Week 6:

Terms, Representations,
Puffery, and Incorporation
 Intended Learning Outcomes
At the end of this lecture, you should be able to

1. Distinguish:

i. a term v a representation

ii. a term v a puffery

2. Identify express terms:

i. Inside a signed and written contract

ii. Outside a signed and written contract, but incorporated by reasonable

notice

3. Identify implied terms

4. Distinguish Conditions from Warranties

 During negotiation, parties may make a number of statements.

 Some statements may turn out to be untrue.

 However, not all false statements will give rise to legal consequences.

 Moreover, different types of false statements => different types of

legal consequences.
 Example: Mathew sold Tom a car for $37.000, and during
negotiation, Mathew made the following statements:

• “It is a 2012 BMW car”

In fact, a cheap BWM car made in 2002.

• “I only used it to go shopping”

In fact, it was used to travel interstates.

• “It has done only 35,000 km”

In fact, the true mileage is 165,000 km. However, Mathew asked Tom to have it
checked by a mechanic.

• “Seat covers were made in Japan”

In fact – made in Vietnam.

• “It is the most beautiful little car in the world”.

• “If you buy the car, I will give you my bike as well”

In fact, Mathew never gives Tom the bike.

Part I
Terms, Representations, and Puffery
 Terms, representations, and puffery

A statement made during negotiation can be …

1. a term of the contract

2. a representation

A STATEMENT OF FACTS - BUT NOT INTENDED TO BE

PART OF THE CONTRACT.

3. a puffery
 Statements
(made during
negotiation)

Terms of a Puffery
Contract Representations Puffery

Collateral
contract

Misrepresentation

Enforceable “zone” Unenforceable

“zone”
 Why a distinction needed ?

• REMEDIES ARE DIFFERENT !

• Breaching a term => the innocent party can sue for

breach of contract.

• Representation

 Untrue => the innocent party may bring an action for

o misrepresentation, or

o breach of a collateral contract

• For a puffery - untrue => No remedy !

 Terms of the contract

• Terms = the contents of the contract,

o represent what parties have agreed to do.

o contain each party’s obligations.

• If a party fails to comply with its obligations,

Þ there is a breach of the contract, and

Þ the other party has the right to sue.

 Express
terms

TERMS

Implied
terms
 What is a term?
• A statement is a binding term of the contract IF it is …

• a promise (Chandelor v Lopus (1603) Cro.Jac 4)

o For example, a car seller may say: “This is a 2012 BMW”;

o The seller GUARANTEES the buyer something => a promise

o ≠ “I think this may be a 2012 BMW” – NO GUARANTEE => Not a promise

• verifiable, i.e. a statement of facts – not a statement of opinion (Handbury v Nolan

(1977) 13 ALR 339)

o For example, “this motorbike is two years old”; “that watch is a real Rolex”

o Are they verifiable ?

o Term ≠ statement of opinion (“I think this watch is the best one in the world”).

• made during the formation of the contract (Oscar Chess Ltd v Williams [1957] 1
WLR 370)

• intended to be legally binding (Ellul and Ellul v Oakes (1972) 3 SASR 377)
 What is a term?

• The most tricky element is whether the statement is

intended to be legally binding.
(However, in this course, it is NOT AN AREA OF
EMPHASIS!)

• To determine whether a statement is intended by the

parties to be legally binding, the court will consider the
following factors…

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 (Do not discuss this requirement in your assessment)

1. When was the statement made?

The less time between the statement and the formation of the contract, the more likely the statement is to be a
term.

2. The importance of the statement

The more important, the more likely the statement is to be a term.

3. Was the statement latter omitted when the contract was put in writing ?
o If so, the verbal statement is unlikely to be a term.

o If the statement is intended to be legally binding, parties would have incorporated it into the written contract.

4. Special knowledge of one party?

If the person making the statement has special knowledge or skill about the matter, the statement is more likely
to be a term.

5. Requirement of independent verification

If the maker of the statement made clear that the truth should be verified independently, the statement is
unlikely to be a term.
 Terms v Representations (Do not discuss
this requirement in your assessment)

Statements …
1) made during contract
formation Representations
Terms
2) can be verified

Intended to be legally Not intended to be

binding legally binding

1. When was the statement made ?

2. Important ?
3. Reduced to writing ?
4. Special knowledge and skill ?
5. Requirement of independent
verification ?
 Term v Puffery
• A ‘puffery’ = words of salesmanship (exaggerated sales talks), statements of opinion,
or words of encouragement.

