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Guide To Understanding
Contracts

... Continued From Previous Page

UNCERTAINTY, INCOMPLETENESS
AND SEVERANCE

If the terms of the contract are uncertain or incomplete, the parties cannot have reached an agreement in the eyes of the law. An agreement to agree does not constitute a contract, and an inability to agree on key issues, which may include such things as price or safety, may cause the entire contract to fail. However, a court will attempt to give effect to commercial contracts where possible, by construing a reasonable construction of the contract.

Courts may also look to external standards, which are either mentioned explicitly in the contract or implied by common practice in a certain field.] In addition, the court may also imply a term; if price is excluded, the court may imply a reasonable price, with the exception of land, and second-hand goods, which are unique.

If there are uncertain or incomplete clauses in the contract, and all options in resolving its true meaning have failed, it may be possible to sever and void just those affected clauses if the contract includes a severability clause. The test of whether a clause is severable is an objective test - whether a reasonable person would see the contract standing even without the clauses.

CONTRACTUAL TERMS

A contractual term is "any provision forming part of a contract". Each term gives rise to a contractual obligation, breach of which can give rise to litigation. Not all terms are stated expressly and some terms carry less legal gravity as they are peripheral to the objectives of the contract.

Classification of Term

  • Condition or Warranty. Conditions are terms which go to the very root of a contract. Breach of these terms repudiate the contract,allowing the other party to discharge the contract. A warranty is not so imperative so the contract will subsist after a breach. Breach of either will give rise to damages.

It is an objective matter of fact whether a term goes to the root of a contract. By way of illustration, an actress' obligation to perform the opening night of a theatrical production is a condition, whereas a singers obligation to perform during the first three days of rehearsal is a warranty.

Statute may also declare a term or nature of term to be a condition or warranty; for example the Sale of Goods Act 1979 s15A provides that terms as to title, description, quality and sample (as described in the Act) are conditions save in certain defined circumstances.

  • Innominate term. Lord Diplock, in Hong Kong Fir Shipping Co. Ltd. v Kawasaki Kisen Kaisha Ltd. created the concept of an innominate term, breach of which may or not go to the root of the contract depending upon the nature of the breach. Breach of these terms, as with all terms, will give rise to damages. Whether or not it repudiates the contract depends upon whether legal benefit of the contract has been removed from the innocent party. Megaw LJ, in 1970, preferred the use of the classic categorising into condition or warranty due to legal certainty. This was interpreted by the House of Lords as merely restricting its application in Reardon Smith Line Ltd. v Hansen-Tangen.

Status as a Term

Status as a term is important as a party can only take legal action for the non fulfillment of a term as opposed to representations or mere puffs. Legally speaking only statements that amount to a term create contractual obligations. There are various factor that a court may take into account in determining the nature of a statement.

Implied Terms

A Term may either be expressed or implied. An Express term is stated by the parties during negotiation or written in a contractual document. Implied terms are not stated but nevertheless form a provision of the contract.

  • Terms may be implied due to the facts of the preceedings by which the contract was formed. The Privy Council established a five stage test in BP Refinery Western Port v. Shire of Hastings to determine situations where the facts of a case may imply terms (this only applies to formal contracts in Australia).

Some jurisdictions, notably Australia and Israel, imply a term of good faith into contracts. A final way in which terms may be implied due to fact is through a previous course of dealing or common trade practice.

Terms may also be implied in law.

These are terms that have been implied into standardised relationships.

Common Law.

  • Liverpool City Council v. Irwin established a term to be implied into all contracts between tenant and landlord that the landlord is obliged to keep the common areas in a reasonable state of repair.

  • Wong Mee Wan v Kwan Kin Travel Services Ltd. established that when a tour operator contracts to for the sale of goods. The most important legislation under United Kingdom law is the Sale of Goods Act 1979, the Consumer Protection (Distance Selling) Regulations 2000 and the Supply of Goods and Services Act 1982 which imply terms into all contracts whereby goods are sold or services provided.

These terms will be implied into all contracts of the same nature as a matter of law.

Statutory.

The rules by which many contracts are governed are provided in specialized statutes that deal with particular subjects. Most countries, for example, have statutes which deal directly with sale of goods, lease transactions, and trade practices. For example, most American states have adopted Article 2 of the Uniform Commercial Code, which regulates contracts for the sale of goods. The most important legislation implying terms under United Kingdom law are the Sale of Goods Act 1979, the Consumer Protection (Distance Selling) Regulations 2000 and the Supply of Goods and Services Act 1982 which imply terms into all contracts whereby goods are sold or services provided.

SETTING ASIDE THE CONTRACT

There can be three different ways in which contracts can be set aside. A contract may be deemed 'void', 'voidable' or 'unenforceable'. Voidness implies that a contract never came into existence. Voidability implies that one or both parties may declare a contract ineffective at their wish. Unenforceability implies that neither party may have recourse to a court for a remedy. Recission is a term which means to take a contract back.

