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Terms of a Contract Essay

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Paper type: Essay

Express and Implied Terms The content of a contract are made up of terms (or ‘clauses’ as they are called in the case of written contracts) which may be express or implied. The express terms are the terms which the parties actually stipulated for themselves when making the contract, whether orally or in writing. In addition to the express terms, the courts sometimes, for a variety of reasons, imply certain terms into the contract. Implied terms are terms that are not expressly stated in the contract but are deemed to be included in the contract.

The most obvious reason is that the implied terms are required by a statute. Examples of statutes requiring certain terms to be implied into particular types of contracts are the Sale of Goods Act 1957, the Hire-Purchase Act 1967 and the National Land Code. Another reason is that sometimes the court finds it necessary to import a particular trade custom or usage into a contract, if it is satisfied that both parties were aware of it and must have intended that trade custom or usage to apply in their contract.

This is less likely to happen nowadays, because most customs have been absorbed into statute (e. g. the Sale of Goods Act). A more likely reason is that the court finds it necessary to imply a term into a contract simply to make it workable, or, in legal language. ‘to give business efficacy’ to it. This will only involve those terms that the parties must have taken for granted. The Moorcock [1889] The owners of a wharf agreed that a ship should be moored alongside to unload its cargo. It was well known that at low water the ship would ground on the mud at the bottom.

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At ebb tide, the ship settled on a ridge concealed beneath the mud and suffered damage. The court held that there was an implied term that the ground alongside the wharf was safe at low tide since both parties knew that the ship must rest on it. Terms may also be implied from previous dealings between the parties concerned. Hillas & Co Ltd v Arcos Ltd [1932] The claimants agreed to purchase from the defendants ’22,000 standards of softwood goods of fair specification over the season 1930’.

The agreement contained an option to buy a further 100,000 standards in 1931, without terms as to the kind or size of timber being specified. The 1930 transaction took place, but the sellers refused to supply any wood in 1931, saying that the agreement was too vague. The court held that the missing terms of the agreement could be imported/implied by reference to the transactions in 1930. 2. Conditions and Warranties Not all terms of a contract are of equal importance. Failure to perform some may have a more serious effect on the contract than failure to perform others.

A condition is a term of the contract which is so important that it goes to the root of the contract, and if breached, the injured party may repudiate (get out of) the entire contract or continue with the contract and sue for damages (compensations). A warranty, on the other hand, is a lesser term, which upon breach entitles the injured party merely to damages, but not repudiation of the contract. Sometimes, a statute states whether or not a term shall be a condition (e. g. the implied conditions and warranties of the Sales of Goods Act). The mere labeling of a term as a condition or warranty is not conclusive.

Normally, it is left to the court to classify the term which has been breached, usually on the basis of the commercial importance of the term. Note that the word ‘warranty’ is sometimes used in a different way, e. g. by a manufacturer of goods who gives a warranty against faulty workmanship offering to replace part free. The term warranty is used by the manufacturer as equivalent to guarantee. Poussard v Spiers and Ponds (1876) Madame Poussard had entered into an agreement to play a part in an opera, the first performance to take place on 28 November 1874.

On 23 November, Madame Poussard was taken ill and was unable to appear until 4 December. The defendants had hired a substitute, and discovered that the only way in which they could secure a substitute to take Madame Poussard’s place was to offer that person the complete engagement. This they had done, and they refused the services of Madame Poussard when she presented herself on 4 December. She sued for breach of contract. The court held that the failure of Madame Poussard to perform the contract as from the first night was a breach of ondition, and the defendants were within their rights to repudiate the contract. Associated Metal Smelters Ltd v Tham Cheow Toh [1971] The defendant, who was the sole proprietor of Tham Engineering Works, supplied a metal furnace to the plaintiff company and had given an undertaking that the melting furnace would have a temperature not lower than 2,600? F so that it would be suitable for smelting lead. The furnace in fact did not meet the required temperature and was not suitable for smelting lead. The plaintiff company claimed damages for breach of warranty.

The court held that the failure on the part of the defendant to supply a furnace which would meet the required temperature was a breach of condition. The plaintiff company was entitled to treat the breach of condition as a breach of warranty [which was a less serious breach]. The plaintiff company therefore succeeded in its claim. 3. Innominate Terms Besides conditions and warranties, there are also certain terms called innominate terms. Their effect on the contract will depend upon how seriously the breach has, in fact, turned out to be.

If the breach has turned out to be serious, the term will be treated as a condition, in which case the contract can be repudiated. In, in fact, the breach has not had a serious effect on the contract, then the term will be treated as a warranty, in which case the parties must proceed with the contract, but the injured party may obtain damages. For example, if a secondhand car dealer advertises a car for sale as having done 50,000 kilometers, this statement is likely to be a warranty if in fact the fact has done, say, 52, 000 kilometers.

