CONTENTS OF A CONTRACT

Unit 1              Terms: covenant, Usage, business  Efficacy  and Implications Unit 2         Terms: Conditions, Warranties & other Clauses

Unit 3              Terms Exclusion (Exception) Clauses

Contract Terms and Mere Representation

 TERMS: COVENANT, USAGE, BUSINESS EFFICACY AND; IMPLICATIONS 

CONTENTS

1.0       Introduction

2.0       Objectives

• Main Content
• Terms of the contract: Business Implications
• Restrictive covenants, Contracts in Restraint of Trade
  • General Considerations
• Trade usage, Business Efficacy and Previous Business dealings
  • Trade Usage
  • Business Efficacy
  • Previous Business dealings

4.0       Conclusion

5.0       Summary

6.0       Tutor-Marked Assignment

7.0       References/Further Readings

INTRODUCTION

In the previous Units you learnt about what contract is all about and the various development in the field. This unit introduces you to the subject matter of “terms of contract” as well as the analysis of the various approaches.

 OBJECTIVES

At the end of this unit you should be able to:

• Identify the subject matter of the terms of contract
• Differentiate between the various approaches to the terms of contract

 MAIN CONTENT

  Terms Of Contract

Whether or not a statement becomes a term of the contract depends substantially on the intention of the parties. Some statements do not form the part of the contract but may have been influential in having a party enters into a contract. Such statements are not of the contract but if found to be false can give rise to an action on the basis of misrepresentation. The problem lies in deciding if and when a representation made by one party to another, at or about the time of the making of the contract, has become a 'term' of that contract. If it has not been intended as such, then problems still arise if a party, on the strength of that representation, has been induced to enter into the contract.  If it is a representation and not a term, but is untrue (a misrepresentation) then this does not give rise to a breach of contract but, as you will see, entitles the other party to certain remedies. 

Read again the elements  of  a  misrepresentation,  above,  and  consider what  this  means in the real world (as reported in various cases). Consider also where a misrepresentation is not a term of the contract but has induced a party to enter into the agreement. Now do the following activity.

Turning aside from consideration of what might  constitute  a  term  of  a contract, and  by now you should appreciate how important that is to the parties, let us now examine  the nature of statements — or representations — which are made between parties to a contract. This is a difficult topic, but if you read the  cases  used  to  illustrate  the  points, then  you  should be able to gain some appreciation of what is required. Why then is a representation so important to the contracting process, and what happens if the statement has become a 'misrepresentation'?

To commence your understanding of this area of law, the  unit  will expand on  the  points made earlier in  this  section, as  they are critical  in establishing  what  constitutes a misrepresentation.

  Express Terms

Express terms are those terms that are contained in a contract and are openly articulated by the parties to the contract. Of course, there is always the issue that what was said is actually what parties intended it to mean. The courts usually take an objective approach to ascertaining what the parties intended by the words they used in the contract. Eyre v. Measday (1986) 1 All E.R. 488.

 Incorporation By Express Reference

Terms can be incorporated into an agreement by express reference to a third party document. Hence a reference to a term such as ‘CIF’ as defined by INCOTERMS in a contract is sufficient to incorporate the meaning ascribed in INCOTERMS as part of the express terms of a contract.

Implied Terms: Terms may be implied in a contract: (1) based on custom usage; (2) as  the legal incidents of a particular class or kind of contract; (3) based on the presumed intention of the parties where the implied term must be necessary to give ‘business efficacy’ to a contract; (4) as meeting the ‘officious bystander’ test as a term which the parties would say, if questioned, that they had obviously assumed. Powder Mountain Resorts Ltd v. British Columbia (1999-08-24) B.C.S.C.C93-683

 Officious Bystander

Whatever may be the precise legal criterion for implying terms into a contract upon which the parties have not expressly agreed, it would always be necessary for a court of our legal traditional to be very cautious about the imposition on the parties of a term that, for themselves, they had failed, omitted or refused to agree upon. Such caution is inherent in the economic freedom to which the law of contract gives effect. Absent some statutory or equitable basis for intention, it is ordinarily left to the parties themselves to formulate any agreement to which they consent to be bound in law . As MacKinnon LJ, who is usually credited with inventing the fiction of the ‘officious bystander’, admitted: ‘(I)n most… cases the Court has … to find… the obvious common agreement, upon a matter as to which t must have the strongest suspicious that neither party ever thought of it at all, and that, if they had, they would very likely have been in hopeless disagreement what provision to make about it’.

