Incorporation

We have already discussed the rules which the courts adopt to decide whether pre-contractual statements should be regarded as having been incorporated into a contract. The situation under consideration here is slightly different, and will generally arise in relation to written contracts in a standard form which have not been signed. One party may object that a particular clause should not be regarded as being included in the contract, because they were unaware of it for some reason, and would have objected to it. In appropriate cases, they can apply to other types of clause, however, as is shown by the case of Interfoto Picture Library v Stiletto Visual Programmes.

The defendants were an advertising agency. They needed some photographs for a presentation. On 5 March 1984, they contacted the plaintiffs, who ran a library of photographic transparencies, to see if they might have anything suitable. The plaintiffs sent round a packet of 47 transparencies, together with a delivery note. The transparencies were, however, apparently overlooked and not used. They were eventually returned on 2 April, that is, nearly a month after they had been received. The plaintiffs then claimed the sum of £3,783 from the defendants as a «holding charge» for the transparencies. This was calculated in accordance with the terms laid down in the delivery note, which stated that, in relation to transparencies not returned within 14 days of receipt, a charge of £5 per day plus VAT would be made in respect of each transparency[U1]. The issue before the court was thus whether the terms of the delivery note formed part of a contract between the parties; and, if so, whether the plaintiffs could enforce these terms against the defendants. The Court of Appeal held that the clause could not be enforced. They did so by reference to the case law on exclusion clauses and when they are deemed to have been incorporated into a contract. In particular, they relied on Parker v South Eastern Railway Co and Thornton v Shoe Lane Parking. Parker established the principle that in order to rely on an exclusion clause in an unsigned contract, the defendant had to have taken reasonable steps to bring it to the attention of the claimant. Thornton added the gloss that the more unusual and onerous[U2] the clause, the more that the defendant had to do to draw it to the claimant’s attention. The court saw no reason why this approach should not apply to the case before them. The clause was particularly, and unusually, onerous in its effect. The plaintiffs had done nothing to draw it to the defendants’ attention. It should be regarded as not having been incorporated into the contract.

The approach taken in the Interfoto case is an unusual one in relation to a commercial agreement. This aspect of the rule of incorporation has tended to be used mainly as a means of protecting consumers, particularly in relation to exclusion clauses. Where parties are contracting at arm’s length, in a business context, it would more commonly be the case that the court would expect each party to take care over the obligations to which it was committing itself. If they agree to unfavourable terms, then that is their own fault. It is perhaps significant that the Interfoto decision has not so far led to many similar reported decisions. An example of a similar approach is to be found in AEG (UK) Ltd v logic Resource Ltd but the majority Court of Appeal decision is strictly obiter, since they found that the clause was also unreasonable under the statutory test contained in the Unfair Contract Terms Act 1977. Indeed, given the statutory control of exclusion and other clauses by this Act and the Unfair Terms in Consumer Contracts Regulations 1999, there would seem to be little need to develop further a restrictive rule for incorporation under the common law.

A move towards a relaxed approach towards incorporation is perhaps exemplified by the Court of Appeal’s decision in O’Brien v Mirror Group Newspapers, which was concerned with a consumer contract. The claim concerned a «scratchcard» game operated by the defendants, Mirror Newspapers. The claimant had obtained one of the scratchcards from a newspaper, from which it appeared that he would win £50,000 if this was the prize on a particular day, which could be discovered by ringing a particular telephone number. He rang the number and was told that the prize amount was £50,000, so he thought that he had won that amount. It then transpired that due to an error, a large number of winning cards had been produced. The defendants therefore relied on Rule 5 of the rules applying to the competition, which they claimed allowed them to draw lots between all the holders of the «winning» cards to decide who won the £50,000. The claimant was not successful in this draw, and sued, claiming that Rule 5 had not been incorporated into his contract with the defendants. The rules of the competition had been published in a number of newspapers, but did not appear every day. The Sunday paper from which the claimant had obtained his card stated «FULL RULES AND HOW TO CLAIM SEE DAILY MIRROR». The paper from which he obtained the number to ring to see if his card had «won» stated «Normal Mirror Group rules apply». The claimant argued that this was insufficient for the rules to be incorporated into his contract.

The Court of Appeal agreed with the trial judge that a contract was made by an offer contained in the newspaper on the day the claimant telephoned the defendants, which the claimant accepted by making the telephone call. The trial judge thought that the claimant, who admitted buying a number of the relevant newspapers, must have seen the rules, or at least have been aware that there were rules applying to the competition. He did not feel that Rule 5 was sufficiently unusual or onerous that the defendants ought to have done more to bring it to the attention of those who might play the scratchcard game.

The Court of Appeal agreed. As Hale LJ put it:

The offer and therefore the contract clearly incorporated the term «Normal Mirror Group rules apply». The words were there to be read and it makes no difference whether or not the claimant actually read or paid attention to them.

The question, therefore, is whether those words, in the circumstances, were enough to incorporate the Rules, including Rule 5, into the contract.

