Learning Outcomes
This article explains how terms become part of a binding contract. It covers the main methods: signature, notice, and course of dealing. For the SQE1 assessments, you need to understand the rules governing each method, including relevant case law and exceptions, particularly concerning onerous terms. Your understanding will allow you to identify how terms are incorporated and apply these rules to SQE1-style single best answer questions concerning contract formation and contents.
SQE1 Syllabus
For SQE1, your knowledge of contract law must include how contractual terms are incorporated. You will be expected to apply the legal principles to factual scenarios to determine whether specific terms form part of a contract.
As you work through this article, remember to pay particular attention in your revision to:
- the ways terms can be incorporated into a contract (signature, notice, course of dealing)
- the legal requirements for each method of incorporation
- the effect of signing a contractual document
- the rules regarding the timing and sufficiency of notice
- when a course of dealing may incorporate terms
- the specific rules relating to onerous or unusual terms.
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
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Which case established the principle that signing a contractual document generally binds the signatory to its terms, regardless of whether they have read them?
- Thornton v Shoe Lane Parking Ltd
- L'Estrange v F Graucob Ltd
- Chapelton v Barry UDC
- Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd
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For terms to be incorporated by notice, when must the notice typically be given?
- Any time before performance is complete
- Within a reasonable time after the contract is made
- Before or at the time the contract is concluded
- Only if the term is particularly onerous
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Which of the following factors is LEAST relevant when determining if terms are incorporated by a course of dealing?
- The frequency of previous transactions
- The consistency of previous transactions
- Whether the parties subjectively intended the terms to apply
- Whether the terms were included in the previous transactions
Introduction
For a term to be legally enforceable as part of a contract, it must be incorporated into that contract. Incorporation means the term has become part of the agreement between the parties. English law recognises three main methods by which terms, particularly standard written terms or exclusion clauses, can be incorporated into a contract: by signature, by reasonable notice, and by a consistent course of dealing between the parties. You need to understand the rules for each method for SQE1.
INCORPORATION OF TERMS
Understanding how terms become part of the contract is fundamental. Different rules apply depending on how the parties reached their agreement.
Incorporation by Signature
The general rule is that if a party signs a document containing contractual terms, they are bound by those terms, even if they have not read or understood them.
Key Term: Incorporation by Signature
The principle that a party who signs a contractual document is bound by the terms contained within it, subject to limited exceptions like misrepresentation.
This strict principle originates from the case of L'Estrange v F Graucob Ltd [1934] 2 KB 394. Mrs L'Estrange signed an order form for a cigarette vending machine which contained, in small print, a clause excluding liability for defects. The machine proved defective. The court held she was bound by the exclusion clause because she had signed the document containing it. Scrutton LJ stated: "When a document containing contractual terms is signed, then, in the absence of fraud or, I will add, misrepresentation, the party signing it is bound, and it is wholly immaterial whether he has read the document or not."
However, this rule is not absolute. Exceptions exist, for example:
- Misrepresentation: If the effect of the term was misrepresented to the signatory before signing (Curtis v Chemical Cleaning and Dyeing Co Ltd [1951] 1 KB 805).
- Non est factum: A rare defence where a person signs a document fundamentally different in character from what they thought they were signing.
- Onerous terms: While signature usually implies acceptance, if a term is particularly onerous or unusual, the party seeking to rely on it might need to show they took extra steps to bring it to the other party's attention, although the interaction between this and the signature rule is complex.
Worked Example 1.1
Ahmed signs a gym membership agreement. He quickly scans it but doesn't read the clause on page 5 stating the membership fee can increase by up to 20% annually without notice. One year later, the gym increases his fee by 18%. Is Ahmed likely bound by this clause?
Answer: Yes, based on the rule in L'Estrange v Graucob, Ahmed is likely bound by the clause. By signing the agreement, he indicated his assent to all its terms, whether he read them or not, provided there was no misrepresentation or other vitiating factor. The term allowing a 20% increase might be considered onerous, but signature remains a strong indicator of acceptance.
Incorporation by Notice
Where a contract is not signed (e.g., tickets, notices on walls), terms may be incorporated if reasonable steps were taken to bring them to the other party's attention before or at the time the contract was made.
Key Term: Incorporation by Notice
Making terms part of a contract by taking reasonable steps to bring them to the attention of the other party before or at the time the contract is concluded.
Three key requirements must be met:
- Timing: Notice must be given before or at the time of contracting. Terms introduced later are generally ineffective. In Olley v Marlborough Court Ltd [1949] 1 KB 532, a notice excluding liability in a hotel room was ineffective because the contract was formed at the reception desk before the guest saw the notice. Similarly, in Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163, terms on a ticket issued by an automatic machine after the customer committed to entry were too late.