• A reasonable person would not take it seriously.

• For example,

• “That’s the most beautiful dog in Vietnam”

• “I think you will be very happy with that television”

• “You should buy that laptop. That’s a good deal for you”

• “Red Bull gives you wings”

• Even if included in the written contract, such a statement is not a binding, legally enforceable
term of the contract.

• Why?

• Not a statement of facts - cannot be objectively verified by an independent third party.

Handbury v Nolan (1977) 13 ALR 339

That’s the most beautiful dog in Vietnam?

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Term v Puffery
 Handbury v Nolan (1977)
• Facts:

o An auctioneer stated before the sale that the cow was pregnant.

o It turned out that the cow was not only not pregnant but also was infertile (can’t fall pregnant).

o The buyer sued - but the auctioneer said it was only his opinion (i.e. a puffery).

• Is the statement that ‘the cow on sale was pregnant’ a term or just a puffery ?

• Decision: the court said that this was not an opinion (a puffery), but a term.
 Term v Puffery

Statements
Term (made during negotiation) Puffery

• Can be verified. • Exaggerated sales talks (salesmanship)

• Statement of opinion, or
• Words of encouragement

A reasonable person would NOT

take it seriously !

• Not verifiable
ENFORCEABLE
UNENFORCEABLE

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Part II:
TERMS
 Inside a signed
& written
contract

EXPRESS
TERMS

Outside - but
incorporated by
reasonable notice

TERMS

Implied terms
by courts

IMPLIED
TERMS

Implied terms
by statute
 1. Express terms

Express terms = terms that parties have expressly

agreed upon.
I can sell
that cow
to you for
$1000 OK. Done
Deal
 1. Express terms

• A statement can become an express term in two ways:

1) By being included in a signed and written contract.

2) By being incorporated by reasonable notice.

 1) Inclusion of a term in a signed and written
contract
 If a term is included in a written contract that is signed by the
parties, it is AN EXPRESS TERM of the contract.

 It is thus a binding and enforceable term of the contract.

 This remains true even if one of the parties has not actually read
and understood the written contract (L’Estrange v Graucob (1934)).

 So, read your contracts carefully before entering into them.

You are bound by what you sign !

 Example: L’Estrange v Graucob
(1934)
o L'Estrange entered into a contract to buy a cigarette
vending machine from Graucob.
o L'Estrange signed the contract without reading it !
o The machine did not work properly and L'Estrange
sued Graucob.
o L'Estrange argued that she was not bound by a
particular term in the contract because she did not
read the contract.
(That term was as follow:
This agreement contains all the terms and conditions …
any ... implied warranty … is hereby excluded)

o The court decided that by signing the written

contract, L'Estrange was bound by all the terms of
the contract. The fact that she did not read the
contract is irrelevant.
 2) Incorporation of a term into a contract
by reasonable notice
 A statement that
o was not expressly included in the contract by the
parties (i.e. outside a contract)

o can still be an express term of the contract !

o But how ?

o It could be incorporated by reasonable notice

 Let’s look at this example

o Tom went to a local store to buy a washing machine.

o There is a very big and visible sign at the front desk of the store indicating clearly that
“The company will not be responsible for delivery costs”.
o Tom signed a basic written contract to buy a washing machine. The contract did not
mention delivery costs.
o The washing machine was then delivered to Tom and the delivery man charged him
$200.
o Tom came back and argued that the shop should cover the delivery costs.

o The shop owner pointed to the sign and said: “Sorry, that sign was also a term of
the contract”
o What is the shop owner trying to do in this case ?

o He is trying to bring/incorporate the outside statement into the written contract.

o Can that be possible under contract law?

 Now, let’s come to the rule

A party can incorporate an outside statement into a contract if the

following requirements are satisfied …
1) reasonable notice of the outside statement was given to the
other party (Causer v Browne [1952] VLR 1).
o Reasonable notice = reasonable steps have been taken to bring the
statement to the attention of the other party.
o Did the store owner in the previous example take reasonable steps to bring the
statement into the attention of the other party, i.e. Tom ?
o The issue is whether a reasonable person would have been aware of the
statement - not whether the party was actually aware of it.
o Would a reasonable person see the sign at the front desk in the previous example ?

