In order to be effective a term must be incorporated into the contract. The simplest method of incorporation is by signature. Incorporation by notice is also possible as long as the notice was given at or before the time of contracting, in a document with contractual effect and reasonable steps have been taken to draw this to the counterparty's attention. Finally, a term can be incorporated by a consistent course of dealings.
A simple illustration of how important incorporation can be is given by Poseidon v Davies Turner [1996] 2 Lloyd's rep 388, where an employee faxed a contract which said at the bottom "the only conditions on which we transact business are on the reverse side". The employee failed to fax the reverse side and the terms had not been incorporated.
In general a party is bound by their signature regardless of whether they read the terms even though this can lead to harsh results sometimes. In L'Estrange v Graucob [1934] 2 KB 394, the defendants visited the claimant and asked her to by a cigarette machine for her cafe which she did and signed a contract which had a clause saying "any express or implied condition, statement, warranty, statutory or otherwise not stated herein is hereby excluded". The machine broke down and she sued the defendants arguing that it was not fit for purpose. The D argued that the contract contained an exclusion which covered fitness for purpose. The Court of Appeal held that she had signed the contract and was bound but did accept that there can be exceptions. The first is the narrow non est factum doctrine which acts as a defence where the defendant can show that through no fault of their own they had no understanding of the document they were signing without being given an explanation. The cause may be poor education, illness or innate incapacity: Saunders v Anglia Building Society [1971] AC 1004. The second exception is misrepresentation. The third exception is that the document signed must purport to have contractual effect not simply administrative effect, such as a time-sheet: Grogan v Robin Meredith [1996] CLC 1127. An administrative document is not a part of the contract but some secondary document which, for whatever purpose, assists in tracking hours, or units etc.
It is important to note in respect of exclusion clauses contained in contracts, that even though it may be signed the Unfair Contract Terms Act 1977 may invalidate the clause if it is unreasonable. So L'Estrange would almost certainly be decided differently.
In order to incorporate terms by notice three requirements must be satisfied:
• The notice must have been given before or at the time of contracting,
• The terms are contained or referred to in a document having contractual effect,
• Reasonable steps have been taken to bring the terms to the attention of the other party.
As regards (1), it may be necessary to apply the rules of offer and acceptance to determine when the contract was completed. In Olley v Marlborough Court [1949] 1 KB 532 the relevant notice, an exclusion clause, was in the hotel room. The court held that this was not incorporated as the contract between the guest and hotel was concluded before she set foot in the hotel room. Similarly in Thornton v Shoe Lane Prking [1971] 2 QB 163 there was a machine dispensing tickets after the customer had paid and an exemption clause in a car park which was only seen by customers after entering. The contract was concluded when the customer paid and the terms on the ticket or on the wall were not incorporated. By the time that the money has been paid the customer is committed and there is no potential to negotiate or disagree with the automatic ticket machine. The contract was concluded when the money was paid as that was the last time the customer had the choice of accepting/rejecting any terms which were displayed to them at that stage.
The second requirement is that the terms are contained or referred to in a document having contractual effect. So terms contained in a receipt are not valid: Chapelton v Barry UDC [1940] 1 KB 532, where a ticket given to someone who hired a deckchair was not a contractual document.
The third requirement is that reasonable steps have been taken to bring the terms to the attention of the other party. This requirement has generated considerable case law as it is not always possible to place notices in the most visible of places where it is certain that they will be seen and determining the minimum standard required has required several judicial opinions. In Interfoto Picture Library v Stiletto Visual Programmes [1989] QB 433, Court of Appeal, the D wanted some photos from C's photo library which D sent to C later in the day. The delivery note stated that the date for return was 19 March. At the bottom of the note there was a large heading CONDITIONS "fairly prominently printed in capitals" under which was a term saying that for every day the photos were late ?5 per photo would be charged. D ended up forgetting about the photos and did not return them until March after several calls from C. C sent an invoice for ?3,783.50 which D refused to pay. The Court of Appeal held that the term had not been incorporated. The Court held that the significance of the third requirement did not focus on the party who received the notice (though if they had actual knowledge they would be bound: Parker v South Eastern railway (1877) 2 CPD 416) but on the party who made the notice. The question is whether they took reasonable steps to bring the notice to the attention of the other party.
