Care in Negotiating Contracts Representations are they Terms

Care in Negotiating Contracts Representations are they Terms or not?

The English Common Law System • Meaning and origin of “common law” • Scope of Common Law • Distinguishing feature of common law

Sources of Law within the UK/Britain • • Custom Common Law Parliamentary legislation The EU

Custom Seldom relied on today as a source of legal rights.

Common Law • Consisted of : The recorded decisions of two separate and competing court systems: 1) The Common Law courts, ( which dealt with criminal offences and “civil” claims), and 2) The court of Equity ( which dealt with “justice”).

Common Law since 1873 • In 1873 the British Parliament legislated to reform the legal system by: 1) abolishing the court of Equity as a separate court and absorbing it into a new “civil” court structure 2) created a new set of courts to deal with “civil” cases/ claims, and 3) a new set of courts to deal only with criminal proceedings/prosecutions

Common Law today is: • The recorded decisions of the courts before and after 1873 • In particular the decisions of the highest courts : 1) The Supreme Court ( formerly : the House of Lords), and 2) The Court of Appeal

All the courts now : • Are required to apply the previous decisions and principles of the courts of Common Law and the court of Equity. • This is important because of the principles and remedies “invented” by the old court of Equity • These included: …….

• Procedural devices such as the subpoena –an order to appear before the court • Principles of fairness and proportionality • Remedies such as orders for specific performance; injunctions; freezing orders… • AND the invention of the TRUST All these developments to the law came from the court of Equity

Is Common Law still significant today? • Today most law in the UK is made initially by: 1) Parliament- ( called – primary legislation, statute, Acts of Parliament) or 2) Secondary legislation ( called – Statutory Instruments ) made by some other body , authorised by Parliament, BUT……

Areas still mainly in the Common Law today There are certain areas of law contained only in common law decisions : • Contract Law • Tort ( Personal injury) Law • Equity (Trusts, Fiduciary duties-partners, directors. . ) • Some – Criminal Law

Contract Law • This is the most important area of commercial law • It is mainly to be found in case decisions e. g. most major maritime contracts (called charterparties) worldwide are made subject to the English common law of contract Similarly for other major transactional contracts.

The Basics of a Common Law Contract • An offer by one person which is accepted by another. • Intention to enter into legal relations • Consideration • Capacity

Terms of the Contract • Basic principle: FREEDOM of CONTRACT – everyone is free to negotiate the terms that are most suitable for them. BUT this is no longer true today. Big corporations, State Enterprises, monopoly providers all have the POWER to IMPOSE their Terms on the weaker party.

Balance of Freedom, Certainty and Fairness • The courts have tried to balance these concepts especially in relation to Terms 1) Decisions on the meaning and effect of Terms 2) Decisions on the effectiveness of Exclusion clauses and limitation of liability clauses

Negotiations • During the negotiations many things are said by the parties involved • Some of these things said are inducements to the other party to enter the contract • They were not intended to become Terms of the contract.

How to decide Terms? • Did the maker of the statement intend it to become a Term? • The test , however, is objective – would a reasonable person have taken that statement to be meant as a term • That depends on exactly what was said and written and the surrounding circumstances

For example; • In negotiating the sale of a boat /car/horse – to say the “it is sound(in good condition), but you should have it surveyed or checked” indicates that statement was not intended to become a Term. • If the maker of the statement has some special knowledge or skill, the statement is likely to be held to be a term.

Statements that are not Terms • Such statements ( representations) may be either: • True, or • False (untrue) If they are true, there is no problem and no need for any remedy. But if they are false…

Misrepresentations • False statements that induced the listener to enter a contract with you entitle the innocent party to legal protection • The induced innocent party can seek a court remedy depending on the nature of the misrepresentation.

Misrepresentation Remedies • If the statement was fraudulent ( made knowing it was false or made recklessly not caring whether it was false) – the remedy is rescission (ending the contract) and damages. • If it was made negligently he remedy is rescission and damages. Here , however, the burden is on the maker of the statement to prove he was not negligent • If it was made innocently – only damages are the remedy.

Statements that become Terms of a contract. • Traditionally Terms are the result of negotiation between the parties • If those things discussed become Terms – if they are written into the contract , the next question is : what type of Terms are they? • Why does it matter ? ……

Types of Express Terms • Traditionally Terms fell into two types: 1) “Conditions”, 2) “Warranties” and

Conditions • Important Terms the breach of which entitles the innocent party: 1) to repudiate the contract (bring their own obligations under the contract , to an end), and 2) sue for “damages” ( money compensation for losses incurred).

Warranties • Ordinary, less important Terms breach of which entitles the innocent party only to sue ( bring an action) for damages. • The innocent party remains bound to comply with his obligations under the Terms of the contract.

Court’s Approach • Ascertain the intention of the parties • This is not necessarily decided by the use of those words ( one party may describe a term as a “condition” but the court may consider that an abuse of power- you may have called every term a condition!) • The court’s view is that parties rarely intend breach of unimportant terms to cause the entire agreement to collapse.

Therefore… • Courts are unwilling to accept a party’s description of a Term if it would produce a remedy for breach out of proportion to its result. • The more unreasonable the result the more unlikely the parties intended the term to be a condition • True conditions are events which deprive the innocent party of substantially the whole benefit of the contract.

Sometimes courts have invented new types of Terms. • In an important case involving the charter of a ship a basic and underlying term purporting seaworthiness, was held not to be a condition of the charter contract.

Hong Kong Fir Shipping Case 1962 • Clause 1 of a contract for the charter of a ship for a period of 2 years described the ship as “fitted for ordinary cargo service”. • When delivered to the charterer the ship was unseaworthy, because her engines were old. On the first voyage she broke down and it took 18 weeks to complete repairs

Issue for the court Did the breach of clause 1 entitle the charterers to treat the contract as repudiated, or only entitle them to claim damages?

Outcome/decision • The highest court held that : In complex contracts , terms cannot always be categorised as being “conditions “ or “warranties”, when it was signed. Many terms will be innominate or (intermediate) – you have to look at the consequence of the breach before deciding whether a condition or warranty has been breached.

This means that: • The legal effect of the breach cannot be predicted until a breach has occurred.

Why did the court come to that conclusion? • because the seaworthiness clause is breached by the slightest failure to be “fitted in every way for service “, so if a nail is missing from one plank on a wooden deck, or only one anchor rather than two are on board, or proper medical supplies are not there – the owners would be in breach! • It is contrary to common sense that the parties contemplated that the charterer should be entitled to treat the contract as at an end for such trifling breaches.

The decision illustrates : • The tension which always exists in the law of contract between the sometimes conflicting interests of – freedom, certainty and fairness. • The same issues arise in relation to terms which seek to exclude or limit the liability of one of the parties.

Conclusion • During negotiations the meaning of statements must be clear and precise. • Intentions and meanings must be clear through the language that is used.