prix (SC Vic) 1996

(unrep)

Save Albert Park protesters were tossed out of the

Grand prix for waving their flag.Condition of entry on a board by the gate, referred

to on the ticket, gave F1 right to eject anyone

with reasonable cause.

Held: Ejection was valid. The clause had been

incorporated as part of their contract of

admission to the track.


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But the exemption clause / exclusion

clause will not apply in circumstances

where it has no tbeen drawn to theattention of the person who is

supposed to be bound by it.

It will not have been

INCORPORATED into the contract


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Le Mans Grand Prix v Il iadis [1998] 4 VR 661

Mr Illiadis was a patron of a go-kart track. He wasasked to sign a licence headed TO HELP WITHOUR ADVERTISING which he didnt read. In fact,it said that he accepted all risks. He was injured ina crash. Sued (in contract)

Held: the licence did not make it clear that it was abinding contract and even if it was, the clause hadnot been drawn to his attention. It was alsounintelligible, and wrongly titled.


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Dillon v Baltic Shipping Co (1991) 22 NSWLR 1

Cruise ship sank. The shipping company

claimed an exclusion clause protected themfrom the losses. The question was whetherthe exclusion clause had been incorporatedas a term of the contract.

Held: No. The holiday-makers had not beenmade aware of it. It did not apply because ithad not been incorporated as a term.

Exclusion clause in unsigned


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documents

Car park cases

When are the terms

incorporated, if at all?



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documents

Thornton v Shoe Lane Parking [1971] 2 QB 163

T was injured when he went to collect his car.

Could he sue?

Held: the fine print on the ticket and the exclusion

clause on the pillars in an inconspicuous corner in

the car park were not binding unless they are the

same as the terms of offer on the ticket machine.So he could sue: the exemption was useless.


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Sydney v West (1965) 114 CLR 481

Car park. Thief fooled attendant.

Could Sydney CC rely upon the exemption

clause?

Held: the SCC failed to meet their side of the

contract therefore could not rely upon the

clause in the contract to exempt them.


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John Dorahys Fitness Centre v Buchanan (SCNSW 1996, unrep)

B signed on at the fitness centre and was then

injured while on faulty equipment.

There was an exclusion clause. Did it bind her?

Held: the fitness centre did not maintain goodequipment, hence was in breach of their contract;hence could not rely upon the contractual termlimiting their liability.


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Terms contained elsewhere than in the main

contract

Olley v Marlborough Court [1949] 1 KB 532

O arrived at MC hotel. On one of the walls of Osroom was a notice that the hotel would not be

responsible for lost goods unless they were

handed over for safe keeping. Os room key wastaken by a 3rdparty and Os goods were stolen.

Could MC rely upon the clause in the room?


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Held: The contract for staying in the hotelwas completed at the front check in

counter.

The hotel could not introduce the exclusionclause afterthe contract had been

completed. Thus the hotel could not rely on

the exemption clause.


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Exclusion / exemption clauses are treated carefullyby the courts. How are they to be interpreted?

Where there is clear ambiguity, the courts will

apply the contra proferentem rule

This rule is simply that any ambiguity isinterpreted againstthe party seeking to enforce

the clause (the one who drew it up) It thus protects the vulnerable party


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TNT v May & Baker (1966) 115 CLR 353

M & B contracted with TNT to deliver packages. TNTsubcontracted to Mr Pay. Pay took packages home,

truck caught fire. TNT sought to rely upon exclusionclause for loss while packages in storage or transit.What did that mean?

Held: storage or transit didnt make it clear whetherthat included OTHER parties. The exclusion clause

was interpreted against the party seeking to reply

upon it. It didnt apply here, and thus TNT were liable

for M&Bs losses.

C t t d t t


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Contract and tort

White v John Warwick & Co Ltd[1953] 1

WLR 1285

W hired a bike to do his deliveries. Its saddle

was defective and W fell off.

Held: the exclusion clause protected JW

because they carried out the contract in the

way it was intended to be carried out.

But, as it happens, the exclusion clause

did not protect JW in negligence.

Statutory protections


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Statutory protections

Deletion of unreasonable terms:

Statutory modifications

Commonwealth and state/territory legislatureshave intervened in the area of exclusion

clauses sale of goods and consumerprotection legislation such as the Australian

Consumer Law.

SUMMARY


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Distinguish representations from terms

Identify express terms and implied terms

The courts will not apply terms that are toovague

An exclusion clause can only apply if it is

incorporatedinto the contract, and once there,

it is interpretedagainst the person who drew it

up if theres an ambiguity

SUMMARY


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Next lecture (after the break)

Contract lawrights of the parties,

discharge of contract and remedies

for breach of contractRead: Chapters 20 and 21

week 6 contract construction

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