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A contract is any promise or set of promises made by one party to another for the breach of which the law provides a remedy. The unique nature of law of contract is that the parties themselves generally create the obligations and liability that form the substance of their relationship. These individually agreed obligations and laibilities are called “terms of the contract”.


The major elements of the formation of a contract are uasually identified as the following

· Agreement;Consideration

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· Intention to create legal relations;

· Certainty of terms.

Offer, accecptence and consideration together define a process which, to make a contract, requires

· At least two parties;A promise by atleast one of them;

· An exchange between them, either promise for promise (bilateral contarct) or promise for act (unilateral contarct).

Exchange. There can be no offer, acceptance or consideration unless the parties intend to make an exchnage. According to a classical formula, the relation of a quid pro quo msut subsist between the promises of each party (in a bilateral contract) or the promise of the one and the act of the other (in a unilateral contract).

Offer. To shaow that party made an offer it is necessary to identify an express or implied promise by that party to perform a specified act in exchange for another party’s

· Specified counter promise;

· or specifies act.

Acceptence of an offer occurs when an offeree makes the specified counter promise or perform the specified act.

Consideration. In a bilateral contarct, each promise is the consideration for the other promise. In a unilateral contract, the promise is the cosideration for the act and the act is the consideration for the promise. But neither a promise nor an act is consideration in the legal sense unless it has some value, if a promise or act has no value in law, it is not good consideration even if it is the promise or act specified by the other party.

Intention to create legal relations need not to be present subjectively. In the law of contracts intention or intentional states are usually estableshed objectively, that is, a party will be held to that intention which would be reasonably inferred in the circumstances.

Certainity of terms required only for essential terms. The court has wide power to imply terms and to fix meaning. These promises may be express (either written or oral) or may be implied from circumstances. Once it has been established that a contract exist between the parties the precise contents of that contract must be determined. The fact that a contract is in existence does not necessarily mean that its provisions are clear and beyond dispute. The parties may disagree on what was expressly agreed upon.


The terms on which the parties specifically agree are generally known as the express terms of the contract. A dispute between the parties with respect to the express terms of their agreement may involve Any, and possibly all, of the following questions

· What statements did the parties make to each other, either orally or in writing;

· Were these statements intended to become part of the express terms of the contract;

· What does a term acually mean; and

· What importance is to be attached to a term?


The parol evidence rule is that where the record of a transaction is embodied in a document, extrinsic evidence is not generally admissible to vary or interpret the document or as a substitute for it. There are obvious grounds of convenience for the application of the parol evidence rule to contracts certainty is promoted by holding that parties who have reduced a contract to writing should be bound by the writing and by the writing alone. On the other hand, the parol evidence rule will commonly be invoked where a dispute arises after the time of contracting as to what was actually said at that time; and in such cases one of the parties could feel aggrieved if evidence on the point were excluded merely because the disputed term was not set out in the contractual document. Evidence extrinsic to the document is therefore admitted in a number of situations, which fall outside the scope of the rule.



If the written agreement was not intended to be the whole contract on which the parties had actually agreed, parol evidence is admissible.

J Evans And son v Andrea Merzario Ltd [176] All ER 0.


Parol evidence may be given about the validity of the contract, eg to establish the presence or absence of consideration or of contractual intention, or some invalidating cause such as incapacity, misrepresentation, or mistake.


Where the contract is silent on a matter on which a term is normally implied by law, parol evidence may be given to support, or to rebut, the usual implication.

Burges v Wickham (186) B & S 66


Parol evidence can be used to show that the contract does not yet operate, or that it has ceased to operate.

Pym v Campbell (1856) 6 E & B 70.


Parol evidence can be used to show in what capacities the parties contracted, eg where a person contracts ostensibly as principal, evidence is admissible to prove that he really acted as anothers agent so as to entitle the latter to sue.

Humfrey v Dale (1857) 7 E & B 66).


where the words of the contract are clear, parol evidence cannot be used to explain their meaning, unless they have a special meaning by custom. Parol evidence can, on the other hand, be used to explain words or phrases which are ambiguous, or which, if taken literally, make no sense, as well as technical terms.


Evidence of custom is admissible to annex incidents to written contracts in matters with respect to which they are silent. (Hutton v Warren (186). Custom can also be used as an aid to construction, eg in Smith v Wilson (18) evidence was admitted of a local custom to show that 1,000 rabbits meant 1,00 rabbits.


A document may fail in accurately recording the true agreement. Equity allows such a written contract to be rectified by parol evidence.


Even though parol evidence cannot be used to vary or add to the terms of a written contract, it may be possible to show that the parties made two related contracts, one written and the other oral, i.e. a collateral contract.

City & Westminster Properties v Mudd [15] Ch 1.


The first step in determining the terms of a contract is to establish what the parties said or wrote. Statements made during the course of negotiations may traditionally be classed as representations or terms and if one turns out to be wrong, the plaintiffs remedy will depend on how the statement is classified

· A representation is a statement of fact made by one party, which induces the other to enter into the contract. If it turns out to be incorrect the innocent party may sue for misrepresentation.

