BSP1004 Lecture 6 - 2010 - TERMS OF CONTRACT LECTURE...

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Unformatted text preview: TERMS OF CONTRACT LECTURE 6 Terms of Contracts Contractual Terms can be: Express Implied EXPRESS TERMS •  Express terms are terms in the contract which are expressly agreed to by the parHes orally or in wriHng. •  What could be some express terms in the following contracts: - tenancy agreement, - employment contract? •  Note: generally parHes are free to agree to any terms. Even if an express term is unfair, generally it is sHll binding. -   Why is this so? -   So what is the implicaHon of this on a business? ExcepHons to the Rule that Express Terms do not have to be Fair Generally Need Not be Fair (a) Clause is against a Statutory Provision But there are ExcepHons (b) Clause is against public policy Express Terms (c) Clause is subject to some judicial control (b) EXAMPLE OF A CLAUSE WHICH MAY BE AGAINST PUBLIC POLICY •  One example of a clause which may be against public policy is the restraint of trade clause. •  A restraint of trade clause is a clause which restricts what a person can do, for instance, in terms of his employment or business, and is typically anH- compeHHve in nature. •  What could be some examples? Restraint of Trade Clauses •  Why are ROT clauses potenHally against public policy? •  However, they may not always be invalid: ROT ROT – Unreasonable: Not Valid ROT – Reasonable: Valid Reasonableness of ROT Reasonableness of ROT depends on factors like: (a) Is there a legiHmate reason for the restraint? (b) Is the restraint too wide? (a) LegiHmate Reason? •  What will be a legiHmate reason would depend on the type of contract and type of restraint in quesHon. •  For example, if it is an employment contract and the restraint states, cannot work for a compeHtor, whether there would a legiHmate reason, depends on: does the employee have access to trade secrets/highly confidenHal informaHon and/or can he pull over customers. (b) Too Wide? •  The clause cannot be too wide in terms of area, Hme and scope of limitaHon. •  Example: ROT in contract of a baker: (i) Singapore (ii) Whole World (i) 6 months (ii) 60 years (i) Cannot work as a baker (ii) Cannot work in a restaurant, bakery or cafe IMPLIED TERMS •  As said, in addiHon to express terms, a contract may have implied terms: Terms may be Implied by: Statutes Custom Courts Implied Terms - Statutes •  A term may be implied by a statute. •  For instance, the Sale of Goods Act, states that each Hme a person enters into a contract to buy goods, there is an implied term that the goods purchased must be of saHsfactory quality. •  But note: there are not that many statutes which imply terms into contracts. Implied Terms - Custom •  A term may be implied by custom. •  That is, if there is a very long- standing and well established custom - eg: in a parHcular industry, that may be implied into a contract relaHng to that industry. •  But note: it is not easy to establish custom and hence implicaHon by custom is not that common. Case Example •  Sagar v Ridehalgh: •  Employer claimed he had a right to deduct from co^on weaver’s wages for bad work. •  This had been pracHced in the factory for more than 30 years. •  This was also the pracHce is the whole of the co^on weaving industry at that Hme. •  What do you think the court decided? Implied Terms - Courts •  The courts may also imply terms into contracts. •  This is by far the most common way in which terms are implied. •  How does the court get an opportunity to imply a term? Implied Terms - Courts •  What is the test used by the courts to imply terms? Is it just based on the court’s concept of “fairness” or are there more specific tests? •  There are more specific tests, such as: -   (a) considering the intenHon of both parHes, is the term to be implied so obvious it goes without saying and -   (b) is it necessary to imply the term in order to give the contract business efficacy/effect. •  For instance, what could be some examples of implied terms in an employment contract on the part of the employer and employee? Implied Terms - Courts •  Even though there are more specific tests, are they sHll a bit vague? •  In light of this, should a business wait for a dispute to arise and then seek the help of the court to imply terms or should it strive to provide for everything expressly as far as possible? Effect of Breach of Terms •  If a party to the contract breaches it, the innocent party can sue for losses (if any). •  Eg: If employee damages equipment, he can be sued for the losses. •  However, if the contract is on- going, can the innocent party also terminate