But, if the car had actually done 120,000 kilometers, then that statement would likely be regarded as a condition. C. Void and Illegal Contracts 1. Meaning of ‘Void Contracts’ Section 2(g) of the Contracts Act states that “an agreement not enforceable by law is said to be void’. In other words, a void contract has no legal effect at all and a court would not enforce it. 2. Unlawful Contracts are Void Section 24 provides that ‘every agreement of which the object or consideration is unlawful is void. The word ‘object’ here means ‘purpose’.

Section 24 also states that the consideration or object of an agreement is unlawful if it is any of the types mentioned in subsections 2(a) – 2(e). Parkinson v College of Ambulance (1925) P donated ? 2,000 on condition of obtaining a knighthood. When no honour was awarded, P sued for the return of his money. The court held that the contract was illegal and therefore no money was recoverable. Pearce v Brook (1866) A prostitute hired a coach to help her acquire clients. The coach owner sued for the hire charge when she refused to pay.

The court held that the contract was illegal and as the coach owner knew the purpose of the contract, he could not recover the charge. In the case of Hee Cheng v Krishnan [1955], an agreement to sell a piece of land held under a Temporary Occupation Licence was held to be void, because under the law, such land cannot be transferred. In this case, the object of the agreement is unlawful. For an agreement to be void, it is not necessary that the whole of the consideration or all the objects of an agreement must be unlawful.

Section 25 states that ‘if any part of a single consideration for one or more objects, or any one or any part of any one of several considerations for a single object, is unlawful, the agreement is void’. 3. Other Void Contracts The following agreements are also declared void by the Contracts Act: (a)An agreement made without consideration unless it is in writing and registered, or is a promise to compensate for something done, or is a promise to pay a debt barred by limitation law – Section 26. (b)An agreement in restraint of marriage – Section 27. c)An agreement in restraint of trade except an agreement an agreement not to carry on business of which goodwill is sold, or an agreement made prior to a dissolution of a partnership or an agreement made during the continuance of a partnership – Section 28. (d)An agreement in restraint of legal proceedings, except for a contract to refer disputes to arbitration or a contract relating to scholarships awarded by the Government – Section 29. (e)An agreement, the meaning of which is not certain, or capable of being made certain – Section 30. See/Read Illustrations to Section 30] (f)An agreement by way of wager – Section 31. Furthermore, agreements entered into by infants/minors are void, except where the agreement is (a) a contract for necessaries, or (b) a contract of scholarship, or (c) a contract of insurance. In Leha Binte Jusoh v Awang Johari Bin Hashim [1978], the Federal court held that an agreement entered into by a minor to purchase certain lands was void. 4. Consequences of Void or Illegal Contracts

Although a void contract is unenforceable, section 66 stipulates that any person who has received any advantage under a void contract must restore the advantage, or make compensation for it to the person who has provided the advantage. D. Voidable Contracts 1. Free Consent A contract is made by the mutual agreement between the parties out of their own free will. If the agreement is not achieved by the free consent of one or both of the parties, then there is no consensus ad idem (or meeting of the minds). Such a situation may arise where there are unequal bargaining powers.

Section 14 provides that consent is said to be free where it is not caused by one of the following: (a)Coercion; (b)Undue influence; (c)Fraud; (d)Misrepresentation; (e)Mistake. 2. Voidable Contracts Section 19 and 20 provides that when consent to an agreement is caused by coercion, fraud or misrepresentation, or undue influence, the agreement is a contract voidable at the option of the party whose consent was so caused. [See/Read Illustrations to Section 19] On the other hand, an agreement made under a mistake may be void or voidable. 3. Meaning of Voidable

Suppose A and enters into a contract, and it is found that the contract is voidable at A’s option. This means A can force B to perform the contract but B cannot force A to perform it. A has a choice: (a)He can affirm the contract by performing his obligations under the contract; or (b)He can repudiate (i. e. refuse to perform) the contract, but must pay for whatever benefit he has received under the contract. 4. Coercion ‘Coercion’ is defined in section 15 of the contracts Act. Usually, it will be in the form of actual violence or threatened violence to the person of the contracting party or those near and dear to him or to his property.

In the case of Kanhaya Lal v National Bank of India Ltd (1913), the Privy Council explained that the definition of ‘coercion’ in section 15 is limited to an unlawful act done ‘with the intention of causing the person to enter into an agreement’. 5. Undue Influence Section 16 defines the term ‘undue influence’. In simple terms, ‘undue influence’ arises when one of the parties to a contract uses his special relationship with the other party to influence that other party into making the contract.

Where the party under suspicion stands in a ‘fiduciary’ (trusted or confidential) relationship to the other, undue influence will be presumed until the party under suspicion prove that the contract is ‘righteous and proper’. Such relationships include parent-child, solicitor-client and doctor-patient. Where there is no fiduciary relationship between the parties, then the party alleging undue influence must prove that there was. Inche Noriah v Shaik Allie Bin Omar [1929] An old and illiterate woman executed a deed of gift of a landed property in favour of her nephew who had been managing her affairs.