Misrepresentation

Misrepresentation means a false statement of fact made by one party to another party and has the effect of inducing that party into the contract. For example, under certain circumstances, false statements or promises made by a seller of goods regarding the quality or nature of the product that the seller has may constitute misrepresentation. A finding of misrepresentation allows for a remedy of rescission and sometimes damages depending on the type of misrepresentation.

According to Gordon v. Selico it is possible to make a misrepresentation either by words or by conduct, although not everything said or done is capable of constituting a misrepresentation. Generally, statements of opinion or intention are not statements of fact in the context of misrepresentation. If one party claims specialist knowledge on the topic discussed, then it is more likely for the courts to hold a statement of opinion by that party as a statement of fact.

Mistake

A mistake is an incorrect understanding by one or more parties to a contract and may be used as grounds to invalidate the agreement. Common law has identified three different types of mistake in contract: unilateral mistake, mutual mistake, and common mistake.

  • A unilateral mistake is where only one party to a contract is mistaken as to the terms or subject-matter. The courts will uphold such a contract unless it was determined that the non-mistaken party was aware of the mistake and tried to take advantage of the mistake. It is also possible for a contract to be void if there was a mistake in the identity of the contracting party. An example is in Lewis v. Avery where Lord Denning MR held that the contract can only be avoided if the plaintiff can show that, at the time of agreement, the plaintiff believed the other party's identity was of vital importance. A mere mistaken belief as to the credibility of the other party is not sufficient.

  • A mutual mistake is when both parties of a contract are mistaken as to the terms. Each believes they are contracting to something different. The court usually tries to uphold such a mistake if a reasonable interpretation of the terms can be found. Although a contract based on a mutual mistake in judgement does not cause the contract to be voidable by the party that is adversely affected. See Raffles v. Wichelhaus.

  • A common mistake is where both parties hold the same mistaken belief of the facts. This is demonstrated in the case of Bell v. Lever Brothers Ltd., which established that common mistake can only void a contract if the mistake of the subject-matter was sufficiently fundamental to render its identity different from what was contracted, making the performance of the contract impossible.

Duress and Undue Influence

Duress has been defined as a "threat of harm made to compel a person to do something against his or her will or judgment; esp., a wrongful threat made by one person to compel a manifestation of seeming assent by another person to a transaction without real volition." An example is in Barton v. Armstrong, a decision of the Privy Council. Armstrong threatened to kill Barton if he did not sign a contract, so the court set the contract aside. An innocent party wishing to set aside a contract for duress to the person need only to prove that the threat was made and that it was a reason for entry into the contract; the onus of proof then shifts to the other party to prove that the threat had no effect in causing the party to enter into the contract. There can also be duress to goods and sometimes, the concept of 'economic duress' is used to vitiate contracts.

Undue influence is an equitable doctrine that involves one person taking advantage of a position of power over another person. The law presumes that in certain classes of special relationship, such as between parent and child, or solicitor and client, there will be a special risk of one party unduly influencing their conduct and motives for contracting. As an equitable doctrine, the court has the discretion to vitiate such a contract. When no special relationship exists, the general rule is whether there was a relationship of such trust and confidence that it should give rise to such a presumption.

Incapacity

Sometimes the capacity of either natural or artificial persons to either enforce contracts, or have contracts enforced against them is restricted. For instance, very small children may not be held to bargains they have made, or errant directors may be prevented from contracting for their company, because they have acted ultra vires (beyond their power). Another example might be people who are mentally incapacitated, either by disability or drunkenness. When the law limits or bars a person from engaging in specified activities, any agreements or contracts to do so are either voidable or void for incapacity. The law on capacity can serve either a protective function or can be a way of restraining people who act as agents for others.

Illegal Contracts

A contract is void if it is based on an illegal purpose or contrary to public policy. One example, from Canada, is Royal Bank of Canada v. Newell. A woman forged her husband's signature on 40 cheques, totalling over $58,000. To protect her from prosecution, her husband signed a letter of intent prepared by the bank in which he agreed to assume "all liability and responsibility" for the forged cheques. However, the agreement was unenforceable, and struck down by the courts, because of its essential goal, which was to "stifle a criminal prosecution." Because of the contract's illegality, and as a result voided status, the bank was forced to return the payments made by the husband.

In the U.S., one unusual type of unenforceable contract is a personal employment contract to work as a spy or secret agent. This is because the very secrecy of the contract is a condition of the contract (in order to maintain plausible deniability). If the spy subsequently sues the government on the contract over issues like salary or benefits, then the spy has breached the contract by revealing its existence. It is thus unenforceable on that ground, as well as the public policy of maintaining national security (since a disgruntled agent might try to reveal all the government's secrets during his/her lawsuit).

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