#7419 - Construing The Terms And Implied Terms - Contract Law

Class 5- Construing the terms and implied terms

Construction:

• Construction is where the parties intentions are considered objectively and the court considers the meaning of the terms which would be understood by reasonable persons in the position of the parties and the actual opinions of the parties are irrelevant.

• Disputes arise because parties cannot foresee all of the events that may affect the contract and terms that appeared adequate are ambiguous or vague in relation to the dispute.

• Everybody agrees that if a document is meant to contain all the express terms of the contract then everyone agrees the parol evidence rule applies and it governs the construction of the document (i.e. what evidence is admissible and what is not on questions of construction). You can’t get evidence from outside the document. Designed to prevent this extrinsic evidence being applied:

  • Extrinsic evidence of what passed between parties in negotiations.

  • Uncommunicated actual intentions of one of the parties.

  • Evidence of the party’s behaviour of their subsequent conduct after the contract.

• Are usually questions about the legal affect of the language being used.

• E.g. the parties are in dispute about whether a promise in the document should be construed as a minor term or an express term that allows termination for any breach. Is it a vital term or a minor term? This is a question of construction.

Objective approach:

• The parties intentions are determined objectively. They consider what the words of the contract would convey to a reasonable person.

Clear express words will prevail:

• In cases of ambiguity in the express terms, courts will favour an interpretation which produces a reasonable commercial result on the ground that it was what the parties probably intended.

Exclusion clauses/ exemption clauses:

• Particular words are interpreted in the light of what they are mean to construe. If words in a document are ambiguous, the meaning in the document is favoured that is least favourable to the person who put forward the document. If the document has more than one meaning, the court will try to interpret it in the way that makes the whole transaction proceed in the most commercial way.

• An exemption clause that does not expressly remove liability for negligence it will not unless negligence is the only thing it could be referring to.

• Exemption clauses are not read restrictively in Australia. They have legislation to get rid of the unjust exemption clauses and so they don’t need to read them down artificially.

• A term of contract that attempts either:

  • To modify the principal obligation (s) arising under a contract of a particular type.

  • Or to limit or exclude liability of a party which would otherwise arise as a result of a breach by the party of his primary obligations to perform the contract.

• It allocates risk to the other party.

• An indemnity clause seeks to exclude the liability of one party by imposing on the other a duty to indemnify the former in respect of any loss incurred.

• There can be issues as to whether a third party can claim benefit to an exemption clause in a contract made by two other parties. The clause must be shown to be incorporated into a contract. An overly broad exclusion clause may empty a contract of all content.

• The Trade Practices Act 1974 (Cth) renders terms void if they try to exclude, restrict or modify rights conferred under the legislation.

• Three questions need to be asked about whether an exclusion clause limits liability:

  • Was the exclusion clause properly incorporated into the contract?

  • Was the person seeking to rely on the protection of the clause a party to the contract?

  • Does the clause apply to reduce or exclude liability in relation to the issue of dispute?

• Clear words are needed to absolve the other party from the consequences of their own negligence. E.g. ‘under no circumstances’ or ‘howsoever caused’.

• Clear words must also be given to protect the party from a deliberate breach.

Contra proferentem:

• If the exemption clause is ambiguous it may be construed as contra proferentem, where if there is more than one meaning the court will be interpreted against the interests of the party relying on the clause.

Four corners rule:

• The four corners rule means that courts are unwilling to construe an exclusion clause as excluding liability for acts that are not authorised by the contract.

  • You can’t break the contract and seek to rely on the conditions that were only intended to protect you if you carried out the contract in the way you contracted to do it.

  • E.g. the parking station has a clause limiting liability for negligence ‘howsoever caused’. They move a car to one side of the station and they damage it by accident. Or the employees decide to take the car for a joy ride. The clause does not cover the second one. There is only no liability for any negligence when doing acts in the course of performance of the contract. Joy riding was never envisaged in the course of performance.

Deviation rule:

• A carrier cannot rely on an exclusion clause to exclude liability for loss occurring during a deviation from the contractually agreed voyage or route.

Implied terms:

• The common law recognises four main classes of implied terms:

  • Terms implied in law.

    • Not based on the intentions of the parties.

    • They are implied in all contracts of a particular class or description.

    • The term can be defined as implied by law if it is applicable to a definable class of contractual relationship. The term must be suitable to be recognised as implied in all contracts of that class. This is determined by a test of necessity.

  • Terms implied in custom.

    • Where a term is custom then everyone making that contract can be reasonably presumed to have imported that term into the contract.

    • It does not need to be universally accepted but it must be well known. It will not be implied if it is contrary to the express terms of the agreement. A person may be bound even if they do not know of the custom.

  • Terms implied in fact.

    • Terms that are tailored and unique to the contract in question. They are based on the presumed intentions of the parties.

    • The term must be reasonable and equitable, necessary to give business efficacy to the contract (whether reasonable people see the term as necessary to enable the contract to operate in a business like manner), it must be so obvious that it goes without saying, it must be capable of clear expression, it must not contradict any express term of the contract.

    • In informal contracts there is a higher standard to imply a term in fact. All 5 requirements must be satisfied. The court must be flexible and imply a term by reference to the party’s intentions and to give effective operation to the contract.

  • Implied duty of good faith.

• Implied terms will be excluded where they are gap fillers or they are inconsistent with the express terms of the contract.

The trade Practices Act (page 1058):

• Ss. 68 and 68 A as they apply to ss. 69-74.

• Section 68 says that a contract provision is void if it excludes, restricts or modifies the provisions of the Division, the exercise of a right of the provision or any liability of the corporation for breach of a condition or warranty implied by such a provision.

• Section 68A subsection 3 states that whether reliance on a term of a contract is fair or reasonable depends on the strength of the bargaining positions between the coroporation and the buyer, whether the buyer received inducement to agree to the term, whether the buyer knew of the existence and extent of the term and whether the goods were adapted to the buyer’s special order.

  • Subsection 1 states that a term in a contract for the supply by a corporation of goods and services other than that ordinarily acquired for personal, domestic or household consumption is not void under section 68.

• Section 69 states in subsection 3 (a) that there is an implied warranty that all charges known to the supplier have been disclosed to the consumer before the contract is made. Subsection b says the consumer’s quite possession of the goods should not be disturbed.

• Section 70 (1) states that there is an implied condition that the goods will correspond to the description.

• Section 71, subsection one says goods must be or a merchantable quality and any defects should be drawn to the consumer’s attention before the contract is made. Subsection 2 states that there is an implied condition that goods will reasonably fit the purpose they are known to be acquired for.

• Section 74 states that in subsection 1 that services must be fit for the purpose that they are supplied.

• Section 68-74. Prohibition on misleading or deceptive conduct.

• Division 2 implies minor terms and warranties into some contracts for the sale of goods.

• Section 68 and 68A tells you when the terms can be excluded or limited- know these.

• Section 68 says that any provisions that try to exclude, restrict or modify liability imposed by the provisions in this division are void. However in section 68A, liability can be modified through an exclusion clause if the goods or services are not of a kind ordinarily acquired for person, domestic or household consumption. In a contract that has a limitation clause for goods or services and that comply under section 68A, you may be able to have the clause in relation to the replacement, repair, payment of replacing or the payment of having fixed the goods but it must be reasonable. But even if you fall under 68A, you can challenge the limited liability clause by arguing it is unreasonable.

• Section 69 says that there are 3...