Business Law Part 2 – Terms of Contracts
1 Overview
In the previous part, we learnt about the concepts and requirements regarding formation of a contract. Once we have resolved the issue of whether there is a valid contract, the next question is what are the terms of a contract? Under most circumstances, contract terms which are written and signed are obviously incorporated in the contract.
1.1 What is the issue?
However, complications arise when it comes to deciding whether pre-contractual statements (or statements made during negotiation) are considered as terms of the contract. Also, there are times where the contracting parties wrote incomplete terms or totally forgot to consider a term. Under such circumstances, a standard procedure to interpret or imply a term is needed. Lastly, while contracting parties should be free to include any terms in a contract, the common law hopes to uphold fairness and equity. Hence, it puts limitations on exemption clauses such that certain unfair contractual terms have no legal power.
1.2 Puff vs Representation vs Term
Pre-contractual statements can be categorised as a puff, representation or a term. In exam, it is usually only necessary to test whether a statement is incorporated as an express term. However, it is helpful to understand the differences between the categories and their associated legal rights. Also, it should be noted that the categorisation of the statement primarily depends on the objective intentions of the parties.
1.2.1 Puff
A puff is a statement which cannot give rise to legal consequences. They are never meant to be taken literally and there is no intention to be legally bound. The most common example of this is sales talk.
1.2.2 Representation
A representation induces the making of the contract but makes no promise. When a misrepresentation occurs, the contract can become voidable (see Vitiating Factors).
1.2.3 Term
A term is a promise as to the truth of a statement. On a breach of a term, the innocent party automatically has the right to sue for damages. There are tests to decide whether the contract can be voided (see Discharge of Contracts).
2 Express Terms
2.1 What are Express Terms
To decide whether a statement is an express terms, we cite the following cases / factors to justify the objective intention of the parties.
2.1.1 Importance of Statement
General Rule: The more important the statement in relation to the purpose of the contract, more likely it will be considered a term of the contract.
- Context: The buyer asked the seller of hops whether hops container sulfur and emphasized he would not bother to ask about the price if the hops had been treated with sulfur. Seller assured the hops were not treated with sulfur.
- Holding: The assurance was a term.
2.1.2 Special Knowledge or Skill
General Rule: If the maker of the statement has special knowledge or skill, the special knowledge and skill may be relevant in determining whether the parties intended to be a term or representation.
- Context: A car trader specializing in prestigious cars recommended a Bentley, claiming it had done 20,000 miles (when it had in fact done 100,000) miles.
- Holding: The statement is an express term.
- Context: A layperson traded in his car, relying on its registration book to say that the car was 1948 model (when it was in fact a 1939 model).
- Holding: The statement is an express term.
2.1.3 Assuming Responsibility
General Rule: A statement is likely to be a term if the party making it appears to have assumed responsibility for its truth or accuracy.
- Context: a horse seller told the buyer “you need not look for anything, the horse is perfectly sound for stud purposes. If there was any matter with this horse I should tell you”.
- Holding: The statement is an express term.
General Rule: A statement is unlikely to be a term if the maker of the statement asks the other party to verify the truth himself.
- Context: The seller’s asked the buyer to check that the boat was in good condition, but the buyer did not. This suggests that the parties intended for the buyer to assume responsibility for the product’s condition.
- Holding: The statement is an express term.
2.1.4 Timing of the Statement
General Rule: The closer the statement was made to the time that the contract was formed, the more likely it will be held to be a term of the contract. - Routledge v McKay (1954)
3 Modes of Incorporation of Terms
Aside from signature, there are other ways where a term can be interpreted into a contract. Here, the focus seems to be more on the reasonableness of the method of incorporation than the objective intentions of the parties based on their whole conduct.
3.1 Signature
- Context: Ms L’EStrange hire-purchased a bending machine. The contract contained an exclusion clause in small print, and Ms L’Estrange did not read it.
- Holding: Ms L’Estrange signed the agreement. No reading it is immaterial.
- Explicit incorporating clause in signed contract.
3.2 Reasonable Notice
3.2.1 Type of Document
General Rule: Terms must be contained in or referred to in a document which was intended to have contractual effect.
- Context: Chapelton hired two deck chairs from the UDC at Brighton beach. He obtained a ticket form attendant. The chair later collapsed and UDC attempted to rely on the exemption clause on the ticket.
- Holding: Exemption clause printed on the ticket was not a term of the contract since the ticket in this case was not a contractual document. No reasonable person would expect to find contractual terms on such a ticket as it would be regarded as a simple receipt. In most cases, such a ticket would be received only after the hirer had sat on the chair.
