Evaluation of Contractual Terms and Ideas for Reform (OCR A-Level Law): Revision Notes

Evaluation of Contractual Terms and Ideas for Reform

Strengths of the current law on contractual terms

The law governing contractual terms has developed through both common law and statute to provide clarity and certainty for parties entering into contracts. Understanding the strengths of the current framework helps identify why these rules exist and how they protect parties.

Pre-contract discussion and formation

Before parties finalise a contract, they engage in negotiations and discussions. The law recognises this process by allowing parties to clearly identify the foundation upon which they are willing to enter into a binding agreement. This ensures that both parties understand what they are committing to before the contract is formed.

Representations and their incorporation

When parties make statements during negotiations, contract law categorises these statements as representations. A representation is any statement of fact made during contract formation that becomes either expressly or impliedly incorporated into the final contract. This categorisation is crucial because it determines the legal consequences if the statement turns out to be untrue or misleading.

Clear classification of different types of representations

Contract law has established a sophisticated system for distinguishing between different categories of statements made during negotiations:

• Terms: statements that become part of the binding contract
• Mere representations: statements of fact that do not form part of the contract but may give rise to remedies if false
• Misrepresentations: false statements of fact that induce a party to enter the contract
• Mere opinions: statements of belief or judgement rather than fact
• Expert opinions: opinions given by someone with specialist knowledge
• Trade puffs: exaggerated advertising claims not intended to be taken literally
• Reliant trade puffs: advertising claims that parties do rely upon

Established tests for determining contractual terms

The courts have developed clear and reliable tests to determine whether a particular representation has been incorporated as a term of the contract. These tests provide predictability and allow parties to understand their legal position. The tests consider factors such as:

• The timing of the statement
• The importance placed on the statement
• Whether one party had special knowledge or expertise
• Whether the statement was reduced to writing

The parole evidence rule

The parole evidence rule provides that oral or similar external evidence cannot be used to add to, vary, or contradict the terms of a written contract. This rule promotes certainty and finality in contractual relationships by ensuring that written agreements are treated as complete and conclusive.

Implied terms

Contract law recognises that not every term needs to be expressly stated. Implied terms are provisions that become part of a contract even though they are not explicitly written or spoken. These terms are implied in two ways:

By fact: where the term reflects the implied but unexpressed intentions of the parties. Courts imply these terms to give effect to what the parties must have intended, based on the specific circumstances of their agreement.

By law: where statute or common law prescribes that certain provisions must be included in particular types of contracts. For example, the Sale of Goods Act 1979 implies terms about quality and fitness for purpose into contracts for the sale of goods.

Regulation of exclusion clauses

Exclusion clauses (also called exemption clauses) are terms that attempt to remove or limit a party's liability for breach of contract or negligence. The law has developed strict guidelines governing these clauses to protect parties from unfair or unreasonable attempts to avoid responsibility. These controls include:

• Common law rules requiring clear incorporation and notice
• The contra proferentum rule (discussed below)
• Statutory controls under the Unfair Contract Terms Act 1977
• Consumer protection legislation

Areas requiring reform

Despite the strengths of the current law, several areas have been identified where reform could improve fairness and certainty in contractual relationships.

Limited remedies for innocent misrepresentation

When a party makes an innocent misrepresentation (a false statement made without fault), the available remedies are limited. The injured party may only be entitled to rescission (cancelling the contract), and even this remedy may be barred in certain circumstances.

This creates potential injustice, particularly where rescission is unavailable but the innocent party has suffered loss due to the false statement. A bar to rescission might arise where:

• The contract has been substantially performed
• Third party rights have intervened
• The parties cannot be restored to their original positions
• Too much time has passed since the contract was made

Harshness of exclusion and limitation clauses

Exclusion clauses and limitation clauses (which limit rather than completely exclude liability) can operate harshly against the party subject to them. This is particularly problematic where one party has significantly weaker bargaining power than the other.

Strict operation of the contra proferentum rule

The contra proferentum rule states that any ambiguity in an exclusion clause must be interpreted against the party who inserted it. While this rule protects the party subject to the clause, it operates very strictly, requiring the party relying on the exclusion to spell out precisely what situations the clause will cover.

This creates difficulties for businesses that want to use legitimate exclusion clauses to protect their commercial interests. If the wording is not absolutely precise, the clause may be rendered ineffective, even where the parties' intentions were clear.

Terms availability versus actual knowledge

Current law requires that contractual terms must be available to the contracting parties, but there is no legal requirement that the terms are actually read or understood. A party is bound by terms they have not read, provided reasonable notice was given.

This can lead to significant injustice, particularly in consumer transactions where lengthy terms and conditions are presented at the point of purchase with no realistic opportunity to read and consider them.

Uncertainty from the battle of the forms

In commercial transactions, parties often exchange multiple documents before a contract is finalised. This battle of the forms occurs when each party tries to impose their own standard terms and conditions through the correspondence leading up to the contract.

The result can be significant uncertainty about which terms were actually incorporated into the final contract. Current law uses various common law tests (such as the "last shot" doctrine) to resolve these disputes, but these can produce unpredictable outcomes.

Exam guidance

In A-Level Law examinations, you may be required to critically evaluate aspects of contract formation or the law governing contractual terms. These evaluation questions may include consideration of potential reforms.

Such questions are typically presented as extended response questions worth a maximum of 20 marks. To achieve high marks, you should:

Structure your answer clearly: Begin with a brief introduction identifying the key issues, then systematically evaluate the strengths and weaknesses of the current law, and conclude with a balanced assessment considering potential reforms.

Use accurate legal terminology: Demonstrate your understanding of key concepts such as representations, misrepresentations, exclusion clauses, implied terms, and the parole evidence rule.

Apply relevant case law and statute: Reference important cases like Carlill v Carbolic Smoke Ball Co. and relevant legislation such as the Misrepresentation Act 1967 and the Unfair Contract Terms Act 1977.

Provide balanced evaluation: Consider both the strengths of the current law (such as clarity and established tests) and its weaknesses (such as potential injustice in certain situations).

Suggest and assess reforms: Where appropriate, discuss proposed reforms and evaluate whether these would improve the law or create new problems.

Support your arguments: Use examples and reasoning to support your evaluative points rather than simply listing strengths and weaknesses.

Remember!