Terms of a Contract

Once the parties have entered a valid contract, the next thing to be determined is the extent of the obligations of both parties. A term of a contract refers to the obligations which are to be fulfilled by a party to a contract. Such a term may be express, when it is stated in the contract, or it may be implied. When parties expressly exclude a term which may ordinarily be implied from a contract, then the term cannot be implied. A term may be a fundamental term, a condition, an innominate term or a warranty. The nature of the term determines its importance and the extent of the remedy for the violation of such a term.

It is important to note the distinction between a term and a mere representation as the breach of a term attracts more damages, and maybe repudiation, than the breach of a mere representation which attracts lesser damages, and possibly nothing at all in the case of innocent misrepresentations. Courts have tried in numerous cases to distinguish between a term and a mere representation. Chesire and Fifoot gave three ways of identifying a term from a representation which shall be observed below.

1. At what stage of the transaction was the statement made? The idea is that statements made at the preliminary stages shall be mere representations while statements made at the later part of negotiations shall be regarded as a term of the contract. However, this is not always the case. While in Shawel v. Reade the statement was held to be a term when the lapse between the statement and the date of making the contract was three weeks long, it was held that it was a mere representation even though the lapse was just a week long in Routledge v. Mckay.
2. Another test is where one party has a superior knowledge of the subject matter. It would be held to be a term if the party making the statement has a superior knowledge about the subject matter, while it would be held to be a mere representation if the party making the statement is less knowledgeable about the subject matter. This is the most successful of the three tests. In Shawel v. Reade and Esso Petroleum v. Mardon, the statements were held to be terms since they were made by experts to laymen. The opposite was the case in Oscar Chess Ltd. v. Williams where a statement made by a layman to an expert was held to be a mere representation.
3. Whether or not the statement is followed by a reduction into writing is the third test, although this is probably the least useful of all the tests. It is easier to state cases in which the rule was ignored, like Esso Petroleum v. Mardon, than to cite cases in which it was followed like Heilbut v. Buckleton.

Treitel added two additional tests, which are verification and the degree of importance attached to the statement. If the party that makes a statement asks the other to verify it, then it cannot be held to be a term as in Ecay v. Godfrey while if the party making the statement prevents the other party from verifying the veracity then it shall be a term as in Shawel v. Reade. The second rule is the level of importance attached to the statement. If the representee can demonstrate that to the knowledge of the representor he would not have entered into the contract if the statement had not been made, then it shall be held to be a term of the contract. In Bannerman v. Reade, a prospective buyer of hops asked the seller if Sulphur had been used in the cultivation, and if so he would not even bother to ask the price. It was held that the statement was a term and not a mere representation upon the seller’s assurance that Sulphur had not been used in the cultivation.

Collateral contracts: In some situations, even when a statement cannot be regarded as a term, a party may still be held bound by their promise under the doctrine of collateral contracts. Collateral contracts are usually oral and occur when a person is induced to enter a contract based on a statement. In City & Westminster Properties Ltd. v. Mudd, the defendant’s lease came up for renewal. The plaintiffs inserted a clause restricting the use of the premises to showrooms, workrooms and offices only. The defendant who, to the knowledge of the plaintiffs, had been sleeping on the premises, objected to this clause and was reassured by the agent of the plaintiff that he could continue to sleep there. When an action was later brought against the defendant for breach, the court held that he was protected under a collateral contract. While the main contract is the lease agreement, the collateral contract is the agreement for the defendant to continue to sleep on the premises while the consideration furnished was proceeding to enter into the main contract which he would have otherwise not entered.

Nature and effect of contractual terms

It has already been stated that the importance of taking notice of a term is to know the extent of obligations created by a contract. Terms are not all equal in nature, with each kind of term attracting a different kind of remedy. Currently, there are four kinds of terms. These are warranties which are the least important, innominate or intermediate terms, conditions and fundamental terms which are the most important.