3.2.2 Timing of Giving Notice
General Rule: Notice must be given before or at the time of the contract, if given after the contract was made, it is ineffective.
- Context: Exemption clause displayed on bedroom door.
- Holding: not part of the contract as notice only given after the contract was formed
- Context: Thornton parked his car in the Defendant’s automated car park. There was a notice at the entrance stating: “All car parked at owners' risk”. A machine then issued a ticket which contained the printed words that referred to conditions displayed in another part of the car park. Thornton then suffered an injury from an accident when he collected his car.
- Holding: insufficient reasonable notice of the exemption clause. Contract was formed when Thornton paid his money into the machine which later issued the ticket. No sufficient notice period prior to time of contract.
3.2.3 Adequacy of notice
General Rule: The person relying on the clause must show that he took reasonable steps to bring the clause to the attention of the other party - it must be sufficiently conspicuous and legible, but there is no need to show that the injured party had notice of it.
- Context: Conditions printed at the back with the ticket’s front saying “for conditions, see back”. Reasonably sufficient notice had been given.
- Holding: The ticket was a common form of contractual document and since it referred to the timetable, the clause was held to be an integral part of the contract.
- Context: Plaintiff sued the defendant for breach of contract when the ship’s slip joint manufactured by the Defendant broke into two. Defendant tried to rely on standard form exemption clauses that were merely referred to in the notes of the quotation.
- Holding: No adequate notice was given as the standard form clauses involved should have been brought fairly and reasonably to the plaintiff’s attention.
- “some clauses I have seen would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient”
- Context: Interfoto delivered 47 transparencies to Stiletto in a jiffy bag, within which contained a delivery note stating the Interfoto’s standard terms and conditions, which Stiletto did not read. It stated that if the transparencies are not returned on the agreed return date, they would charge a $5 per transparency per day.
- Holding: Stiletto did not have to pay the fines.
3.3 Course of Dealing
General Rule: A term can be incorporated based on previous dealings between parties, even though it can be shown that the clause may not have been read or noticed by the party.
- Context: The parties had been doing business together for many years. The acknowledgement receipt referred to an exemption clause printed on the back.
- Holding: The exemption clause was incorporated by previous course of dealings (although the contract had already been concluded by the time the Plaintiff passed the defendant the acknowledgement receipt document).
- Context: Hollier previously repaired his car at the RM’s garage 3 or 4 times over 5 years and on at least two of those occasions Hollier had signed a form containing an exemption clause. This time, parties entered into oral agreement to have the car repaired. The car was damaged by fire due to RM’s negligence.
- Holding: Insufficient course of dealing for the exemption clause to be incorporated into the oral agreement.
4 Interpretation of Terms
4.1 Contextual Approach - Zurich Case
Singapore courts adopt a contextual approach to construing a contract: plain language + relevant extrinsic material which is evidence of its context.
Requirements for Extrinsic Material:
- Be relevant in construing the contract
- Be reasonably available to all the contracting parties
- Relate to a clear or obvious content
4.2 The Parol Evidence Rule
Applies where the contract was intended by the parties to contain all the terms of their agreement => if it applies, no extrinsic evidence is admissible to contradict, vary or add to or subtract from the terms of the contract (cannot change but can be clarify and interpret).
4.2.1 Entire Agreement Clauses
The inclusion of an entire agreement clause basically triggers the Parol Evidence Rule automatically.
General Rule: Entire agreement clause constitutes a binding agreement between the parties that the full contractual terms are to be found in the document containing the clause and not elsewhere, i.e. Parol Evidence Rule kicks in. - Lee Chee Wei v Tan Hor Peow Victor (2007)
General Rule: Entire agreement clauses generally do not prevent the court from implying term in fact or in law. - Ng Giap Hon v Westcomb Securities (2009)
5 Implied Terms
Implied terms will not contradict express terms of contract. There are a few ways to imply a term in a contract and they happen under difference circumstances and have different implications.
5.1 Implied Terms in Fact
- There must be a gap in the contract (parties did not contemplate it at all, not that they later forgot to incorporate or could not agree on it). - Sembcorp Marine Ltd v PPL Holdings (2013)
- Business Efficacy Test: Court considers whether it is necessary in the business or commercial sense to imply a term in order to give the contract efficacy.
- Officious Bystander Test: Court considers the specific term to be implied. This must be one which the parties, having regard to the need for business efficacy would have responded “oh, of course!” had the proposed term been put to them at the time of the contract.