2) Reasonable notice given before the contract was formed

(Thornton v Shoe Lane Parking (1971) 2 WLR 585; Olley v
Marlborough Court Hotel [1949] 1 KB 532 Ltd )
o Was reasonable notice given to the other party before the formation of the contract in
the previous example?
 Incorporation by reasonable notice

 The outside statement is commonly in the form

of either
o a sign,

o a document, or

o a verbal statement.

 Let’s discuss when reasonable notice is given.

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 Incorporating SIGNS

 Sometimes, a party may put a statement on a sign.

 RULE:
o The sign will be incorporated into the contract if it is clearly displayed for
a reasonable person to see before the contract is formed (Thornton v
Shoe Lane Parking Ltd [1971] 2 QB 163)
o The issue is whether a reasonable person would have seen it - not
whether the party actually saw it or not.
 Example :
Olley v Marlborough Court Hotel [1949] 1 KB 532 Lt

• A couple checked into a hotel and paid for a week in advance.

• They went upstairs and found a sign inside the room (on the
back of the main door) stating that “the owners of this hotel
will not be responsible for articles lost or stolen”.
• The wife’s furs were stolen.
• The hotel owners argued that the sign displayed in the room had
effectively excluded their liability.
• Were the hotel owners correct ?
• Can the sign be incorporated into the contract ?
• Two requirements need to be satisfied.
 Was the sign clearly displayed ?
 Was the notice given to the couple before the contract was formed ?
Example - Thornton v Shoe Lane Parking (1971)

 Thornton bought a parking ticket from a ticket machine.

 The ticket stated that terms and conditions of parking were

displayed on the inside of the car park.

 Can the terms and conditions of parking be incorporated into the

parking contract ?

 Two requirements need to be satisfied.

 Were the terms and conditions of parking clearly displayed ?

 Were the terms and conditions given to Thomson before the

contract was formed ?
 Incorporating DOCUMENTS

• Sometimes, a party may put a statement in a document.

• If the statement is contained in a contractual document – a document that a

reasonable person would expect to find contractual terms in it (e.g., a price
quote, an Attachment to contract),

Þ reasonable notice of the outside statement is given to the other party

(The outside statement can be incorporated into the contract as an express term)
Product Details
 Incorporating DOCUMENTS
• If the statement is contained in a non-contractual document – a
document that a reasonable person would not expect to find
contractual terms in it (e.g. a survey, an advertisement leaflet, or a
brochure),

Þ reasonable notice of the term is NOT given 

(Le Mans Grand Prix Circuits Pty Ltd v Iliadis [1998] 4 VR

661)
 Incorporating DOCUMENTS

• Note: Courts have generally decided that

o If a statement is included in a ticket, reasonable notice of that
statement is given => it is a term of the contract.

o However, if a statement is included in a receipt, reasonable notice of

that statement is NOT given => it is NOT a term of the contract.

(Parker v South Eastern Railway Co (1877), Thompson v LMS Railway

[1930] 1 KB 41) .
 Incorporating VERBAL STATEMENT

 A verbal statement might be incorporated into a written contract to be

a term if

 it is a promise or guarantee (Chandelor v Lopus (1603) Cro.Jac 4),

 it is independently verifiable (Handbury v Nolan (1977) 13 ALR

339), and

 reasonable notice of that statement was given to the parties

(Causer v Browne [1952] VLR 1) before the formation of the
contract (Thornton v Shoe Lane Parking (1971) 2 WLR 585; Olley
v Marlborough Court Hotel [1949] 1 KB 532 Ltd).
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 Example

o Tom went to a local restaurant and booked 20 tables for a

Christmas party with his family and friends.

o A receptionist told Tom that “There is a 10% service fee on all

bills”.

o Tom then signed a basic contract with the receptionist. The

contract did not mention service fee.

o The party took place happily and when the bill came it included a
10% service fee. He got angry and said he never agreed to that.

o Can the restaurant incorporate that verbal statement into the

written contract?
Incorporation by Reasonable Notice

CONTRACT

……………………
INCORPORATION ……………………
……………………
Two conditions:
OUTSIDE ……………..
STATEMENTS 1. Reasonable notice of the
outside statement is given to ……………………
the other party ……………………
……………………
2. Reasonable notice was given ……………………
before the formation of the ……………………
Sign contract. ………………..

Document

Verbal statement
 Notes

• Where there is a verbal contract, if reasonable notice is

given, a statement can be successfully incorporated
into the contract as an express term.

