The process of determining the contents of a contract involves deciding what are the terms of a contract. Terms are individual sub-agreements, which when taken together, serve to limit the scope of a contract. In other words, without specific terms, a contract would have limitless scope, in theory.
However, not all terms are of the same importance. Some terms form the core of the agreement, and without which one of the parties would never have agreed to enter into the agreement. This kind of term has the legal name of “condition”.
Other less important terms are known by the legal name of “warranty”. Intermediate terms may be either conditions or warranties, depending upon the facts surrounding the nature of the breach of contract. These kinds of terms, without name until the court so decides, are called innominate terms, and they are of intermediate importance until the court decides otherwise.
- A condition is a term of a contract that is so essential to the fabric of the contract that, when it is breached, the aggrieved party may elect to terminate the contract and sue for damages.
- A warranty is a term of a contract that is not essential to the core of the contract that, when it is breached, the aggrieved party may sue for damages but not terminate the contract.
Pre-Contractual Negotiations
Before one party to the agreement makes an offer to the other party, they conduct pre-contractual negotiations. This negotiations phase of the life of the contract is where the parties determine which representations will fall into the contents of the contract as agreed terms, and which will remain as mere representations.
The Encyclopaedic Australian Legal Dictionary describes a representation as a statement made by one person to another, usually with intent to persuade the representee to take a course of action. It further describes a representation as an oral or written statement made by one party to a contract or proposed contract, which induces the other to adopt a course of action, such as entry into a contract.
A mere representation is statement or assertion, which the maker does not intend to be legally binding. The distinction between a statement that is intended to be contractual and a mere representation depends on the intention of the parties and their conduct at the time the statement was made: Jeffrey Kenneth Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1.
The law of misrepresentation is outside the scope of this article.
Puffery
A special form of pre-contractual representation is called “puffery”. The leading case on puffery was the 1866-7 matter of Dimmock v Hallett (1866-67) LR 2 Ch App 21. The doctrine underlying puffery was embodied in the Latin civil law rule simplex commendation non obligat. (Simple commendation can only be regarded as a mere invitation to a customer without any obligation). In Dimmock v Hallett (1866-67) LR 2 Ch App 21, a 934-acre (3.78 km2) estate was about to be auctioned off to discharge a debt to a mortgagee. The estate included three parcels of land called "Bull Hassocks Farm", "Creyke's Hundreds" and "Misson Springs". The advertisement for the auction described the Bull Hassocks Farm as having "fertile and improvable land", and described in the particulars that each parcel was let out to paying tenants. However, it was not mentioned that the tenants had, by the time of the auction, already given notice to quit the property. The eventual buyer, Mr Dimmock, sought rescission of the contract for misrepresentation (among a number of other grounds). Turner LJ held as follows.
- Thus I think that a mere general statement that land is fertile and improvable, whereas part of it has been abandoned as useless, cannot, except in extreme cases — as, for instance, where a considerable part is covered with water, or otherwise irreclaimable — be considered such a misrepresentation as to entitle a purchaser to be discharged. In the present case, I think the statement is to be looked at as a mere flourishing description by an auctioneer. (1866-67) LR 2 Ch App 21, 23.
Characterising Terms
1. Conditions: Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286.
Tramways entered into an agreement with the Defendant Luna Park to advertise for it for 3 seasons. An express term of the agreement provided that the advertisements would be on for at least 8 hours a day every season. The Defendant found out, during the second season, that the ads were not displayed a minimum of 8 hours a day. The Plaintiff admitted this, but argued that they were being displayed on an average of 8 hours a day. The Defendant considered this a breach of condition and regarded himself as no longer bound by the contract. The Plaintiff continued to display the ads. When the Defendant did not pay, the Plaintiff sued. The Defendant argued breach of a contract and therefore the right to termination.
The court held that to be a condition, a term must be essential. "The test of essentially is whether it appears form the general nature of the contract...or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or a substantial performance of the promise, as the case may be, and this ought to have been apparent to the promisor." . . . ."If the innocent party would not have entered into the contract unless assured of a strict and literal performance of the promise, he may in general treat himself as discharged upon any breach of the promise, however slight."
2. Warranties: Oscar Chess Ltd v Williams [1957] 1 All ER 325.
In June, 1955, the defendant sold to the plaintiffs, who were motor dealers, a second-hand Morris motor car for £290, this sum being credited to the defendant on the purchase of a new car through the dealers. The car sold to the dealers had been obtained by the defendant's mother in 1954 under a hire purchase contract, and was shown in the registration book to have been first registered in 1948. There had been five changes of ownership between 1948 and 1954. The defendant, who honestly believed that the car was a 1948 model, described it as such to L, the salesman who acted for the plaintiffs in the matter, and showed L the registration book. L, who had frequently been given lifts in the car, also believed that it was a 1948 model, and the purchase price of £290 was calculated on this basis. In January, 1956, the plaintiffs sent the chassis and engine numbers of the car to the manufacturers and were informed by them that the car was a 1939 model. If the plaintiffs had known at the time of the purchase that the car was a 1939 model, they would have paid only £175 for it. In an action brought by them against the defendant eight months after the sale the plaintiffs claimed the sum of £115 as damages for breach of warranty, either on the basis that it had been a condition, ie, an essential term, of the contract that the car was a 1948 model or that there had been a collateral warranty that it was.
The court held that the defendant was not liable to the plaintiffs in damages for breach of warranty because, having regard particularly to the fact that the defendant had no personal knowledge (as the plaintiffs knew) of the date of manufacture of the car and the date was a matter on which the plaintiffs might well also form their own opinion, the true inference from the whole of the facts was that the defendant did not intend to bind himself in contract that the car was a 1948 model, but made an innocent misrepresentation as to the date of its manufacture.
Innominate (intermediate) terms are outside the scope of this article.
In Summary
First consider whether a pre-contractual representation was either a mere representation such as puffery, or a representation meant to induce the other party into entering into the contract. Then characterise the term and determine the effect of its breach.
Sources:
Encyclopaedic Australian Legal Dictionary
Jeffrey Kenneth Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1.
Dimmock v Hallett (1866-67) LR 2 Ch App 21.
Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286.
Oscar Chess Ltd v Williams [1957] 1 All ER 325.
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