- Implied terms in fact creates no precedent for future cases. - Forefront Medical Technology v Modern-Pak (2006)
5.2 Implied Terms in Law
- Once implied, implied in all future contracts of that particular type. - Forefront Medical Technology v Modern-Pak (2006)
- Whether a term should be implied in law is based largely on policy considerations (rather than the intentions of the parties). - Chua Choon Cheng v Allgreen Properties (2009)
- e.g. implied in all employment contracts that an employer owns the employee a duty not to undermine or destroy mutual trust and confidence. - Wee Kim San Lawrence Bernard v Robinson & Co (2014)
5.3 Implied Terms by Statute
- Public policy reasons or to facilitate commercial transactions
- Section 12(1) of Sale of Good Act
- If sale of goods act applies, a term automatically implied into the sale of goods contract that the seller has title to the goods he is selling to the buyer.
5.4 Implied by Custom
- Reasonable, certain and notorious. - Bond v CAV Ltd (1983)
- Custom must also have been followed “because there is a sense of legal obligation to do so”. - Solectron Scotland LTd v Roper (2004)
- Custom would bind the parties even if both were ignorant of its existence. - Chan Cheng Kum v Wah Tat Bank Ltd (1975)
- Universality => the custom must be so generally known that an outsider who makes reasonable enquiries could not fail to be made aware of it.
6 Exemption Clauses
Seek to exclude or limit the liability of a party.
6.1 UCTA (The Unfair Contract Terms Act)
6.1.1 Overview
- Sections 2 to 4: Avoidance of liability for negligence, breach of contract, etc.
- Sections 5 to 7: Liability arising from sale or supply of goods
6.1.2 Scope
- Sections 2 to 7: only apply to business liability which is “liability for breach of obligations or duties arising from things done or to be done by a person in the course of a business”.
- Sections 2 to 4: does not apply to
- Insurance contracts
- Contracts relating to transfer of land
- IP / Trademark / Copyright
- Transfer of shares / securities
- Formation of company / company constitution matter
6.1.2 Negligence (Section 2)
- Cannot exclude or restrict liability for death or personal injury due to negligence. - Section 2(1)
- Cannot exclude or restrict liability for other loss or damage due to negligence unless the term is reasonable. - Section 2(2)
- Irrelevant if the other party agrees to or is aware of the exclusion clause in question
6.1.3 Contract (Section 3)
- Cannot exclude or restrict liability for breach of contract unless the term is reasonable. - Section 3(2)(a)
- Cannot claim to be allowed to perform the contract substantially different from what was reasonably expected of you unless the term is reasonable. - Section 3(2)(b)(i)
- Cannot claim to be allowed to not perform some or all parts of the contract unless the term is reasonable. - Section 3(2)(b)(ii)
6.1.4 Implied Terms by Statute
- Cannot exclude or restrict liability for a breach of section 12 of the Sale of Goods Act (implied terms about title). - Section 6(1)
- Cannot exclude or restrict liability for a breach of section 13 (implied term that the goods will correspond with the description), section 14 (implied terms about quality or fitness), or section 15 (implied term regarding to sale by sample). - Section 6(2/3) [6(2) against a consumer, 6(3) against a non-consumer unless the term is reasonable]
Who is a consumer?
X deals as a consumer in relation to Y if all three requirements under Section 12(1) are met:
- X does not make the contract in the course of a business
- X does not hold himself out as making the contract in the course of a business
- Y makes the contract in the course of a business
Can a company be a consumer?
- Context: R&B was a shipping company that bought a second-hand car for business and personal use.
- Holding: R&B was a consumer as the purchase was 1. not integral parts of its business and 2. without a degree of regularity.
6.1.5 Reasonableness Test
The reasonableness test applies to Sections 2(2)">}}, 3, and 6(3). The burden is on the party claiming that a contract term satisfies the requirement of reasonableness to prove it. - Section 11(5)
- Regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made - Section 11(1)
- Consider the following - Section 11(2)
- the strengths of the parties' bargaining positions, accounting for how the customer’s requirements could have been met in other ways
- whether the customer was induced to agree to the term, or whether he could enter into a similar contract with other people without accepting a similar term
- whether the customer knew or reasonably ought to have known of the existence and extent of the term (customs / previous course of dealing)
- if the term excludes of restricts any relevant liability for an unmet condition, whether it was practically reasonable to expect that condition would be met
- whether the goods were manufacture, processed or adapted to the special order of the customer
It is important to note that Section 11(1) says that the circumstances in the term have been reasonably contemplated, not whether the term itself has been reasonably contemplated.