As far as implications in fact are concerned, there is the proposition that resort to the fiction of testing a propounded implied contractual term by reference to what an ‘officious bystander’ would regard as self-evident may unduly restrain the importation of implied terms proper to a particular case. The officiousness of the bystander merely explains the intervention of that fictional person in the private business of the parties. It says nothing about the attitude or approach of the bystander concerned.

There is no reason why officiousness and reasonableness could not go together. But the time may be coming where the fiction is dispensed with completely and the courts acknowledge candidly that, in defined circumstances, the law to which they give effect permits, according to a desired policy, the imposition upon parties of terms and conditions for which they have omitted to provide expressly. Clarion Limited and others v. National Provident Institution 9200) 1 WLR 1888;

Custom And Usage

Terms grounded in custom or usage in the industry can be implied on the basis is notorious, certain and reasonable so that the parties to the contract would have understood that the custom being relied upon was applicable. Lancaster v. Bird (2001) 73 Con. LR 22

The Legal incident of a Particular Class or Kin of Contract Terms can be implied as a legal incident to a particular class or kind of contract as ‘necessary’ for the very existence of the contract. This category of implied terms is distinguishable by its disregard for the actual or presumed intention of the parties. Terms implied are those that would necessarily be implied in all such contracts of a particular category or class. Canadian Pacific Hotels Ltd. V.  Bank of Montreal (1987) 1 S.C.R 71 

Business efficacy:

In business transactions, what the law desires to effects by the implication of a term is to give such business efficacy to the transaction as must been intended at all events by both parties. The court will imply a term to give efficacy to a contract on the simple basis that it is reasonable to do so; nevertheless, consideration of what is reasonable is important in determining whether or not a term should be implied into a contract to give it efficacy. The court may imply a term if such an implication necessarily arises that the parties must have intended that the suggested stipulation should exist. It remains that the term implied into the transaction must be required to give efficacy to the contract. Liverpool City Council v. Irwin and Another (1977) A.C. 239 (H.L), Royal Caribbean Hotels Ltd v. Barbados Fire & General Insurance Co. and Another; Bank of Nova Scotia v. Royal Caribbean Hotels Ltd. (1992) 44 W.I.R. 81

 Combined Business Efficacy/Officious Bystander Test

Historically, the two major tests for implication of terms by the courts have been described as the officious bystander test and the business efficacy test. Both have contributed to the composite test now applied by the courts. Arthur Edmond Dovey v. Bank of New Zealand (1999) N.Z.C.A. 328

 Term Implied By Law

Terms can be implied in a contract largely on the basis of statute. Sale of Goods Act Chapter 82:30 (Revised Laws of Trinidad and Tobago, 1980) as amended by Act No. 11 of 1983 14.

• In a contract of sale … there is an implied condition on the seller that in case of a sale he has the right to sell the goods…
• In a contract of sale, … there is an implied warranty that –
  • The goods are free, and the will remain free until the time when the property is to pass … and
  • The buyer will enjoy quiet possession … 16(2) where the seller sells goods in the course of business, there is an implied condition that the goods supplied under the contract are of merchantable quality, except that no such
  • As regards defects specially drawn to the buyer’s attention before the contract is made; or
  • If the buyer examines the goods before the contract is made, as regards defects which that examination ought to

 Terms of the Contract (I): Business Implications

You have now completed the first part of this course dealing with the law of contract and what elements are needed to create one.  You have examined a situation where the  parties thought they had completed the contractual process but  in  reality,  their ‘contract’ was void:  it  did not exist.  You  have  also  looked  at  the  distinction  between  this  and   a voidable contract, and an unenforceable contract.   You have  looked at the contract in more ‘global’ sense and considered those that may be illegal, either in their creation or in their performance, as distinct from encounter from time to time in the material which follows.

Accordingly, you are now ready to commence a detailed examination of the terms of a given contract. Every contract must have ‘terms’ and they may range from the most elementary to the highly complex. As an introduction to  this  important  topic of  contract law, we will examine them within the context of the business world: the role ‘terms’ play in employment contracts and in the sale of an enterprise. We will also discuss the relevance  of  trade  usage,  business  efficacy  and previous business  dealings.