• However, where there is a written contract, there is one

more rule to deal with, i.e. parol evidence rule (to be
discussed in week 8)

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2. IMPLIED TERMS

Implied terms
by courts

IMPLIED
TERMS

Implied terms
statute
 i) Terms Implied by Courts
 Contracts may have some gaps.

 If too vague - the courts will “strike” it down - no real agreement. Courts =>
reluctant to imply/insert terms into a contract.

 However, if the contract can still be saved, the courts may imply/insert
certain terms to fill in the missing pieces.
 i) Terms Implied by Courts

 So,

 Implied terms by courts are terms that were never

negotiated or even discussed by the parties.

 But they are created and inserted into the

contract by the courts so that the contract can
work.
 When can a term be inserted
by the court ?
a) Courts may insert/imply a term into a settled contract to ‘fill the
gaps’ if the following requirements are satisfied:
the term is reasonable and fair,

the term is necessary to make the contract workable for the parties -
i.e. necessary for the contract to be performed. So if the contract can still
be performed, the court will not imply any term.

the term is so obvious that it ‘goes without saying’,

the term is able to be clearly expressed, and

the term is consistent with the express terms.

(BP Refi nery Pty Ltd v Hastings Shire Council (1977) 52 ALJR 20; The Moorcock (1889) 14
PD 64)
 The Moorcock (1889) 14 PD 64

 The plaintiff moored his ship at the defendant's wharf on the river
Thames.
o Wharf: an ​area where ​ships can be ​tied and ​goods can be taken off
them.

 The river Thames is a tidal river and at times when the tide went
out the ship would come into contact with the river bed.
 The plaintiff's ship became damaged due to uneven surfaces and
rocks on the river bed.
 The plaintiff brought an action for damages against the defendant.

 The defendant argued that there was no term in the contract

warranting the suitability of the river bed for mooring a ship.
 The court decided that a term could, and should, be implied to the
effect that…

The river bed was suitable for mooring a ship.

Obviously,

• That term (“the river bed was suitable for mooring a ship”) is
reasonable and fair

It is reasonable & fair for the ship owner to expect that the mooring was
safe.

• That term is necessary to make the contract effective.

If the river bed was unsafe, the ship owner could not moor the ship =>
the mooring contract could not be performed.

• It was so obvious that the mooring needs to be safe and thus

parties didn’t discuss it.
b)Courts may insert/imply a term as a result of prior dealings between
parties - Balmain New Ferry Co Ltd v Robertson (1906)
• If the parties have entered into similar contracts in the past and those contracts always
contained a particular term,
• then that term may be inserted/implied into the contract by the court.
• Example:
• John rents a shop from Ben since 2007.
• The contract is renewed every year.
• In the first ten contracts, there was always a term stating that “Rent will be paid on the 1st day of
each month by cheque”.
• The contract of this year (2018) contains no term like that.
• As a result, parties have a dispute as to which date the rent should be paid, and whether the rent
can be paid by cash.
• They brought the dispute to the court.
• What can the court do to save the contract between the parties ?
• The court can insert/imply the missing term (which appeared in the last ten contracts) into the 2018
contract.
 Balmain New Ferry Co Ltd v Robertson (1906)

• Balmain New Ferry run a steam ferry form Sydney to Balmain.

• Robertson used the ferry backward and forward regularly.
• Passengers would pay at the turnstiles before entering the wharf.
• A notice board near the turnstiles presented the conditions:
“Notice. A fare of one penny must be paid on entering or leaving the wharf. No exception will be made to
this rule, whether the passenger has travelled by ferry or not.”

• The notice can be seen by passengers exiting the wharf, but not by those entering the
wharf.
• One day, Robertson paid the fare and stepped onto the wharf. He missed the ferry, and
tried to leave the wharf, when he was asked to pay another penny. He refused.
• Can the sign be incorporated into the contract by reasonable notice ?
• No.
• Can it be implied into the contract as a result of prior dealings ?
• Court’s decision: "Having travelled on many occasions backward and forward by the
company's boats”, he must have been aware of the notice.
 ii) Terms implied by statute

• Terms may also be implied into a contract by statute, i.e.

laws made by the parliaments.

• Why ?

• To protect the weaker contracting party.

• Such terms are enforceable regardless of the wishes

of the parties.

• The best example of terms implied by statute is the

Australian Consumer Law.
 ii) Terms implied by statute

• The Australian Consumer Law implies many terms into

the contract.

