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AF2504 Introduction to Business

Law
Lecture 4 - Terms of a Contract
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Outline
• Before contract formation, what are terms?
▫ Representations vs Contract Terms
• After contract formation, what are the legal effects
of different types of contract terms?
▫ Express terms vs implied terms
▫ Conditions vs warranties vs innominate terms
▫ Exemption clauses
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Categories of Statements
• Parties to the contract will make statements during
the negotiation process. Not every statement has
legal effect.
• These statements may be classified as:
▫ Sales puffs: no legal effect
E.g. “The product will make you look 5 years younger.”
▫ Representations;
▫ Terms of the contract.
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Representations
• A representation is a statement of fact which aims at
inducing or persuading a party to enter into a contract.
• Representations >< Terms of a contract
• E.g. (before buying LB mini-bond): “Is the product
safe?”
• Banker: “Yes, it is a low-risk product.”
▫ Different legal effects: misrepresentation / breach of
contract
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Certain rules for distinction

• The time gap between the making of the statement and the final
contract
▫ Statements made in preliminary negotiations?
▫ Statements made at the time or near the time that the contract is
concluded?
• The importance of the statement in the minds of the parties
• Whether the maker of the statement is in a better position to
ascertain the accuracy of the statement
▫ Statements made by persons with special skill and
knowledge are more likely to be terms of a contract

• Where an oral contract is later reduced to writing, there is a

presumption that the written document contains all the terms of
the contract
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Classification of contract terms

Express vs Implied
• Express terms
▫ Terms expressly agreed, whether in writing or verbally
• Implied terms
▫ Terms implied by trade usage or custom (British Crane
Hire Corp Ltd. v. Ipswich Plant Hire Ltd. [1974])
▫ Terms implied by intention of the parties or business
efficacy (The Moorcock (1889))
▫ Terms implied by legislation
 E.g. Sale of Goods Ordinance
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Terms implied by trade usage or custom

• Must be usual practice and both parties know
• British Crane Hire Corp Ltd. v. Ipswich Plant Hire Ltd.
[1974]
▫ Both companies were in the business of hiring out
cranes
▫ I urgently needed a crane and hired one from B
▫ The crane sank out into marshy ground, and a dispute
arose as to who was liable to pay for the recovery of
the crane, which was not mentioned in the contract.
▫ Under the terms usually governing such
▫ contracts, I would be liable.
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Classification of contract terms

Conditions, Warranties and Innominate
terms
• Conditions – major terms
▫ Breach of which will entitle the innocent party to
repudiate the contract and claim damages
• Warranties – less important terms
▫ Breach of which will only give the innocent party to
claim damages
• Innominate terms – not to classify terms when the
contract is formed, but when a breach is taken place
▫ Hong Kong Fir Shipping Co Ltd v. Kawasaki Kinsen
Kaisha Ltd [1962]
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•
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1000 Pens – Innominate term

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Exemption Clauses
• A term in a contract which exempts one party’s
liability to certain extent.
• Exemption clauses create unfairness where parties to
the contract do not have equal bargaining power,
hence need to be controlled:
▫ Common law control;
▫ Statutory control.
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Overview
• For an exemption clause to be effective in HK, it must
satisfy the following three conditions (see p.146);
▫ It must have been incorporated as a term of the
contract; (rules established by case law) and
▫ Its wording must be clear and wide enough to protect
the party relying on it; and
 If there is any ambiguity in the wording, it will be
interpreted in favour of the injured party.
▫ It must not be in contravention of any provisions of the
Control of Exemption Clause Ordinance (CECO)
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Common law control

• Common law rules mainly concern whether the
exemption clause is part of the contract.
• A clause (i.e. a term) can be incorporated in a
contract by
▫ by signature;
▫ by reasonable notice;
▫ by past dealing;
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Signed v Unsigned Contracts

• Common law presumes once a party signs a contract,
he must have read, understood and accept the terms
of the contract.
• Exemption clause contained in a signed contract will
be a term of the contract.
▫ L’Estrange v Graucob Ltd (1934)
• If an exemption clause is not contained in a signed
contract, it can be incorporated as a term of the
contract by a number of ways. (see previous slide)
• (Note: A contract need not be signed.)
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Incorporation by reasonable notice

• In the event that entering into a contract does not
require signing a document, exemption clause may
be contained in a ticket or notice.
• In such a case, the exemption clause will be effective
only if the party trying to rely on it establishes that:
▫ the notice must be made to the other party before or
at the time of making the contract;
▫ it has taken reasonable steps to bring to notice of the
exemption clause to the other party.
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When to give notice?

• Olley v. Marlborough Court Hotel (1949)
▫ O visited the hotel and hired a room.
▫ When she reached her room she saw a notice on the
wall excluding the hotel from liability for loss of theft
of goods
▫ Her furs and jewels were stolen from the hotel room
and she sued for compensation.
▫ Held: the exemption clause in the notice was not
included in the contract. The contract had already
been made at the reception before she got into the
room.
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Steps taken to notify the other party

• Reasonable steps must be taken to notify the other party of
the exemption clause
• Thornton v. Shoe Lane Parking Ltd. [1971]
▫ Thornton received a ticket from an automated machine when he
drove into a car park.
▫ He did not read on the ticket the words “this ticket is issued
subject to the conditions of issue displayed on the premises”, nor
did he see the pre-printed conditions displayed on a pillar
opposite the machine and in the shroff’s office.
▫ One condition exempted all types of liability including injury to
the customer.
▫ Held: The parking company did not do what was reasonable to
give him notice of the exemption clause.
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Terms incorporated by previous dealings

• Previous dealings must be long and consistent and on the
basis that the parties know a particular term
▫ J Spurling Ltd v Bradshaw [1956]
 D had used P’s services for a long time. D never bothered to read
the contract terms (including exemption clause) in previous
transactions.
 Though D did not sign any contract for the transaction at issue, the
court held that exemption clause would be implied into the present
contract due to previous dealings.
▫ Hollier v. Rambler Motors (AMC) Ltd. [1972]
 Whether an exemption clause can be implied by previous dealings?
 Four transactions over the past five years was insufficient to draw an
inference that the party intended the term to apply to subsequent
transactions.
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Statutory control
• Control of Exemption Clauses Ordinance (CECO)
▫ Applies to “business liability” (s.2 CECO)
▫ Business liability means:
▫ liability for breach of obligations or duties arising
from:
 Things done or to be done in the course of a business; or
 The occupation of premise used for business used for
business purposes of the occupier.
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For liability related to negligence

• Any exemption clause that excludes or limits liability
for personal injury or death is invalid – s. 7(1).
▫ See, Chan Sui Ying v HYFCO Travel Agency Ltd [2002]
• Any exemption clause that excludes or limits liability
for other losses is invalid – unless such terms are
reasonable – s. 7(2).
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The test of reasonableness

• To be decided by the court. CECO gives some
guidelines:
▫ Whether the clause is fair;
▫ Whether the language used is understandable;
▫ Whether the two parties have equal bargaining power;
▫ Etc.
• See, e.g.
▫ Always Win v Autofit
▫ Bewise Motors v Hong Kong Container Services Co Ltd