Applying the approach taken in the Interfoto case, the test was whether the rules could be said to have been fairly and reasonably brought to the notice of the claimant. This depends on the nature of the contract and the nature of the term. In the view of Hale LJ, although Rule 5 did turn an apparent winner into a loser, it could not by any normal use of language be called «onerous» or «outlandish». It did not impose any extra burden upon the claimant, unlike the clause in Interfoto. It did not seek to absolve the defendant from liability for personal injuries negligently caused, unlike the clause in Thornton v Shoe Lane Parking; it merely deprived the claimant of a windfall for which he had done very little in return. He bought two newspapers and made a call to a premium rate number, which would have cost him a matter of pennies, not pounds. Nor was there any evidence that this type of rule was «unusual» in this sort of competition. In any event, as Hale LJ concluded:

The words «onerous or unusual» are not terms of art. They are simply one way of putting the general proposition that reasonable steps must be taken to draw the particular term in question to the notice of those who are to be bound by it and that more is required in relation to certain terms than to others depending on their effect. In the particular context of this particular game, I consider that the defendants did just enough to bring the Rules to the claimant’s attention. There was a clear reference to rules on the face of the card he used. There was a clear reference to rules in the paper containing the offer of a telephone prize. There was evidence that those rules could be discovered either from the newspaper offices or from back issues of the paper. The claimant had been able to discover them when the problem arose.

Although the court had sympathy with the claimant, he was bound by the terms of the competition, and his claim failed. It would seem then that even in consumer contracts, there is no necessary requirement to take special steps to draw attention to a clause which may have the effect of disappointing the expectations of the unwary contractor. The position would, however, presumably be different if the consumer, unlike Mr. O’Brien, had paid a significant sum for what he or she was expecting to obtain under the contract.

Construction

Even where there is no dispute as to whether a clause is incorporated, the parties may disagree as to what it was intended to mean. It will be necessary to try to construe the clause in order to give effect to it. The courts will adopt the approach of trying to assess objectively what the parties must be taken to have intended. If the contract is in the form of a written document, this will generally be regarded as very strong evidence of the parties’ intentions. The «parol evidence rule» will apply, with the effect that it will not normally be open to one of the parties to argue that some part of the written document should be disregarded, or interpreted in a way which is not consistent with its most obvious meaning. The Law Commission has doubted whether there is such a rule of law as the «parol evidence rule» - regarding it as being essentially a circular statement, to the effect that when it is proved that a written document was intended to set out all the express terms of an agreement, other evidence of what was intended will not be admissible. Nevertheless, as the Commission itself recognised since the «rule» has regularly been referred to by writers and judges, it provides a convenient shorthand for the approach to constructing contracts to which it applies. The rule, whatever its precise status, thus makes it very important for the parties to ensure that any written document forming part of the contract is clear and explicit as to the obligations which are being imposed on each side. The parol evidence rule is not, however, unchallengeable, and there are certain established exceptions to it.

Exceptions to the parol evidence rule include:

• Ambiguity

Where a word or phrase contained in the written document is ambiguous, other evidence may be given as to what was actually intended, as in Robertson v Jackson. The phrase in question was «turn to deliver» in relation to the unloading of goods at a particular port. The contract did not on its face give any indication of when the ship’s «turn to deliver» would arise. The court was prepared to allow oral evidence as to the custom applying in that port. This exception must now be considered in the light of the overall approach to construction taken in recent cases, such as Investors Compensation Scheme Ltd v West Bromwich Building Society, and discussed in the next section.

• Written agreement incomplete

If either or both of the parties can show that the written agreement was not intended to contain all the terms of the contract, then oral or other extrinsic evidence may be used to fill it out. In Allen v Pink, for example, the written document relating to the sale of a horse was little more than a receipt. It stated the price and the names of the parties, but contained no other terms. In the circumstances, the court was prepared to allow evidence of an oral promise as to the horse’s behaviour in harness. This case was fairly clear. It will be more difficult where the written agreement contains some terms. The court will have to consider objectively whether it appears to be complete, or whether it is more likely that the parties intended it to be supplemented by other obligations. The insertion of a clause to the effect that «this document contains all the terms of the contract» will presumably make it difficult to rebut the presumption that it is complete, and that any other evidence of additional terms should be excluded.

• Custom

Sometimes, a particular word or phrase is used in particular trade, market or locality, in a way which does not accord with its obvious meaning. In Smith v Wilson, evidence was allowed to establish a local custom to the effect that the phrase «1,000 rabbits» meant «1,200 rabbits». Custom may also be used to fill out an aspect of the contract on which the written document is silent. In Hutton v Warren, a custom as to allowances to be given to an outgoing tenant for seeds and labour used in the last year of the tenancy was held to be incorporated into a lease which contained no such provision. Parke B commented that:

It has long been settled that, in commercial transactions, extrinsic evidence of custom and usage is admissible to annex incidents to written contracts in matters with respect to which they are silent.

This use of custom overlaps with the use of custom to imply terms, which is discussed further below. Custom may not be used, however, where it is clearly contradicted by the terms of the contract. Where, for example, a charter provided that the expenses of discharging a cargo should be borne by the charterer, it was not possible to override this by showing a custom that the expenses should be borne by the owner of the ship.

• Starting or finishing date

Extrinsic evidence may be used to establish the date on which a contract is intended to start to operate. In Pym v Campbell, evidence was allowed as to an oral provision that the contract should not start to operate prior to the approval of a third party.

• Other exceptions

Where it can be argued that a written document was intended simply to record earlier oral agreements, but fails to do so accurately, extrinsic evidence may be allowed to prove this, and thus to «rectify» the written document. The parol evidence rule may also be circumvented by showing the existence of a collateral contract. An example of this is the decision in City of Westminster Properties v Mudd which has been discussed above. This is perhaps not a true exception, since it concerns not the interpretation of one contract, but rather a decision as to the priority between two inconsistent contracts. Finally, as we have seen earlier, a pre-contractual statement may become part of the contract if the courts feel that it related to something of great importance to one or other of the parties. This is perhaps best exemplified by the case of Evans v Andrea Merzario, where the statement that the cargo would be carried below deck was held to override the provision in the written contract allowing it to be carried on deck.

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