TERMS OF CONNTRACT

TERMS, CONDITIONS, WARRANTIES AND OTHER CLAUSES

CONTENTS

1.0       Introduction

2.0       Objectives

• Main Content
• Terms of the Contract
  • Express Terms
  • Implied Terms
• Conditions, Warranties and Innominate
• Innominate Terms
• Condition Precedent and Conditions Subsequent

4.0 Conclusion

5.0 Summary

6.0 Tutor-Marked Assignment

7.0 References/Further Readings

 INTRODUCTION

You have learned the importance of the terms  in a contract  and  that without  them,  there is  no  contract.  The  parties  then must  agree  on something, whether it be a  simple ‘goods/cash and carry’ transaction or a  complicated  20-page  technology  transfer   agreement.   The   law acknowledges that no one is perfect, and even the   parties to a contract who are very clear and precise as to what each is agreeing, may well find themselves in dispute over a particular clause. This final material studies this in further detail and expands upon the business implications of terms which you encountered in the last section.

 OBJECTIVES

At the end of the Unit, you should be able to:

• understand the essence of terms in a contract
• differentiate between conditions and warranties
• identify appropriate remedy in each perbanler breach

 MAIN CONTENT

Express Terms

Here is an excellent example of express terms. NOU Electronics orders a computer- testing machine for N20 million to be delivered on July 1, 2006; both the price and the delivery date are clearly express terms. In addition, Omatek also undertakes to install the equipment and train the staff.   If   Omatek   fails   to   deliver   until   July    3,    can NOU  Electronics successfully  bring   an   action   against   Omatek?   In   general   terms, the answer to that is “yes”, as Nou Electronics will argue that the delivery date  was an express term and hence Omatek was in breach of their contract. However,  Omatek may well argue that being two days late is not  critical  to  the   overall   intent   of  their  agreement,  and  is   a  mere warranty that  does not substantially effect  the   sale and purchase o the machine.

So this raises the first issue: Did the express term (delivery July 1) go to the very heart,  or ‘root’ of the contract? Nou Electronics will argue ‘yes’ in which case what is its remedy? Assuming its position is correct, that it is a condition, then its remedies are rescission and a claim for damages.

What is a two-day delay in delivery worth? We will study the courts’ approach to this later.  Meanwhile,  Omatek will  of  course  argue  that being two days late is no big  deal, a warranty entitling Nou Electronics to damages,  but not rescission.  Both parties  of course have their own viewpoint and by now, you should also be forming your own opinions in these cases.

However, this is academic as Nou Electronics has accepted delivery of the equipment, which would still not  prevent  it  from making a claim based on  the  delay.  But  now, the second issue  is  that  Omatek has neglected  to install  the machine and train  the staff, a delay which ran from July 2 to October. During this time, Nou Electronics presumably lost considerable  business  revenue.  Now what  is  the  measure  or  quantum of  Nou  Electronics’  potential  damages?  Moreover,  is Omatek  assuming  that  he  does  finally  complete   his   contractual obligation, entitled to something for   his efforts?

You have then, in this relatively simply, hypothetical scenario, at least four issues: conditions, warranties, partial performance and remedies all of which we will examine in due course. 

In summary then, although, it is relatively simple to identify an ‘express’ term (‘delivery date, July 1’ and ‘sale price, N20 million) the parties may well have differing views on the impact that a breach of such a term has on the contract. And if that is not bad enough, what about contracts where the terms are not so clear, not ‘express’, but implied?

Therefore, let us turn to the subject of implied terms in common law and by statute. Implied Terms By Statute, Common Law And The Courts

In the world of commerce, it should be noted that terms of a contract, even if not expressly stated by the parties, may be implied by a Common Law principle such as  trade usage, as in  the  British  Crane  Hire Corporation case we mentioned in the previous section. In addition, in some areas, there has been statutory intervention in which certain trade practices have been codified, as for example in Sales of Goods Act.  In this Act there are four ‘consumer’ sections in which certain  terms by implication are an integral part of every contract of the sale of goods to a consumer:

• Part A – the seller has the right to sell
• Part B – the goods correspond with the description
• Part C – the goods are of merchantable
• Part D – in sale by sample, the bulk of the goods will correspond to the sample and the buyer will have a reasonable opportunity to compare the bulk of the goods with the sample and check that the goods will not be un-merchantable.