Critical to any contract are its ‘terms’. As we will see in this part of the unit, contractual terms are limitless and can be expressly state without ambiguity or uncertainty, or they can be implied by common law or statute or by trade custom. Let us first examine a category of terms which are referred to as restrictive covenants (in business) and contracts which are in restraint of trade.

  Restrictive Covenants, Contracts in restraint of Trade

Generally  speaking  and  notwithstanding  our   ‘freedom  of   contract’ principle and   the sheer volume of commerce in Nigeria contracts freely entered into between willing parties and which are in restraint of trade are against public policy. Many of these ‘restrictive’ covenants are found in employment contracts, and  often  manifest themselves as ‘non competition’ clauses in which an employee may agree with his or her employer as follows:

• not to enter into competition with  the  employer  for  a  certain period of time following termination of the contract;
• not to solicit   the employer’s customers or  clients either during employment   or   for  a certain period after termination of the contract;
• not to induce the employees to leave  the  employer’s  business within a specified period of time after leaving the employment;
• not to disclose confidential   information or other aspects of   the employer’s business to third parties.

In addition to employment contracts, other clauses of  the  type  listed above can be  found in contracts for the sale of a business, in contracts between suppliers of goods services, and solus or ‘tied-sales’ agreements in which a retailer promises to see only supplier’s brand of goods.

Let us briefly summarize the key considerations, which give rise to the fact that trade restraints as listed above are prima facie, void at common law. See Nordenfelt V.  Maxion Nordenfelt & Sons Ammunition Co Ltd (1894).

 General Considerations

The presumption that restraint of trade contracts are void can be rebutted if it can be shown that they are reasonably in the interests of both parties and the public at large.  This reasonableness between the parties depends on  whether  the  person  benefiting from  the  restrictions  has  some legitimate  reason  for  imposing  it   (for   example, trade interest is protected), and whether it is reasonable for the other person to comply with it. Factors for consideration in the concept of reasonableness include:

• The nature of the restraint (e.g. is an employee prohibited from working in his/her occupation?);
• The time period (one year? Two year?);
• The geographical area. (radius of 2, 10 15 miles, city or state etc)

 a)   EMPLOYMENT

The employer, when enforcing a restrictive covenant in an employee’s contract, must show that it is  no  wider  than  necessary  to  protect  that  interest.  Where  a  Stockbroker working for the Plaintiff signed a three-year non-competition clause and after 11 months left the firm with about 17 of  the Plaintiff’s employees,  the Judge  in an action  to enforce  the covenant,   agreed  that  the  risk  of  the  Defendant   setting   up   his   own brokerage was a real  one and that the nature of the business was highly personal; however, he ruled that three years was too long and therefore the clause was  not  enforceable.   A   similar   clause that prevented Ms Buchana from working anywhere in what was then ‘the Colony’ as a hairdresser for one year, was held void. The Court of Appeal had no difficulty with the time limit but refused to prohibit her from working as a hairdresser in the Colony.

 b)   SALE OF A BUSINESS

As already noted, in assessing ‘reasonableness’ within this area of the law, the courts  tend to be more strict with contracts formed between two businesses  than  clauses   which  attempt   to   bind   employers   and employees.   Agreements between suppliers  to fix prices on goods and regulate supplies are largely regulated by statute, e.g. the Restrictive Trade Practices Act The legislative thrust in various jurisdictions has been that such agreements are presumed void unless it can be shown that such an agreement is beneficial to both parties and in the public interest.

There is no specific regulatory control of a comparable in Nigeria, and in the case of a dispute, resort would have to be made to the Common Law along the lines of the “reasonableness” test in restraint of trade cases.

As you have already learned, most business agreements are intended by the parties to be a contract and hence binding on them. Difficulties may arise in enforcing a contract when in fact is no ‘contract’ to start with. And at the end of the last section, you briefly examined some specific contract clause between parties to a contract who wish to  restrain the other’s trading activity.  This now leads us into the two last topics in this  unit, the first dealing with trade; the second expanding this material into an overall discussion of contract terms in general and examining various problems which can be encountered.