the contract? •  Eg: If employee damages equipment, can the employer also dismiss him? Rights of Innocent Party Can sue for Losses (if any) (a) Does the contract clearly state you can terminate for that breach? Whether can terminate the contract, depends on factors like: (b) Are the consequences of the breach serious enough to jusHfy terminaHon? If there is a breach: (c) Is the clause breached a condiHon (can terminate) or warranty (cannot automaHcally terminate)? (c) CondiHon/Warranty •  CondiHon: A very important and fundamental term. Breach: Innocent party can terminate the contract. •  Warranty: A trivial term. Breach: innocent party cannot automaHcally terminate the contract. •  The court has to determine whether a term is a condiHon or warranty by ascertaining the intenHon of the parHes at the Hme of making the contract. •  Note: not all terms can be classified as such. •  Eg: Employment Contract: Term 1 (not to compete); Term 2 (to wear a He to work), Term 3 (to follow instrucHons). IllustraHon involving (a), (b) & (c): •  For instance, if an employee commits a crime outside his job, can the employer terminate the contract? Effect of Breach of Terms •  There can be uncertainHes as to what amounts to a “serious” breach or what amounts to a “condiHon”, thus it is best for the contract to expressly provide for this. EXEMPTION/LIMITATION CLAUSES •  One express clause which is commonly found in contracts is the exempHon/limitaHon clause. •  An exempHon/limitaHon clause is a clause through which a party tries to exclude or limit his liability for breach. EXEMPTION/LIMITATION CLAUSES •  Such clauses may or may not be valid. •  Validity depends on many factors, such as: -   (1) When was the clause introduced? If it was introduced aher the contract was made, it would not form part of the contract and hence it would not be valid. -   (2) Was there reasonable noHce of the clause? If there was no reasonable noHce, then it would not be valid. -   (3) Is the clause valid under the Unfair Contract Terms Act? If it is not, it would not be valid. Unfair Contract Terms Act •  Note: The Unfair Contract Terms Act does not deal with all types of unfair terms. It generally deals only with exempHon or limitaHon clauses and among other things, it provides: •  Cannot exclude or restrict liability for negligence in relaHon to personal injury or death (secHon 2(1)). •  Cannot exclude or restrict liability for negligence for other loss or damage, unless the clause is reasonable (secHon 2(2)). Reasonableness under UCTA •  Whether the clause can be considered to be reasonable under UCTA depends on factors, such as: -   (1) The bargaining strength of the parHes. If the parHes are of equal bargaining strength, the clause is ______ likely to be reasonable. -   (2) Who could have taken out insurance more easily to cover the loss? If the party trying to exclude liability could have taken out insurance more easily to cover the loss as compared to the other party, the clause is ______ likely to be reasonable. -   (3) Does the innocent party know of the exempHon clause. If he knows or ought to know, then it is _____ likely for the clause to be reasonable. InternaHonal Comparisons Can terms be implied? Are exclusion clauses definitely valid? Are restraint of trade clauses definitely valid? China Yes No No US Yes No No India Yes No No Malaysia Yes No No Summary •  All contracts would typically have express terms, which may be in wriHng or in oral form. •  Express terms of the contract are binding even if unfair – so great care needs to be exercised before entering into a contract. However, there are some limited excepHons to this rule (eg: restraint of trade clauses). •  Contracts may also contain implied terms. Since it may not always be easy to predict whether a term may be implied, it would be be^er for the business to provide for terms expressly as far as possible. •  If there is a breach of an express or implied term and it is an on- going contract, the quesHon might arise whether the innocent party can terminate the contract. There are certain rules to determine whether this can be done. Nonetheless, it would be clearer if the contract expressly stated which parHcular breaches will enHtle the innocent party to terminate the contract. Readings: •  RC Chapter 3 (and pgs 83 to 85) and/or TB Chapter 5 (and pgs 153 to 155) •  Case referred to from ...
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This note was uploaded on 11/01/2011 for the course BIZAD BSP 1004 taught by Professor Ravichandran during the Spring '11 term at National University of Singapore.

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