• For example,
 The goods must be of acceptable quality;

 The goods must match the description or sample;

 The goods must fit any disclosed purpose,

 The owner must have the right to sell…

• The Australian Consumer Law will be discussed in

weeks 9 & 10.
Part III

Terms: Condition & Warranty

50
 Condition and Warranty

Based on their importance, terms can be

classified into …

1. Condition,

2. Warranty

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 Condition
• A condition is term that is vital and extremely fundamental to the
contract. It goes ‘to the root’or “to the heart” of the contract.

• Thus, a breach of that term would render the whole contract

meaningless.

• Examples:
• Tom paid $37,000 for a BMW, but he was delivered a cheap BWM car.

• Ben paid for a 5 bedroom house, but got a 2 bedroom house.

• Breach of a condition entitles the innocent party to…

o rescind, i.e. terminate, the contract and/or

o claim damages
(Poussard v Spiers and Pond [1876] 1 QBD 410)
 Warranty
o A warranty is also a term of the contract. However, it is
o less important than a condition, and
o not central to the contract.
o Breach of a warranty would not destroy the purpose of the contract.
o Examples:
o Ben bought a new apartment and it was indicated in the contract that a 42 inch TV would be
installed in the kitchen. However, in fact, no TV was installed.
o Tom paid $500 for a second hand iPhone. The seller promised that the iPhone also came with a
case, but when he got home he found that the case was missing from the box.
o John bought a new BMW and the seller assured him that the seat covers were made in Japan.
However, in fact, they were made in Thailand.

o A breach of a warranty entitles the innocent party

 To claim damages only

 Not to rescind (i.e. terminate) the contract (Bettini v Gye

[1876] 1 QB 183)
 Condition or Warranty: How to
distinguish ?
 The court will apply the “Essentiality test”
 Particularly, the court will ask…
 Would a party still enter into the contract if he/she knew that the term would be
breached ?
 If he/she would not enter into the contract - the term is a condition.
 If he/she would still enter into the contract - it is a warranty
Tramways Advertising v Luna Park (1938) 61 CLR 286
 Examples,
 “This is a real Rolex” – In fact, fake.
 “This car is a 2012 BMW, and made in Germany” – In fact, BWM, 2002, and
made in a developing country.
 “This house has a sewerage system” – In fact, no sewerage system.
 “a 42 inch TV will be installed in the kitchen” - In fact, no TV is installed.
 “This iPhone 6s will come with a case” – In fact, no case.
 Example - Poussard v Spiers and Pond
[1876] 1 QBD 410.

• An actress was employed to play the leading role in an

operetta for a season.

• However, she was unable to take up her role until a week after
the season had begun.

• As a result, the producers had to find someone else to replace

her.

• It is widely regarded that the opening night is the most

important night of an operetta.

• Did she breach a condition or a warranty ?

 Example - Bettini v Gye [1876] 1 QB 183

• A singer was employed to perform for a season

from March to July.

• The contract required him to arrive six days before

performances to attend rehearsals.

• However, he was ill and could not come to attend

the first few rehearsals.

• Did he breach a condition or just a warranty ?

 Exercise – Please discuss this case

A goes to Superbike Exotic bike shop and talks to B, a salesman.

A begins to enquire about the unique bike, Terminator. A tells B
that he is looking for a super fast bike and B tells him that the
terminator has a 500cc engine and can go from 0 to 60 mph in 3.1
seconds. A is impressed. A notices that the rear view mirror is quite
unique looking. B tells A that the rear view mirror is made of
stainless steel and is manufactured in Italy. A finds that interesting.
A finally decides to purchase the Terminator motorbike.
• Question 1: If B delivers to A the Terminator bike but it only has a
300cc engine, can A terminate the contract?

• Question 2: If B delivers to A the Terminator bike but A later

discovers that the rear view mirror was actually made in China,
can A terminate the contract?
 Conditions or warranties?

 Do the following statements look like terms of a contract ?

This motorbike is a “Honda Wave You find out that the motorbike is
S” actually a copy made in China – a
 If so, are they warranties or conditions?
Hum-Da Wavy Z
A buys a new car and was also Tires are over 2 months old
told that the tires on the car are
“brand new”

“This new IPhone 6 has the new It does not have the flappy bird
app Flappy Birds on it” app.

“You will look “rất đẹp”/nice on Your boyfriend says you look “rat
this motorbike. You should buy xấu”/ugly on the motorbike
it.” - Verbal
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