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SCOTTISH LAW COMMISSION THREE BAD RULES IN CONTRACT LAW

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The Scottish Law Commission recommends the abolition of three rules of Scottish contract law all of which have pern...
The Scottish Law Commission recommends the abolition of three rules of Scottish contract law all of which have pernicious effects.

In a report published yesterday the first rule operates to prevent a party to a contract which appears to be wholly in writing, but is not in fact wholly in writing, from proving the additional contract terms.

The second rule is that the terms of a contract are superseded entirely by a later conveyance. So, for example, in the case of a sale of a house, contractual terms agreed between the buyer and the seller (for example, as to the condition of the central heating system) are superseded as soon as the disposition of the house is handed over. Unless steps have been taken to counteract this rule, the buyer will find that the agreed terms can no longer be relied on.

The third rule is that the buyer of certain types of property cannot both retain the property and claim damages from the seller for a breach of the sale contract which affects the value of the property. So, even if the buyer of a house can prove a breach of contract by the seller, he or she cannot recover damages for this type of breach unless the house is returned to the seller.

The commission recommends the abolition of all three of these rules. Further details and examples are given below.

Restriction on proof of contract terms. Under the present law, when a document has been drawn up which appears to contain the terms of a contract, the general rule is that extrinsic evidence (that is, evidence of anything outside the document itself) cannot be led to prove an additional term. One party may have refused to sign a document setting out the contract unless the other agreed that there was an additional term not mentioned in the document.

The other party may have agreed to this additional term before witnesses, or may have acknowledged it in an informal writing, but if a dispute arises as to what are the contract terms a court, under the existing law, may refuse to allow evidence of the additional term to be led.

Example. A hirer (H) entered into a contract with an owner (O) whereby H agreed to hire a valuable piece of machinery from O. O's solicitors sent H a form of offer for signature. H refused to sign because the form did not contain certain terms which he wanted to be part of the contract. He went to see O's solicitors, who telephoned O for instructions. O authorised the solicitors to give H a letter confirming O's agreement to the additional terms which did not appear in the formal offer.

The letter was duly handed over and, on the understanding that these additional terms were part of the contract, H signed the formal offer which was then accepted in writing by O. A question later arose as to the extent of O's obligations under the contract. O founded on the formal offer and acceptance. The court held that the terms of the formal offer and acceptance could alone be considered. H could not lead evidence of the additional terms set out in the letter from O's solicitors. (Example suggested by Norval v Abbey 1939 SC 724.)

There are exceptions to the general rule on proof of additional contract terms. These are in respect of collateral agreements, missing terms and writing which is admittedly inaccurate. The scope of these exceptions is uncertain; it is particularly difficult to know when a term will be regarded as a collateral agreement or when a court will be prepared to say that there is obviously a missing term in a contractual document so that extrinsic evidence will be admissible.

The commission considers that the existing law can lead to manifest injustice. Parties may have expressly agreed that certain terms, although not embodied in the document which records most of the terms of their contract, are nonetheless to be additional terms of the contract.

The present law enables one of the parties to ignore the additional terms, found on the document and plead that extrinsic evidence of the additional terms is inadmissible. This plea will have every chance of success.

The existing rule restricting proof of additional terms, and the exceptions to it, apply also to unilateral voluntary obligations, such as bonds. The commission feels that the policy considerations are the same in both cases so that the recommendations should apply to both.

Accordingly, the commission recommends that the rule which disallows extrinsic evidence to prove an additional term of a contract or unilateral voluntary obligation in such circumstances should be replaced by a presumption that a document which appears to contain all the express terms of a contract or unilateral voluntary obligation does contain all those terms, but that this presumption should be capable of being rebutted, extrinsic evidence being admissible for that purpose; similarly where any of the terms of the contract or unilateral voluntary obligation are embodied in two or more documents. It should be made clear that the new provision is without prejudice to the effect of an express provision in a document that it contains all the express terms of a contract between the parties and to the effect of any enactment on constitution or formal validity.

The rule being changed here is a rule of the law of evidence and the commission therefore recommends that the change should take effect only in relation to proceedings commenced after the new legislation comes into force.

Supersession of contract by conveyance

In recent years a great deal of difficulty has been caused by the rule that, where a contract is followed by a conveyance in partial implement of it, the contract is entirely superseded by the conveyance.

Example: A contract for the purchase of a house contains terms on such matters as compliance with statutory and local authority requirements. The contract is followed by a disposition. It turns out that the seller is in breach of the terms of the contract relating to compliance with statutory and local authority requirements.

The purchaser claims damages for the loss caused by this breach of contract. The court holds that the contract has been entirely superseded by the disposition. The purchaser cannot recover damages from the seller, even although both parties may have intended the terms in question to survive the delivery of the disposition. (Example suggested by Winston v Patrick 1980 SC 246.)

Again there are exceptions (although the scope of some is unclear) to the general rule. The supersession rule has given rise to great uncertainty in the law. In practice solicitors attempt to get round this legal difficulty by various methods but there are doubts about the effectiveness of some of these methods and, at best, they require provisions which may be elaborate and ought to be unnecessary.

The supersession rule in its current form goes too far. It should be made easier for contracting parties and their legal advisers to achieve the results they want to achieve, provided those results are not unfair, unreasonable or contrary to public policy. The commission can see nothing unfair, unreasonable or contrary to public policy in allowing parties to ensure that freely negotiated contractual provisions as to, for example, the state or condition of the property sold or any of its appliances, systems or fixtures survive the delivery of the disposition.

The commission recommends that the rule of law whereby, regardless of the intentions of the parties, a contract is entirely superseded by the execution, or delivery and acceptance, of a conveyance or other formal deed in implement of it should cease to have effect. Accordingly, unless the parties agree otherwise, any unimplemented or unfulfilled term of a contract should not be superseded by virtue only of the execution, or delivery and acceptance, of a deed in implement of the contract.

As parties may have contracted on the basis of the present rule, the commission considers that the new rule should apply only to contracts made on or after the date of commencement of the new legislation.

No damages unless property returned

There is a general rule that a buyer of property, other than moveable property coming within the Sale of Goods Act 1979, cannot, while keeping the property, successfully claim damages for breach by the seller of a contractual term relating to the property which results in a diminution in its value. The law of Scotland, it is said, does not allow an actio quanti minoris.

This rule, which probably crept into Scottish law as a result of a confusion between two rules of Roman law, was changed over a hundred years ago in relation to the sale of goods. The buyer of moveable property such as a car or an item of household furniture can retain the goods and claim damages for breach of contract. However, in relation to property other than moveable 'goods' the old rule remains in operation. Again there are several exceptions to the general rule and some possible exceptions on which the law is in a state of doubt.

The rule applies in particular to sales of houses. It is harmful in its operation. There are many cases where the buyer of a house would be most unwilling to reconvey the house and start looking for another one. It is unrealistic to make the return of the property a condition of claiming damages for breach of contract by the seller. The commission therefore recommends that the rule of law whereby in a contract of sale the buyer is precluded from obtaining damages for a breach of contract unless the property is returned to the seller should cease to have effect.

Again, as parties might have contracted in reliance on the existing law, the commission thinks that the new rule should apply only in relation to contracts made on or after the date of commencement of the new legislation.

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