In these four instances, the consumer enjoys protection to the extent that even though the seller has made no representations (examined in unit 3) regarding ownership of the goods, their  description,  their merchantability and their corresponding to a sample,  these aspects are there by implication, and by the Sales of Goods Act. The retailer cannot exclude them in a typical sale. 

The  sale  of  goods   is   an  integral   part  of   commercial   law  and  space precludes   us  from pursuing  this  aspect  in any detail.   However,  you should  be   aware   that   the ‘protection’ we have referred  to  varies  in accordance with the relationship and status of the parties: the sale can be a consumer sale as between the retailer and the consumer, or it can be between two private  individuals,  or  between  the  wholesaler  and the retailer. Consequently, in some instances it may be possible to exclude the provisions of the Sales of Goods  Act;  for  example,  in  a wholesaler/retailer  transaction, provided it is fair and reasonable. This will be examined at the end of the unit.  And in a private seller/private buyer  transaction,  only  the  right   to  sell   and   sale by description are implied.

At common law, commercial practice has led to the evolution of these and many other terms which are implied in a myriad of relationships, of which we will name only three:

The bank/customer relationship – both parties have implied duties to each other, particularly the bank’s obligations to the customer.

1. Employment contracts – the employer is obliged to provide safe working conditions for the employees, among others, and it  is implied that the employee will use  reasonable care and skill in the execution of his/her
2. The landlord/tenant relationship – it is  implied  in  the relationship between the parties that the premises ‘are reasonably fit for human habitation’.

Finally, you have learned that the courts may imply terms into a contract which is in dispute. We  refer  to  the  consideration  of  trade  usage, business  efficacy  and  previous business dealings, which you encountered in the last section.

Do not forget that  although  this section has talked about  ‘statute’ and ‘common  law’  as though they  are  distinct  entities,  nothing  could be further from the truth.  In the  ‘real world’, in employment, for example, there is a subtle blend of these two leading components of English law.

In facing an employment dispute, reference will have to be made to both the labour law and common law principles, many of which will not be found in the Act.You have already learned that  in examining a company’s director’s conduct,  recourse will  again be necessary to the common law as the Companies & Allied Matter Act may not necessarily provide the guidance you need.

It is  now  time  to  turn our  attention  to  some  of  the  issues  raised  in hypothetical Nou Electronics case, in which, among other things, we were trying to assess the importance  of  the  delivery  date  of  the equipment on July 1.  This leads us into the next topic of this unit.

 Conditions, Warranties And Innominate Terms

You have two broad principles to consider from  the materials  you are about to read:  how do we distinguish between terms in a contract which go to its ‘root’ as distinct from those that do not. Once that problem has been solved and one party to the contract to a greater or

lesser degree is at fault, what remedies would a court of law award to the injured party? You will not be surprised to learn that these questions are often not easily answered. Consider therefore the situation in two old English cases which illustrate these complexities.

In Bettini V Gye (1876) 1 Q.B. 277, the plaintiff was contractually bound  to sing with the defendant’s company from March 30 to July 13, 1875. There was no scheduled programme for the plaintiff but she agreed to be in London six days before March 30 in order to rehearse. Illness prevented

her from being there and the defendant refused her services although she could have completed the schedule. The plaintiff succeeded as the court decided that the failure to attend rehearsals did not go to the root of the contract.

In another case involving a singer, Poussard V. Spiers & Pond (1876) 1 QBD 410 the plaintiff’s wife was hired by the  defendant  to play  in  an opera beginning November  14,  1874 for  three months.  The plaintiff’s wife attended  the  rehearsals but  was  too   ill to attend the gala opening on November 28. The Defendant used an understudy for  that night and until December 15. The Plaintiff’s wife said she was fit to resume singing on December  4,  but  the defendant  refused  to accept  her  services.  The court  held  that the plaintiff’s wife had breached her contract and that the defendant was justified in terminating her services.

Thus in both cases, the plaintiffs had breached their obligations to the defendants, but in the first it was a breach of warranty; in the second, it was a breach of condition, and hence much more serious. What effect then does a court ruling on these points have on the respective remedies awarded the successful party? These can be summarized as follows:

Breach of a condition of a contract entitles the injured party to rescind or terminate the contract, or alternatively, continue with the contract and sue for damages for any loss that might have been

1. Breach of a  warranty  does  not  entitle  the  injured  party  to rescind or terminate the contract but merely sue for damages for any loss suffered. As you can see, it is important to distinguish between a condition and a warranty as  it  has  a  considerable   effect   on   the   remedies  which   are available  in  the event  of    Sometimes  it  is easy  to make  this distinction by  the  phrasing of  the  terms,  or  the nature of  the parties’ conduct.  But in the  complex commercial world, undertakings between the parties are so inter-related that the seriousness of a breach can only be assessed after the breach has  occurred.