 SELF ASSESSMENT EXERCISE

1. Rauf agrees to pay Edosa N50,000 if Edosa will arrange to have Rauf’s brother   enter   United  States  of  America  from  Spain without going through immigration control.  The brother arrives safely  but  Rauf  refuses  to   pay   Edosa  N50,000.   can   Edosa successfully  sue Rauf? Give reasons for your
2. What general presumptions govern contracts in restraint of trade? Give two

 Trade Usage, Business Efficacy And Previous Business Dealings

You have  spent  considerable  time   in   assessing given   situations,   and upon   the basis of  your  understanding of  the  requirement  for  certain essential  elements,  you can establish whether or not a contract exists.

Part of this complicated weave of concepts are the ‘terms’ which can be expressed in writing or orally.  Unfortunately, it  is not always easy to identify  which   term   or   terms  are  intended  to   contractually   bind  the parties.   In this regard,   the opinion   has been expressed that there  is a spectrum, or sliding scale (of terms) rather than a  series of recognized categories.

We will study this in more detail in the final section of this unit but you should already be aware that contractual terms differ in importance and may be easily identified in a complicated, ten-page written agreement; but less so in a small cash sale where goods  and money are exchanged and in which terms may be virtually non-existent.

In the example of trade restraint clauses entered into between the parties in the previous section, such clauses are clearly ascertainable: A agrees with B that upon termination of the contract, B will not solicit A’s clients for a period of one year, within a geographic area of five miles of the premises. And if the parties in their business dealing express in writing that:

‘This  agreement  is  not  entered  into,  nor   is   this  memorandum written, as a formal or legal agreement and shall not be subject to legal jurisdiction in the law courts either of the United States or England… Then the courts may well, as the House of Lords did, in Rose and Frank V.  Crompton (1975) (supra)   rule   that   the   parties   clearly   intended not to be contractually bound. Interestingly enough, the parties there had also agreed that their lack of intention to be legally bound was partly based on their past business dealings with each other, thus taking into account that the courts, in the absence of an express term, will imply a term in at least three situations:

1. trade usage;
2. business efficacy;
3. previous business

 Trade Usage

Terms may not necessarily be incorporated into a contract, and although not expressed by the parties, the courts will sometimes acknowledge a given custom or common practice in a particular industry or trade. In British Crane Hire Corporation Ltd V. Ipswich Plant Hire Ltd, (1975) the hirer of an earth-moving crane, on the basis of trade convention or custom, was held liable for the salvage costs when it sank in marshes., no express agreement on this aspect of the contract had been entered into, in writing or orally. 

For the courts  to  take due notice of  particular custom  in a particular trade or industry,  it must clearly be shown that:

1. the custom  being   relied   on   is   well   established,   certain   and reasonable;
2. everyone in  that  industry  would  intend  that  such  an   implied clause was to   apply;
3. it may not contradict any existing legislation;
4. it will bind a party who is unaware of such custom or trade usage; In other words, if the custom is well-known to ‘everyone’ in the trade, ‘constructive’ notice (in which one is deemed to know a certain fact, even if that  is not  the case)  will  apply as distinct from ‘actual’ notice. From time to  time  in  this  course,  you will  encounter  the  concept of constructive notice, which basically says in law that if you are ignorant of a particular piece of knowledge, that will not help you if you ought to have known about it. Hence, some of the cases you may read will assert that the ‘defendant knew, or ought reasonably to have known’ In company law, you will  encounter  constructive notice  with respect to documents which are registered, say  in  the Companies Registry.  As  they are in the public domain, you are deemed to have read them even if you have not.

That said, you will learn that the concept in this latter regard has been abolished or extremely modified by the Companies and Allied Matters Act, 1990.

Business Efficacy

This arises where the courts  in a business dispute attempt  to give  the ‘desired effect’ to a term in a contract which is not explicitly stated or is completely  absent.  Does  this error  or omission  render  the   contract nonsensical from a commercial standpoint? In the Moorcock (1889) the owners of a docking wharf on the River Thames agreed to berth there for the purpose of unloading its cargo. Both parties knew the vessel would be grounded at low tide but the owners of Moorcock were not aware that in  addition  to mud and silt on the river bed, which  they accepted,  there were also exposed rocks  which ultimately damaged it.

The  contract  did  not  refer  to   this   contingency.   The   ship   owner successfully  sued the wharf owner on the basis of business efficacy; that it was implied in the contract that the river bed would be safe, at least to the extent that reasonable care could be provided.

