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
- 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
- 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:
- trade usage;
- business efficacy;
- 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:
- the custom being relied on is well established, certain and reasonable;
- everyone in that industry would intend that such an implied clause was to apply;
- it may not contradict any existing legislation;
- 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 3rd Ed. 1993.
OLUSEGUN YEROKUN, Modern Law of Contract, 2nd ed., Nigerian Revenue Project Publishers (2004)
T.O DADA, General Principles of Law, 3rd ed., T.O. Dada & Co. (2006)
I.E. SAGAY, Nigerian Law of Contract, 2nd ed., Spectrum Law Publishing (2001)
EWAN MACINTYRE, Business Law, 1st ed., Pearson Education Limited (2008)