Conditions and Warranties: Conditions and Warranties are the oldest and most commonly used kinds of terms of all the four. Terms may be used in different senses and it was stated by James, L.J., in Re Lees, exp. Collins that a condition may be precedent, inherent or subsequent. It is precedent if it is necessary that the condition is fulfilled before the contract may come to life, it is subsequent if the estate is defeated if it is broken after the contract has been made, and it is inherent if the estate is qualified restrained by it. An agreement subject to the preparation of a formal contract is a condition precedent as it must be fulfilled before the contract can be binding. In Pym v. Campbell, an agreement by the defendant to buy the plaintiff’s invention was held subject to the approval of a third party. When subsequently, the third party did not approve of it, the court held that there was no binding contract as the condition precedent had not been fulfilled. Another situation where a contract was not binding due to failure to fulfill a condition precedent was in Pickard v. Innes. The court stated in Re Lees, exp. Collins that there exists another group of conditions known as conditions subsequent. They happen when an event occurs to destroy an existing obligation. The closest case which may be cited to illustrate this is the unreported case of African Continental Bank Ltd. v. Okonkwo. The defendant applied for a loan from the plaintiff for the sum of 20,000 naira. In consideration of the loan application, the plaintiff invited an estate valuer to value the property which the defendant was offering and security. The valuer charged 958 naira which was debited from the defendant’s account with his permission. Subsequently, the approval for the loan was refused and the defendant refused liability for the valuer’s fee. The plaintiff contested this. The court held that the defendant allowed the fees to be debited from his account on the belief that the loan would be approved. The subsequent failure of the bank to grant the defendant a loan operated to destroy the contract.

The third kind of conditions are referred to as conditions inherent. These are conditions which qualify the nature of the obligations, and the absence of such shall nullify the contract. For a while, condition inherent and warranties were used interchangeably until a distinction was made by section 11(1)(b) of the Sales of Goods Act 1893 which defined a condition as a stipulation, the breach of which entitles the innocent party to repudiation of the contract, while the breach of a warranty only entitles the other party to damages and not repudiation of the contract. Although the distinction between a condition and a warranty may be hard to create sometimes, two cases which can properly be used to differentiate them are Poussard v. Spiers & Pond and Bettini v. Gye. In the former case, the plaintiff was engaged as the lead actress in a French operatta from the beginning of its run. Illness made her miss the first week and the defendants replaced her with another actress. She brought an action for breach of contract when they refused to have her back and the court held that the defendants were entitled to treat the contract as discharged as there was the breach of a term. In the latter case, the defendant had engaged the plaintiff as a singer in an opera for three months and he was to be in London at least days before the commencement of the program for rehearsals. The plaintiff arrived two days before the opera and sued for breach when the defendants treated the contract as repudiated. The court held that the plaintiff had breached a warranty and not a condition.

It can be seen that the breach in Poussard v. Spiers & Pond was much graver than the breach in Bettini v. Gye. While the plaintiff missed an entire week of performance of the actual show in the former case, the plaintiff only missed four days of rehearsals in the latter case.

Innominate or intermediate terms: Innominate terms, which are also referred to as intermediate terms, are a more recent development by the courts. This kind of term is a hybrid between conditions and warranties, and the breach of such terms may either lead to damages or repudiation. If the breach is so devastating that it denies the injured party of substantially the whole of the benefit, then it may repudiate the contract, otherwise it would lead to damages.

In the case of Cehave v. Bremer, otherwise known as The Hansa Nord, a German company sold 12,000 tons of United States citrus pulp pellets to be used as cattle food to a Dutch company for about 100,000 pounds. The contract provided that the goods were to be delivered in good condition. It was discovered upon delivery that a small portion of the cargo had become bad a result of overheating. The court held that the Dutch company was not entitled to repudiation since the breach did not reach the root of the contract.

While the courts may decide whether a term repudiates a contract or leads to damages in a contract, this would not be done when the contract expressly provides for the consequence of the breach of a term. However, simply stating that one term is a condition and another is a warranty is of no effect as the court shall still decide the consequence of the breach if the consequence of the breach is not expressly stated.

Fundamental terms: A fundamental term is one which when breached, transforms the contract into something fundamentally different from what was in the mind of the parties when entering the contract. Failure to comply with a fundamental term is synonymous to nonperformance as it violates the nature of the contract itself. It was stated in Chanter v. Hopkins that there was no performance when a party delivered beans instead of peas. It was also held in Karsales (Harrow) v. Wallis that the delivery of a broken down piece of iron-mongery in a contract for the delivery of a car was not performance. Other cases of fundamental breaches include Pinnock Bros v. Lewis & Peat and Photo Production v. Securicor Transport Ltd.