- Contractual Document: The terms must be contained in or referred to by a document reasonably expected to contain contractual terms. In Chapelton v Barry UDC [1940] 1 KB 532, an exclusion clause printed on the back of a ticket for hiring a deckchair was not incorporated because the ticket was seen as a mere receipt, not a contractual document.
- Reasonable Steps: The party seeking to rely on the term must have taken reasonable steps to bring it to the other party's attention. What is reasonable depends on the circumstances and the nature of the term.
Onerous or Unusual Terms
If a term is particularly onerous or unusual, greater effort is needed to bring it to the other party's attention. Lord Denning in J Spurling Ltd v Bradshaw [1956] 1 WLR 461 suggested some clauses need "to be printed in red ink on the face of the document with a red hand pointing to it" (often called the 'red hand rule').
In Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433, a hefty holding fee for photographic transparencies returned late was considered onerous. It was included in the delivery note terms, but the Court of Appeal held it was not incorporated because insufficient notice had been given of such an unusual and burdensome term.
Worked Example 1.2
Priya buys a ticket online for a concert. After payment, she receives an email confirmation with a link to the event's "Terms and Conditions", which include a clause stating no refunds are given, even if the event is cancelled due to performer illness. The performer gets sick and the concert is cancelled. Can the organiser rely on the no-refund clause?
Answer: Possibly not. The notice of the terms was given after the contract was concluded (payment made online). Following Olley and Thornton, notice given post-contract is generally ineffective. Furthermore, a complete no-refund clause, even for cancellation by the organiser, could be considered onerous, requiring clearer and more prominent notice before purchase (Interfoto).
Exam Warning
Be careful with timing. Notice of terms must occur before or at the point the contract is finalised. Analyse the sequence of events in problem questions carefully to determine when the contract was formed and when the terms were presented. Post-contractual notice is invalid for incorporation.
Incorporation by Course of Dealing
Terms may be incorporated if the parties have consistently dealt with each other on the same terms in the past. The course of dealing must be regular and consistent.
Key Term: Incorporation by Course of Dealing
Incorporating terms into a contract based on the parties' previous regular and consistent transactions on those same terms.
Key factors:
- Regularity: The dealings must be sufficiently numerous and frequent. In Hollier v Rambler Motors (AMC) Ltd [1972] 2 QB 71, three or four transactions over five years were held insufficient. However, in Henry Kendall & Sons v William Lillico & Sons Ltd [1969] 2 AC 31, 100 similar contracts over three years was sufficient.
- Consistency: The dealings must have been consistently on the same terms.
- Knowledge: The parties must have known about, or ought reasonably to have known about, the terms in their previous dealings.
In commercial contexts between parties of equal bargaining power, courts may infer incorporation more readily, sometimes even without a long history, if the terms are standard within that trade (British Crane Hire Corporation Ltd v Ipswich Plant Hire Ltd [1975] QB 303).
Worked Example 1.3
A supplier has delivered goods to a commercial customer monthly for two years. Each delivery was accompanied by an invoice stating "All contracts subject to our standard terms and conditions, available on request." The customer never requested the terms. On the latest order, the invoice is missing. The goods are defective. Can the supplier rely on an exclusion clause within their standard terms?
Answer: Potentially yes. There appears to be a regular (monthly for two years) and consistent (reference to standard terms on each invoice) course of dealing. Even though the customer never read the terms, the consistent reference on invoices may be sufficient to incorporate them, especially in a commercial context (Kendall v Lillico). The absence of the reference on the final invoice may not prevent incorporation based on the established course of dealing.
Revision Tip
When analysing incorporation, consider all three methods. Sometimes terms might be incorporated by signature, but if not, consider notice. If notice seems inadequate, consider if a course of dealing exists. Always check for onerous terms, which require clearer notice regardless of the method.
Key Point Checklist
This article has covered the following key knowledge points:
- Terms must be incorporated into a contract to be binding.
- The main methods of incorporation are signature, notice, and course of dealing.
- Signing a contractual document usually binds the signatory to its terms (L'Estrange v Graucob), subject to exceptions like misrepresentation.
- Incorporation by notice requires reasonable steps to bring terms to the other party's attention before or at the time of contracting.
- The document containing the notice must be one reasonably expected to contain terms (Chapelton v Barry UDC).
- Timing is essential for notice; post-contractual notice is ineffective (Olley, Thornton).
- More onerous or unusual terms require clearer and more prominent notice (Interfoto, 'red hand rule').
- Incorporation by course of dealing requires previous dealings to be regular and consistent (Kendall, Hollier).
Key Terms and Concepts
- Incorporation by Signature
- Incorporation by Notice
- Incorporation by Course of Dealing