One obvious factor is location. A notice on the back of a document is unlikely to be incorporated unless there is an indication on the front: Henderson v Stevenson (1875); whereas where the terms are on the front it is likely they have been incorporated: Thompson v London, Midland and Scottish Railway [1930].
O'Brien v MGN [2002] CLC 33, the C thought he had won a prize in a scratch card game in D's newspaper. In actual fact a mistake had been made by D and instead of issuing 2 winning cards they had issued 1,472. D refused to pay out any money and relied upon a rule of the competition which said that if more prizes were claimed than were available in any prize category, a separate draw would take place for the prize. The question was whether this rule was incorporated. The scratch card said "Normal Mirror Group rules apply" beside the hotline phone number. The trial judge held that the offer of the prize was accepted when the C called the telephone number to say he had a winning card. The question was whether the reference to the normal rules was enough to incorporate the normal rules which were stated in the newspaper. The Court of Appeal held that the reference was neither onerous nor unusual. The D did "just enough" to bring the terms to C's attention.
So, in conclusion, factors to be considered are:
• Location
• Prominence i.e. bold, underlining etc
• Is it onerous
• Is it unusual
• If it's a reference to terms, how easily can they be found
A term can be incorporated if it is regularly used by the parties or as a result of a custom within an industry. McCutcheon v David MacBrayne [1964] 1 WLR 430, HL, C asked his brother in law to ship his car from an island to the UK mainland. The brother in law took the car to the Defendant's office where he was quoted a price for shipping the car. He paid and was given a receipt. The vessel sank as a result of the defendant's negligence. C sued for negligence and D relied on an exclusion clause. D's usual practice was to ask the customer to sign a notice agreeing to be bound by the terms and conditions but had failed to do so on this occasion. The brother in law said that he had shipped goods with D before and had been asked to sign the agreement but had never read it. HL held that the terms had not been incorporated. In order to establish a course of dealing there must be regularity and consistency of dealing between the parties. The main downfall of the present case was that the dealings in the past had been inconsistent, as the brother in law had not always been asked to sign one. In Hollier v Rambler [1972] the parties had about one dealing per year and this was insufficient to establish regularity.
Terms can be incorporated into contracts by three sources: statute, custom or case law. The basis on which the courts can imply terms is controversial. Traditionally the justification has been that they were giving effect to the presumed intention of the parties. In these cases the idea is that it is necessary to presume the term was intended otherwise the contract would not function properly. However, not all terms implied by the courts have only been implied when necessary.
Implied terms are important in practice such as, for example, ss12-15 Sale of Goods Act 1979. These implied terms apply to any contract for the sale of goods and are designed to bring clarity to contracts, efficiency and protection for the parties in involved. Section 12 provides that the at the time of the sale the seller guarantees that he has a right to sell the goods free from any charges unless they were drawn to the buyers attention. This provides the buyer with a cause of action against a seller who does not have the right to sell the property (i.e. they will usually be able to recover the price of the goods). Section 13 provides that where the goods are sold by description (i.e. the buyer did not examine them) there is an implied term that the goods will correspond with the description. This provides protection for the buyer. Section 14(2) implies a term that the goods must be of satisfactory quality (which includes fit for purpose) if they are sold in the course of business. As is made clear in 14(2C) this does not extend to any defects brought to the buyers attention or which the buyer ought to have noticed. Again, this implied term lends certainty to the parties by letting them know that in all contracts in the course of business, goods sold must meet this minimum standard. It also provides protection for a buyer against defective goods when the seller may have all of the bargaining power; the buyer no longer has to seek a specific undertaking from the seller as to quality. Section 15 implies two terms: firstly that goods sold by sample must conform with that sample and, secondly, the goods must be free from any defect making them unsatisfactory in quality which would not be apparent from the sample.
