Beyond the black and white

Implied condition – fit for purpose

In an old case from 1925 (Baldry v Marshall), a buyer told a car dealer he wanted a vehicle suitable for “touring purposes”. The dealer recommended a particular Bugatti model.  The car turned out to be unsuitable for comfortable touring. The court held that there was an implied condition (from the then version of the Sale of Goods Act) that the car would be reasonably fit for the stated purpose because i) the buyer communicated the purpose; and ii) the buyer relied on the seller’s skill and judgment.  The exclusion of “any guarantee or warranty, statutory or otherwise” was not sufficient to displace the implied condition. (Even if the condition had been expressly excluded, it must pass the UCTA reasonableness test ie was the exclusion fair and reasonable, considering everything the parties knew or should reasonably have contemplated when they made the contract.)

Such implied conditions are one of the best examples of how the actual obligations that apply to a party can be fundamentally different to what’s written in the contract.

Is it the entire agreement?

There was a contract in place between a customer and an Facilities Management (FM) provider. The parties agreed a reduction in rates which was recorded in a letter of variation. Years later, out of the blue, the FM provider claimed that the reduction in rates was in return for additional work which had been promised but had never materialised, and this was supported by an email exchange with the customer. The FM provider claimed that such promises were misrepresentations and that they induced them to enter into the variation. The entire agreement clause in the contract confirmed that the contract comprised the whole agreement between the parties but it didn’t prevent a party from relying on a statement made pre-contract which induced them to enter into the contract or exclude liability for misrepresentation. Ideally, (depending on which party you are and the circumstances) an entire agreement clause should contain all 3 elements but again will be subject to the UCTA reasonableness test. The letter of variation only amended the price and left all other terms unchanged. Therefore the upshot was that the FM provider had a potential claim for misrepresentation and sought to recover the difference in rates from the customer.

In practice, it wasn’t the entire agreement because the wording didn’t prevent the FM provider relying on pre-contractual statements which induced them to enter into the agreement, nor did it exclude liability for misrepresentation. This demonstrates how laws relevant to contract negotiation can unravel the bargain that the parties thought they had agreed.

Any set-off

Contracts often include wording preventing the buyer setting off or deducting amounts from invoices. The specific wording is particularly important because there are different types of set-off. In a 2019 case (AMC III Purple BV v Amethyst Radiotherapy Ltd), the contract said that “All payments to be made by the Borrower under the Finance Documents shall be calculated and be made without (and free and clear of any deduction for) set-off or counterclaim.” The judge focused on the specific wording, finding that the use of the word “any” meant that equitable as well as legal set off must be excluded. If this word had not been included, equitable set-off would have been possible.

This example is a good reminder that i) even the inclusion or omission of a single word can materially alter the legal and commercial effect of a contract and ii) that equitable rights and remedies may also operate in the background unless they are excluded.

Moral of the stories: These 3 examples are only a small taster of the types of legal principles, implied terms and rules of interpretation that can interact with what is written on the page and fundamentally alter the commercial outcome.