 Previous Business Dealings

You will recall that in the Rose  and Frank  V Compton  (1975),  the parties  were  saying  that  partly  as  the  result  of  their   past   business dealings  with  each other, they did not intend  their  agreement  to  be legally binding.  The  reverse of  this  is where past business dealings between the same two parties will be implied. Hence, if A and B have for the past five years dealt with each other on particular terms but for some reason, one or more of the terms is omitted from the present contract,  then  in  appropriate  cases,  the  courts   will   enforce   it   by implication.  In Hillas & Co. Ltd   V Arcos (1932) 147 LT. 505 a purchase and sales of timber contract between the parties referred to ’22,000 standards of soft wood (Russian) of fair specification over the season 1930’. An option clause  also  allowed  the  plaintiff  (buyer)  to  take  up  to  an additional 100,000 standards in 1931.

Despite the rather inexact specification, the parties bought and sold the timber during 1930,  but  when  the  plaintiffs  exercised   the   100,000  option,   the  defendants refused  to deliver as  the specification was  too vague  to bind  the parties.  The House   of Lords held in favour of the plaintiffs, stating that although the specification was to a certain extent vague, the parties encountered no serious difficulty in carrying out the 1930 order and there was no reason to believe the option for 1931 could not be similarly carried out.

You will note that the concept of ‘previous dealings’ between the parties may also be a deciding factor in the case of exclusion or exemption clauses in which one party may enforce a term in a contract in which he or she is attempting to exclude or limit in some way liability for a breach in that contract.

CONCLUSION

This unit marks the beginning of our discourse on ‘terms’ of a contract. Because it is not possible to provide for every situation, other business relationship between parties have  to be considered when interpreting the intention  of  parties  to   a   contract.   Hence   such matters  of  business implication,  Trade Usage and business  efficacy among  others, which you have learnt in this unit. It is better that the contract succeeds than it perishes.

 SUMMARY

We have discussed terms of a contract where parties are unequal, the court may sometimes restrictive covenants in contracts.

 TUTOR-MARKED ASSIGNMENT

• ‘The courts  will  on  occasion   acknowledge   a   particular   trade custom as being  an implied term of the contract’: The British Crane Hire case. Comment on this  statement and outline the tests the courts apply when establishing ‘trade usage’ or ‘common practice’.
• Bee-Bee, an importer,  enters  into  a  one-year  contract  with Chukwu,  who  operates a games outlet in Awka which state the following: Bee-Bee  agrees  to  supply  to  Chukwu  for  a  one-year   period commencing January 1,  2006  to December 31, 2006 inclusive, five hundred boxes of assorted widgets for a total sale price of N500,000. And provided  further   that  Bee-Bee shall  have  the option   to   purchase   a   further one  thousand  (1,000)  boxes  of widgets  on or after January 1,  2007 for a further  period of one year, provided that  such notice  to exercise  the option shall  be made on  or before that date’.Bee-Bee provides Chukwu with five hundred boxes of widgets through 2006 and Chukwu, on December 30, sends written notice to Bee-Bee that he wishes to exercise his option to purchase the 1,000 boxes of widgets. Bee-Bee contracts Chukwu and says: ‘No delivery. The agreement is too vague.  What the devil is a  widget?

Is Bee-Bee obliged to complete the order? Give reasons for your answer.

 REFERENCES/FURTHER READINGS

BELL, MALCOLIN W: The Law of Contract: Elements and Terms in Corporate Law. The open University of Hong Kong 2001

BLACK’S LAW DICTIONARY 7th Ed.

CURZON. B Dictionary of Law 3rd Ed.

FOGAN. P. Law of Contract malthouse Press Ltd. Lagos 1997.

OYALCHIROMEN OF ANOR: Compendium of Business Law in Nigeria, 2004

MACMILLAN C. AND STORE R: Elements of the law of Contract Univ. of London Extenal Programme, 2003

TREITAL, G. H: The Law of contract 8th Ed., London: Sweet and Maxwell 1991

WADDAM S: The Law of Contract 3^rd Ed. 1993.

OLUSEGUN YEROKUN, Modern Law of Contract, 2^nd ed., Nigerian Revenue Project Publishers (2004)

T.O DADA, General Principles of Law, 3^rd ed., T.O. Dada & Co. (2006)

I.E. SAGAY, Nigerian Law of Contract, 2^nd ed., Spectrum Law Publishing (2001)

EWAN MACINTYRE, Business Law, 1^st ed., Pearson Education Limited (2008)