Terms

SUMMARY OF CHAPTER 8, "CONTRACT LAW" by EWAN MCKENDRICK, 2009


A statement between an offeror and and offeree in the formation of a contact can be the categorized as such:

1. A statement of opinion "mere puffs" have no legal effect 
2. A term - If a statement is a term, then failure to comply with it is a breach of contract. 
3. A mere representation - If a statement is a mere representation, then there is no breach of contract, but there is misrepresentation

Distinguishing between a TERM and MERE REPRESENTATION relies on the INTENTION of the statement.  This will be determined objectively by the courts, based on several set principles in contract law, which follow:

1. Verification:  If the maker of the statement asks the other party to verify its truth, then it is most likely not a term, but instead, a mere representation. 
   
   Example:  If I offer to sell you a car and tell you that its in good condition, but tell you to take it to the mechanic for a checkup, this is a mere representation.
    
2. Importance: If a statement is of such importance that it brings about the decision to enter into a contract, then it is a term. 
   
   Example: If I am moving to the UK from the US, and want to buy a TV in the US prior to moving, and I need that TV to be 240v, and I am told by the salesperson at the electronics shop that the TV is 240v, but it turns out to be 120v, then that is a term, because of its importance in my purchasing the TV.
    
3. Special knowledge:  a) If the person making a statement has special knowledge or skill compared to the person the statement is being made to, then it is a term.  b) If the person making the statement has equal or lesser knowledge than the person the statement is being made to, then it is a mere representation.
   
   Example: If a mechanic selling a car makes a statement to a car buyer that the car is in good condition, and it has mechanical problems, then it is a term.  If an individual selling a car makes a statement to a car buyer, who is a mechanic, that the vehicle is in good condition and it's not, then it's a mere representation.

Consequences of distinction between TERM and REPRESENTATION

Due to the Misrepresentation Act of 1967, the availability of damages for misrepresentation are more easily attainable, so the consequences of distinction between TERM and MERE REPRESENTATION are not as stringent as they used to be.

1. The distinction on a claim between the two is the amount of recoverable damages
   
   
   
   
   • If the statement of breach is decided by the court to be a term, then the party recovering damages will be awarded "expectation interest" - what he would have expected from the fulfillment of the contract.
      
   • If the statement of breach is decided by the court to be a mere representation, then the party recovering damages will be awarded "reliance interest" - the calculated loss brought about by the misrepresentation.
   
   
   
   
   
2. The distinction between a term and a representation is important in "setting aside the contract
   
   
   
   
   • In the case of misrepresentation a contract can always (in principle) be "set aside" by the representee, both retrospectively and prospectively, bringing both parties back to the point where there was no contract.
      
   • In the case of a breach of term, the contract can only be "set aside" when the broken term is a "condition" or an "innominate term" (between a condition and a warranty), and the "consequences of the breach are significantly serious".  In this case, they can only be "set aside" prospectively without any retrospective consequences.

Incorporating a Representation as a Term in a Contract

This goes against the above principles, but has happened in several cases - ex. Pennsylvania Shipping Co v Compagnie Nationale de Naviation [1936] 2 All ER 1167.  Basically, a representation became a term in a contract, and the claimant brought about an action to "set aside" the contract on misrepresentation.  Held - The representation "merged in the higher contractual right", and the claimant did not need to set aside the contract on misrepresentation, but had a claim of breach of contract (breach of term).

Due to section 1(a) of the Misrepresentation Act of 1967, if a representee enters a contract based on a misrepresentation which is then incorporated into the contract, the representee has the right to rescind the contract, "provided that he would otherwise be entitled to rescind the contract".