The  modern  judicial  view  on  this  difficult  point  of  law  is  that  it  is meaningless to try  to  ‘slot’  terms  of  a  contract  into  ‘conditions’  and  ‘warranties’ even if the parties describe them as such, as to do so may lead to a party being awarded an inappropriate remedy. Consequently, in some cases, the judges have ruled that despite terminology it is easier to consider the consequences of the breach rather than the significance.

In this regard, now consider the following.

 Innominate Terms

Suppose as a contract, the seaworthiness of a vessel was an issue. Part of the contract  said the owners would ‘maintain her in a  thoroughly efficient state in hull and  machinery during service’. The hirer of the vessel did not have continuous use of the ship as it had to be docked and was not seaworthy for about 20 weeks. The plaintiff owner would be in breach of the clause but  the Defendant  hirer would not  be allowed  to terminate the contract, as it was not a condition that had been breached.

The test put forward by Lord Diplock was that if the innocent party has been deprived of most of the benefit he/she expected to get from the contract, then it is a breach of condition;  if that  is not so,  then  it  is a breach  of   warranty.   Terms   subjected   to  this  test  are   known   as ‘innominate’ terms, and unless a term is clearly a condition or  a warranty, the contract must be looked at in its entirety and a court will ask the questions that Lord Diplock asked.

At this juncture let us briefly examine three types of contract clauses, which  are  common  in  today’s  business  world:   conditions   precedent, conditions subsequent, and exclusion or exemption clauses. Before we do this, complete this exercise.

 SELF ASSESSMENT EXERCISE

Distinguish between a condition, a warranty and an ‘innominate’ term.

 Conditions Precedent And Subsequent

In the previous section of this unit, you studied an important distinction between conditions  and warranties  in  a  contract  and   the   subsequent development of the courts in awarding remedies in the event of breach.

In this regard, you have briefly considered this judicial approach in the formation of innominate terms. Now  we  will  encounter  two  forms   of   conditions   which,   are  not conditions  at  all  and   are   not   a   term   of   the   contract:   conditions   subsequent and conditions precedent. These are conditions independent of the contract and influence its very existence. Put simply, a condition precedent is a happening or event, agreed upon between the parties, by which there is no contract unless the stated happening or event occurs.

Often the later will involve the parties obtaining some form of approval or licence as in Pym V Campbell (1856), where the Defendants agreed to buy a share in an invention owned by the Plaintiff.  They further agreed that  their  agreement  would not  be   binding unless   the   invention was approved   by   the  Plaintiff’s    engineer.    It  was not approved and the

Defendant’s action against the Plaintiff  failed  as  their  agreement  to obtain the  approval was a condition precedent and hence there was no contract. This is a much  more clear-cut situation than where the parties are negotiating a contract and say, ‘Let’s work out the details if we get our licence. Then, if the licence is granted, they must still agree as to the contract terms.

On the other hand, a condition subsequent occurs when an existing contract is in place but will cease to bind the parties or allow one party to rescind, if some happening or  even occurs. In Head V Tattersall, (1870), it was agreed between the parties that if the horse, the subject of the contract, did not meet expectations within a certain period of time, it could be returned to the owner. The horse did not meet its contractual description and was successfully  returned  to  the  seller.  Another example could be an employment   contract in  which  the  employee  is  employed  on  the  basis  of  a  condition  subsequent that he passes his  engineering  examinations.  If  he  fails,  then  the  employer can treat the contract as terminated

 CONCLUSION

A term may  be  a  condition  or   a warranty;   express   or   implied.  A condition is   very important and a breach may entitle the other to rescind the contract. A breach of a warrant entitles the other only to damages.

 SUMMARY

We  have  discussed  the  essence  of  terms;   conditions,   warranties, innominate   terms. We differentiated between condition precedent and conditions subsequent, with illustrations. It does immense good to replicate this.

 TUTOR-MARKED ASSIGNMENT

Write short notes on each of the four implied consumer rights under the sales of Goods Act.

 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 7thEd.

CURZON. B Dictionary of Law 3^rd 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

TREITEL, G. H: The Law of contract 8th Ed. 1991

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