Implied terms

Contracts are often concluded under some presumptions. Even though these presumptions are not stated expressly in the terms of a contract, parties would still be bound by such terms. The courts would also make some presumptions for the sake of business efficacy. These terms are known as implied terms and they include terms implied by custom or trade, terms implied by statute and terms implied by courts.

Terms implied by custom or trade: A term may be held binding on parties if they are commonly practiced customs in a kind of transaction. The court stated in Hutton v. Warren that where a contract is silent on a particular matter, extrinsic evidence as to custom and usage is admissible. In British Crane Hire Corporations v. Ipswich Plant Hire Ltd., the plaintiffs and the defendants were both in the business of hiring out heavy earth-moving equipment. The defendants who were then engaged in drainage work arranged by telephone for a drag line crane from the plaintiffs. Although the fee was agreed on, nothing was said about the conditions for hire. The plaintiffs, in accordance with the usual practice, sent a printed form of the agreement to the defendants for signature. Before it was signed, the crane sank into marshy ground without anyone’s fault. The unsigned document contained an indemnity clause and according to custom which the defendants also followed often in the hiring business, hirers were liable to indemnify the owners against liability in the sort of situation which had occurred. When the defendant tried to escape the term, the court held that it was a term implied by custom and therefore binding.

Although a term may be implied by use in trade, such a term shall not be binding if the contract has an express term excluding the application of the term implied by conduct and this was the case in Les Affreteurs Reunis Societe Anonyme v. Walford and Leyland (Nig) Ltd. v. Dizengoff. Furthermore, a term shall not be implied by custom if it is not well-established to be known or presumed to be known to all in the relevant trade. This was why the term could not be implied by custom in Bank of the North v. Poland.

Terms implied by statutes: It often happens that the legislature makes statutes to protect the weaker one of two contracting parties. The Sale of Goods Act, passed by the British Parliament in 1893, is one example. Section 12 to 15 of the act implies certain terms in a contract which are binding unless such terms are expressly excluded. The terms implied are as to title, description, suitability for purpose, sample and merchantable quality. It should be noted that the Sales of Goods Act is applicable in Nigeria as a statute of general application in force on 1st of January, 1900. While the Western region and Lagos enacted their own Sales of Goods Law, the stipulations are practically the same.

1. Implied condition as to title: Section 12(1) of the act states that every seller in a contract for the sale of goods shall be implied to have the right to sell during a sale, and shall be implied to be promising that he will have the right to sell when the actual sale takes place in an agreement to sell. The seller is also implied to give a warranty that the buyer shall enjoy quiet possession and that the goods are free from any charge or encumbrance in the favour of a third party. In Akoshile v. Ogidan, the defendant bought a car from a European who stole the car for 335 pounds and then resold it to the plaintiff for 340 pounds. When the European was later convicted for stealing the car and the car was repossessed from the plaintiff, the plaintiff brought an action against the defendant. The defendant tried to rely on the doctrine of Caveat Emptor, which means that buyers should beware. It was held that it was no sufficient defense as the statute implied he had good title to the car.
2. Sale by description: Section 13 of the Sale of Goods Act is the provision which covers sale by description. There is an implied condition that the goods sold by the seller to the buyer shall fit the description given by the buyer. While this is ordinarily the case when the buyer does not see the goods but relies on the description as in Varley v. Whipp, the necessity to fit the description may still be binding even when the purchaser has seen the product. This is usually the case where the seller has more knowledge of the object being sold as in Beale v. Taylor and Ogwu v. Leventis Motors. When a sample follows the description of the goods, the sample shall be taken to be the description as it was in Boshalli v. Allied Commercial Exporters Ltd.
3. Fitness for purpose: Section 14 of the Sales of Goods Act starts by stating that that there shall be no implied warranty or condition as to the quality or fitness for any particular purpose of goods supplied under a contract of sale. This emphasizes the common law doctrine of caveat emptor and it means that buyers should beware when buying. However, this is immediately followed by subsection (1) of section 14 which states that the rule shall not apply if the buyer states the purpose of purchase and there shall therefore be an implied term as to the fitness for performing the stated purpose. It should also be noted that the purchaser does not need to state the purpose if the product can only be used for one purpose. In Priest v. Last, it was held that there was an implied condition for fitness of purpose in the sale of a hot-water bottle since it could only be used for one purpose. If the goods supplied may be used for various purposes, it is necessary that the particular purpose must be stated for fitness of purpose to be implied. Where it is not, no term can be implied as in DIC Industries v. Jimfat (Nig.) Ltd.
4. Merchantable quality: Section 14(2) of the Sale of Goods Act states that when a product is sold by description, it shall be implied that the goods are of merchantable quality. However, this rule shall not apply when there has been an inspection by the buyer and such an inspection ought to reveal any defects. Goods that are of merchantable quality should be capable of being used for the natural purposes for which they are used. This rule is relatively easy to satisfy by sellers and in Khalil v. Dibbo & Mastronikolis, the engine oil bought by the plaintiff was held to be of merchantable quality since evidence suggested it could be used for other purposes besides the buyer’s purpose and the buyer never communicated his purpose of purchase to the defendants before sale. In John Holt Ltd. v. Ezefulukwe, it was held that there was no implied term as to merchantable quality as there had been inspection even though this rule was harsh and carried to the extreme since it is impossible to properly inspect geisha in tins without opening them.
5. Sale by sample: Section 15 of the Sale of Goods Act states that in every contract of sale by sample, there is an implied condition that the bulk shall match the sample, the buyer shall have a reasonable opportunity to compare the bulk with the sample. There shall also be an implied condition that the goods shall be free from any defect rendering them unmerchantable which would not be apparent on reasonable examination of the sample.