The importance of these terms is proved by the fact that Parliament has put restrictions on when they can be excluded. Section 12 cannot be excluded at all. They cannot be excluded at all when dealing with consumers (i.e. sale in the course of business to a buyer who is not acting in the course of business) and can only be excluded if reasonable in other cases.
However, the question remains, what is the basis on which Parliament introduced these terms? Is it that there is a presumed intention in all contracts that these terms exist? This seems unlikely. Similarly it is unlikely that the justification is necessity and contract law would continue to function well without them, as it did before them. The likely basis is public policy: the protection of buyers.
Terms may be implied because of a common custom in a certain industry. In Hutton v Warren (1836) 1 M&W 466 it was said that parties do not always express the whole of the terms by which they intend to be bound in the contract but instead intend for there to be reference to common customs in the industry. In order to form the basis of an implied term these customs must be so well known that "an outsider who makes reasonable enquiries could not fail to be made aware of it": Kum v Wah Tat Bank [1971] 1 Lloyd's Rep 439. This does not mean that the parties themselves had to know about it.
Another way of saying that the custom must be well-known is that it must be "notorious, certain and reasonable". In Cunliffe-Owen v Teather & Greenwood [1967] 1 WLR 1421, Thomas J stated that 'certain' means it is a clearly established practice. Do the experts in that field know of the term and treat it as implied. If parties in that field use arrangements and compromises this suggests that there is no implied term. The particular custom must have binding effect in order to be considered an implied term. Repetition in itself is insufficient, it has to be shown that the custom is being repeated because of its binding effect not out of courtesy or ease. The evidence of an expert witness will most likely be required by the court. 'Notorious' means that it is so well known in that market that people use it as an implied term. The burden of proving it is an implied term falls on the party relying on it. If the contract contains any express terms which contradict the alleged implied term, this will most likely be fatal to case.
It is possible to divide terms incorporated by the courts into two categories: terms implied in fact and terms implied in law. In the latter case, the term will be implied in every contract of that kind, whereas in the former case the term will only be implied where the facts of the case give rise to a need i.e. where there is evidence that it was an unexpressed intention of the parties. The importance of the distinction is that the test seems to be lower for a term to be implied in law, where it is only reasonably necessary, whereas for terms implied in fact it must be necessary. However, the distinction between terms implied in law and in fact is not always easy to draw. The case law below reveals two main tensions: the first is whether there should be a distinction between terms in law and in fact and the second is whether the overall test for implying a term should be based on reasonableness or on necessity.
The first case - The Moorcock - is the most historically significant and concerns a term implied in fact. The court prefers a necessity to reasonableness. In The Moorcock (1889) 14 PD 64, Court of Appeal, the Defendants agreed to allow the Claimant to unload his vessel at their wharf. While the vessel was moored the tide fell and the uneven conditions of the river bed damaged the ship. The court held that the D was liable because there was an implied term in the contract that they would take 'reasonable care to ascertain that the bottom of the river was in such a condition as not to endanger a vessel using the wharf in an ordinary way'. The case was appealed. Two important points emerge from the judgment. The first is the basis for implying the term, and the second is the test for when a term will be implied. As regards the first, the Court of Appeal held that there was indeed an implied term in the contract and that the term was based on the presumed intention of the parties as well as on 'reason'.
As regards the test, the court held that the test is based on the need to give 'business efficacy' to the contract which is a test based on necessity rather than reasonableness. The question is: is it necessary to imply a term in order to make this contract work i.e. to give it business efficacy. However, as a criticism of the court, was it really necessary that the wharf owner bears the risk of damage rather than the ship owner? If wharf owners didn't accept the risk there would most likely be little change in commerce since ship owners have to dock their vessels somewhere and if there is no guarantee of safety, one wharf is as good as another.