· Breach of a term of the contract entitles the injured party to claim damages and, if he has been deprived substantially what he bargained for, he will also be able to repudiate the contract.

· If a statement is not a term of the principal contract, it is possible that it may be enforced as a collateral contract How can the courts decide whether a statement is a term or a mere representation? It was established in Heilbut, Symons & Co v Buckleton [11] that intention is the overall guide as to whether a statement is a term of the contract. In seeking to implement the parties intentions and decide whether a statement is a term or a mere representation, the courts will consider the following four factors


The court will consider the lapse of time between the making of the statement and the contracts conclusion if the interval is short the statement is more likely to be a term.

Routledge v McKay [154] 1 WLR 615


The court will consider the importance of the truth of the statement as a pivotal factor in finalising the contract. The statement may be of such importance that if it had not been made the injured party would not have entered into the contract at all.

Couchman v Hill [147] 1 All ER 10.


The court will consider whether the statement was omitted in a later, formal contract in writing. If the written contract does not incorporate the statement, this would suggest that the parties did not intend the statement to be a contractual term.

Routledge v McKay [154] 1 WLR 615


The court will consider whether the maker of the statement had specialist knowledge or was in a better position than the other party. Oscar Chess v Williams [157] 1 All ER 5


Traditionally terms have been divided into two categories conditions and warranties.

(A) CONDITIONS a condition is a major term, which is vital to the main purpose of the contract. A breach of condition will entitle the injured party to repudiate the contract and claim damages. The injured party may also choose to go on with the contract, despite the breach, and recover damages instead. See

Poussard v Spiers (1876) 1 QBD 410.

(B) WARRANTIES A warranty is a less important term it does not go to the root of the contract. A breach of warranty will only give the injured party the right to claim damages; he cannot repudiate the contract.

Bettini v Gye (1876) 1 QBD 18.


It may be impossible to classify a term neatly in advance as either a condition or a warranty. Some undertakings may occupy an intermediate position, in that the term can be assessed only in the light of the consequences of a breach. If a breach of the term results in severe loss and damage, the injured party will be entitled to repudiate the contract; where the breach involves minor loss, the injured partys remedies will be restricted to damages. These intermediate terms have also become known as innominate terms.

Hong Kong Fir Shipping Co v Kawasaki


In most contracts the primary obligations of the parties are contained in express terms. In addition there are various circumstances in which extra terms may be implied into the agreement. Implied terms are those, which are declared to be part of the contract even though the parties have not consciously included them. The court will imply a term into a contract if they believe that the addition is necessary to make the contract truly reflect the intentions of the parties. The decision to do so will be based upon an examination of the express terms of the contract and the circumstances surrounding its formation. Certain terms may be implied into particular contracts as a result of legislation. In such cases, the court are bound by the legislation and must treat the contract as containing the statutory implied term irrespective of the perceived intentions of the parties.

The cases indicate that there are four main circumstances, which allow the courts to imply term into a contract. These are as follows

· Where there have been past dealings between the parties;

· Where there is a custom or trade usage concerning the subject matter of the contract;

· Where it is necessary to give business efficacy to the contract; and

· Where a term is implied by statute.


The court will often look to the past dealings between the parties (if there were any) as an aid to interpreting their present conduct. If they have always dealt with each other on particular terms but for some reason one or more of the usual terms are omitted from the current contract, the court is inclined to imply the missing term or terms into present contract.

In Henry Kendall & Sons V William Lillico & Sons [16] case, a verbal contract was followed the day after with a note containing the terms of the contract. The parties had been dealing with each other three years and there had been around 100 such notes. The recipient had known of the written conditions on the note and had never queries or even read them. It was held that the terms on the note had been incorporated through the parties’ established course of dealing.

Hollier V Rambler Motors ( AMC) [17] is another example of the courts’ general hostility to exclusion clause, in that a court is likely to be reluctant to use past dealings to imply such a clause into a current contract, especially if the parties to that contract are not of equal bargaining power.


The terms of a contract may have been negotiated against the background of the customs of a particular locality or trade. The parties automatically assume that their contract will be subject to such customs and so do not deal specifically with the matter in their contract.

Con-Stan Industries Of Australia Pty V Norwich Winterthur Insurance Ltd [186] 160 CLR 6 Con-stan industries engaged Bedford Insurances as its insurance broker. Pursuant to this engagement, certain insurances were affected with Norwich Winterthur. Con-stan Industries paid the premiums for such insurances to Bedford, however Bedford did not forward the premiums to Norwich, which later sued Con-stan for the premiums, which Bedford had failed to pay over.

In the course of its judgment the high court indicated that the cases have established the following propositions in regard to the implication of terms on the basis of trade custom or usage

· The existence of a custom or usage that will justify the implication of a term into contract is a question of fact.

· There must be evidence that the custom relied on is so well known and acquiesced in that everyone making a contract in that situation can reasonably be presumed to have imported that term into the contract.

· A term will not be implied into a contact on the basis of custom where it is contrary to the express term of the agreement.