Before executing the deed, she had independent advice from a lawyer who acted in good faith. However, he was unaware that the gift constituted practically the whole of her property and did not impress upon her that she could have equally benefited her nephew by bestowing the property upon the nephew by a will. The court held that the gift should be set aside, because there was a presumption of undue influence raised by the relationship between the parties and the presumption was no rebutted. The effect of undue influence is to render the contract voidable at the option of the innocent party. . Misrepresentation Before two parties entered into a contract, they may be involved in a process of negotiation, during which many statements may be made. Some of these pre-contract statements would be incorporated as terms of the contract. Other pre-contract statements may not be incorporated as terms in the contract but play an important role in inducing the formation of the contract. Such pre-contract statements are called representations. Thus, a representation is a pre-contract statement that induces the formation of a contract but is not incorporated as a term of the contract.

If a pre-contract statement incorporated as a term of the contract turns out to be untrue or not complied with, then the party who rely on that term in making the contract can claim for breach of contract. On the other hand, if a representation turns out to be untrue, then the party misled can claim misrepresentation. Misrepresentation is divided into three categories Fraudulent misrepresentation (Derry v. Peek) occurs when one makes representation with intent to deceive and with the knowledge that it is false. An action for fraudulent misrepresentation allows for a remedy of damages and rescission.

Negligent misrepresentation at common law occurs when the defendant carelessly makes a representation while having no reasonable basis to believe it to be true. The case of Hedley Byrne v Heller [1964] A. C. 465 where the court found that a statement made negligently that was relied upon can be actionable in contract as well as tort. Innocent misrepresentation This is a false statement which the person makes honestly believing it to be true. 7. Fraud Section 17 lays down five different acts which may constitute fraud.

As a general rule, wherever a person causes another to act on a false representation which the maker himself does not believe to be true, he is said to have committed a fraud. Mere silence or non-disclosure would, generally, not constitute fraud. However, in certain circumstances, silence may be equivalent to fraud, as shown in Illustrations (b) and (c) in Section 17. The basic difference between ‘misrepresentation’ and ‘fraud’ is that in fraud the person making the representation does not himself believe in its truth, whereas in cases on misrepresentation, he may believe the representation to be true. . Mistake In general, the law will not protect those who have made a bad bargain. The mere fact that the contract turns out to be less favourable to one of the parties than he anticipated will give him no legal grounds for terminating it. However, where both parties entered into a contract under a common mistake of fact essential to the contract, the contract would be void. Sections 21 to 23 discuss the effect of mistake on an agreement. Section 21 states that: Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void.

So, if A has contracted to buy something from B, but unknown to both A and B, that something already belongs to A, the contract would be void. Cooper v Phibbs (1867) Cooper’s uncle innocently believed that he himself was the owner of a fisher, and told Cooper so before he died. In fact, Cooper was the real owner, but both of them did not know about it. After the uncle’s death, Cooper agreed to take a lease of the fishery from his uncles’ daughter, Phibbs, who became the apparent owner of the fishery. Cooper now realized the actual position and applied to court to set aside the lease.

The court held that the lease must be set aside for reason of common mistake as to the ownership of the fishery. Section 22 provides that a contract is not voidable because it was cause by a mistake as to any law in force in Malaysia; but a mistake as to a law not in force in Malaysia has the same effect as a mistake of fact. Section 23 state that: A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact. Section 21 and section 23 read together mean that: a)If both parties contracted under a common mistake of essential fact, the contract is void; but (b)if only one party contracted under a mistake of essential fact, the contract is valid and binding. Note that the mistake concerned is mistake as to fact. Thus, a mistake of judgment, e. g. as to the quality of goods, which results in making a bad bargain will not render the contract void, if all relevant facts are revealed. E. Restraint of Trade 1A restraint of trade clause in an agreement seeks to limit a person’s freedom to carry on a tade or business. Section 28 states that:

Every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, is to that extent void. Examples of restraint of trade: (a)An employer makes it a condition of employment that if the employee leaves his job, he cannot work for a competitor for a period of time, and/or within a stated distance. Attwood v Lamont (1920) Attwood employed Lamont as a tailor on the condition that if he left, he would not work as a tailor within 10 miles. The court held that this condition was a restraint of trade and was therefore a void condition. b)A business is sold on condition that the seller cannot carry on a similar business within a fixed time and/or distance. (c)Traders agree to be supplied by only one company. 2There are 3 exceptions. The first exception deals with the sale of goodwill and the other two deal with partnership agreements. The three exceptions to the general rule are: •restrictions on the sale of the goodwill of a business; •agreements between partners made upon or in anticipation of a dissolution; and •agreements between partners not to carry on business during the continuation of the partnership.

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