In Shirlaw v Southern Foundries [1939] 2 KB 206, it was said that a term could never be implied unless it was obvious to both parties so that if a bystander suggested it to the parties at the time of the contract they would both say "yes of course that is included". This has been called the 'officious bystander test' and emphasises that the test is a high one. The question is not whether it is reasonable to imply a term but whether it is such a necessary term that both parties would have considered it obvious and necessary to the contract. In Spring v National Amalgamated Stevedores [1956] 1 WLR 585, it was held that the Claimant's ignorance of the effect of a certain term meant that he would not have answered 'yes of course' to the officious bystander.
However, the idea that a term can only be implied when necessary was challenged by Lord Denning in the leading modern case Liverpool City Council v Irwin [1976] QB 319. In that case the D were tenants in a tower block in Liverpool. The Claimant city council were the landlords. D stopped paying rent for their maisonette and C brought an action for possession and D counterclaimed for the nominal figure of ?10 for failing to keep common parts of the building in a state of repair. The C denied that there was any implied term to keep the common parts in repair. D won at trial and but lost in the Court of Appeal (Lord Denning dissenting). D appealed to HL who held that there was an implied term to take reasonable care to keep the property in repair but that there had been no breach on the facts. Lord Wilberforce stated that Lord Denning's test of reasonableness was far too expansive and that necessity must always be the touchstone. He continued that here must indeed be an implied term for the landlord to keep the common parts in a state of repair as they were the only access to the building but disagreed with Lord Denning's reasonableness test. He stated:
"In my opinion such obligation should be read into the contract as the nature of the contract itself implicitly requires, no more, no less: a test, in other words, of necessity."
The common parts of the building provided essential access and thus there repair was necessary. However, why if the test was necessity did the court not simply apply The Moorcock test? The reason is because The Moorcock allows terms to be implied if necessary to give business efficacy i.e. when both parties would say yes to the officious bystander. The situation here is not one of obvious business efficacy and the chances are both parties would not have answered affirmatively to the officious bystander.
Despite the HL disagreeing strongly with Lord Denning's test of reasonableness, arguably the necessity test is mixed with reasonableness. As P S Atiyah has said,
"It is not necessary to have lifts in blocks of flats ten storeys high (indeed high rise buildings existed long before lifts were invented), though it would no doubt be exceedingly inconvenient not to have them. So 'necessary' really seems to mean 'reasonably necessary', and that must mean 'reasonably necessary having regard to the context and the price'. So in the end there does not seem to be much difference between what is necessary and what is reasonable."
This case is most often regarded as involving a term implied in law since the term will be implied into all comparable landlord & tenant contracts, rather than a term in fact only arising on the particular facts on the case. The officious bystander test only applies on latter cases.
Scally v Southern Health and Social Services Board [1992] 1 AC 294, HL, C sued their employers for breach of contract in failing to inform them about their right to purchase additional years of contribution to their pension scheme following a change in the law. The advantageous price only lasted 12 months. The Claimants advised that this amounted to a breach of an implied term within the employment contract. HL held that there was indeed such an implied term and that it imposed a duty to take reasonable steps to inform employees of their rights which they could not reasonably discover on their own. In so holding, Lord Bridge stated that it was necessary to imply such a term for reasons beyond mere business efficacy. It was not, however, strictly one of necessity. As Atiyah commented on Irwin v Liverpool CC , the court considers the wider context and when it says 'necessary' it means reasonably necessary. The court will take "wider considerations" into account when making its decision.
(1a) It must be necessary to give business efficacy: use officious bystander test (terms in fact)
- OR -
(1b) It must be necessary given the context (terms in law) - i.e. the stairs were the only access in Irwin.
• It must be fair and accord with common sense.
• It must be clear and precise: Shell UK v Lostock Garage [1976] 1 WLR 1187.
• It must not contradict any term in the contract.
An Introduction to the Law of Contract (5 th ed OUP 1995, p207).