The breach of the terms implied by statute stated shall more often be treated as breaches of warranties and not conditions, and purchasers are more often entitled to damages and not repudiation. This is usually the case when the contract of sale is not severable or when the title of the goods sold have passed to the purchaser.

Terms implied by courts: It has been stated that some terms will be implied by the courts for the smooth-running of contracts. This is because it is impossible to put their every intention in a contract, and some things are only to be reasonably expected and therefore parties may not trouble to put them down in the contract. Glanville Williams gave three situations in which the courts might imply a term: when the parties probably had a term in mind but did not trouble to express it, terms which the parties would have expressed if it had been brought to their attention and terms that the parties to a contract would have included in their contract if they had foreseen a difficulty. It has been argued by some that while the courts may imply terms from the possible intentions of the parties, the courts should not imply terms only in the interest of justice and fairness. Terms implied in the interest of justice and fairness come under the umbrella of terms implied that parties would if included in their contract if they had foreseen a difficulty. It has become settled that such terms may be implied by the courts in the interest of justice and fairness. For terms that shall be implied since they were probably the intentions of the parties, the officious bystander test is used. The officious bystander test was set up by Makinnon L.J. in Shirlaw v. Southern Foundaries, and the test simply provides that if a random listener overheard the conversation and suggested that they included the term as one of the terms of the contract, they would have done so without protest. If A offers to buy a habitable house from B, the court may imply that the house should have a roof and lockable doors as it is what would be expected by a reasonable person. In Oketete v. Electricity corporation of Nigeria, the plaintiffs were engaged by the defendants to carry out “bush clearing” along the Warri-Ugheli road at 9 pence per yard. To the knowledge of the plaintiffs, the defendant wanted to install electric poles and cables along the cleared path. When the plaintiffs brought an action for extra wages with the claim that bush clearing did not include the felling of trees, the court implied that it included the felling of trees as it would have been impossible to satisfy the purpose without the felling of the trees. Terms were also implied in Ghandi v. Pfizer and Mazin Eng. Ltd v. Tower Aluminium.

It should be noted that terms cannot be implied if both parties are not aware that such terms may be reasonably implied by courts. In Spring v. National Amalgamated Stevedores and Dockers Society, the defendant union was a member of an association of unions known as the Transport and General Workers Union. At a conference of member unions, it was agreed that no member union should accept anyone who quit another member union without paying all his dues and fulfilling financial obligations in the latter union. The defendant union admitted Spring in ignorance of him previously being in another union and defaulting in his financial obligations. The defendant union purported to expel him when they found out. The plaintiff brought an action and when the union tried to rely on the agreement reached at the conference as an implied term, the court held that it could not be implied as a term as the plaintiff could not be reasonably expected to know about the agreement at the conference. If an officious bystander had asked the parties to include the conference agreement in their contract, the plaintiff would most probably have asked what it was. Also, a term cannot be implied from a contract when the contract expressly states otherwise.