TERMS IMPLIED TO GIVE A CONTRACT BUSINESS EFFICACY The term may imply into a contract if that is necessary to give it business efficacy, that is, to give it the effect intended by the parties. The court usually adopts this method when there are no past dealing or customs or trade usages upon which they can rely. It is a discretionary power which the court exercise with considerable caution; basically, terms will be implied on this ground only when it is necessary to overcome an ‘oversight’ of the parties which, if left uncorrected, would defeat their presumed intentions

The courts will be prepared to imply a term into a contract in order to give effect to the obvious intentions of the parties. Sometimes the point at issue has been overlooked or the parties have failed to express their intention clearly. In these circumstances, the court will supply a term in the interests of business efficacy so that the contract makes commercial sense.

Where a court is asked to imply a term into a contract, it must ascertain, as objectively as possible, the parties’ presumed intention when they agreed. The early test used to determine this was what came to be called the “officious bystander” test. In Shirlaw v Southern Foundries (16) Ltd [1] case we see “prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that, if’ while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common’ oh, of course’.”

An early example of a term being implied into contract on this basis can be found in

The Moorcock (188) 14 PD 64.


The courts not only imply the terms into the contract on the basis of previous dealings, custom and trade usage and business efficacy, statute is playing an vital role in the area of implied terms and their exist several statute which import terms into contracts irrespective of the intentions of the parties of the contract.


The Goods Act 158 is important from the point of view of non-consumer transactions in Victoria, but can be avoidable by the seller of goods.


· Implied condition is that the seller has the right to sell or will have it at the time of property to pass;

· An implied warranty that the buyer will enjoy quite possession;

· An implied warranty that there is no undisclosed encumbrance or charge affecting the goods sold.


· An implied condition is that the goods will correspond with the description

· Implied condition as to quality and fitness

· An implied condition that the goods will be reasonable fit for their purpose

· An implied condition that the goods be of merchantable quality;

Implied undertaking in sale by sample

· An implied condition that the bulk shall correspond with the sample;

· An implied condition that the buyer shall have a reasonable opportunity of comparing the bulk with the sample;

· 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 implied terms mentioned above are mostly conditions, but also includes some warranties. The intention by the original legislation was to apply in all sales of goods unless the parties showed the contrary intentions.


In Australia, the main statute which imply terms into contracts for sale of goods are Commonwealth Trade practice act 174 and the sales of Goods act of each state and territory.


Basically, the implied terms contained in the TPA apply only to the contracts between a ‘consumer’ and ‘corporations’.

A ‘consumer’ is defined in 4B1) of the TPA as follows

For the purpose of this act, unless the contrary intentions appears

A person shall be taken to have acquired particular goods as a consumer if, and only if

(i) The price of the goods did not exceed the prescribe amount; or

(ii) Where that price exceeded the prescribed amount the goods were of a kind ordinarily acquired for personal, domestic or household use or consumption, or the goods consisted of a commercial road vehicle , And the person did not acquire the goods, or hold himself out as acquiring the goods, for resale or for the purpose of using them up or transferring them, in trade or commerce, in the course of a process of production or manufacture or of repairing or treating other goods or fixture on land.

The Vendor Because of the limitations imposed on the legislative power of the Commonwealth government, the implied terms mainly apply if the consumer purchases from a corporation.


The relevant implied terms can be found in Pt V Div of the TPA. They are as follows;


(i) In every contract for the supply of goods by a corporation to a consumer, there is

(a) An implied condition that, in the case of a supply by way of sale, the supplier has a right to sell the goods, and in the case of an agreement to sell or hire purchase agreement, the supplier will have a right to sell the goods at the time when the property is to pass;

(b) An implied warranty that the consumer will enjoy the possession of the goods

except so far as it may lawfully be disturbed by the supplier or by another person who is entitled to the benefit of any charge or encumbrance disclosed or known to the consumer before the contract is made; and

(c) In the case of a contract for the supply of goods under which the property is to

pass or may pass to the consumer, an implied warranty that the gods are free, and will remain free until the time when the property passes, from any charge or encumbrance not disclosed or known to the consumer before the contract is made.


Where there is a contract for the supply by a corporation in the course of business of goods to consumer by description, the implied term is that the goods will correspond with the description.


(1) There is an implied condition that the goods supplied under the contract for the supply of the goods are of merchantable quality, exception apply if

(a) As regard defects specially drawn to the consumer before the contract is made; or

(b) If the consumer examine the goods before the contract is made, and the examination ought to reveal the defect.

() It is an implied condition that goods supplied in the course of a business must be reasonably fit for the buyer’s purpose, where Is purpose is made known, expressly or by implication.


Graw, S 00, An introduction to the law of contract, 4th edition, Lawbook Co, New South Wales.

Seddon, N C 00, Law Of Contract, 8th edition, LexisNexis ButterWorth

Lawson, Richard, Business Law For Business & Marketing Students, 00, rd edition, Butterworth Heinemann.

Ryan, H, Gibson, A, Rigby, S & Tamsitt, G 001, Commercial law in principle, Lawbook Co, New South Wales.

Parker, David, Basic Law, 4th edition, 000

Khoury D, Understanding Contact Law, 16, 4th edition, Butterworths.







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