ICAEW BL · Chapter 3

Contract terms, exclusion clauses and misrepresentation MCQs with Answers

10 multiple-choice questions on Contract terms, exclusion clauses and misrepresentation for ICAEW BL Business Law. Try each one before revealing the answer and explanation.

1. Question 1

   Hartley Joinery Ltd buys 500 oak boards described in the contract as 'kiln-dried', which it needs for making internal doors. The seller delivers air-dried boards, which are unsuitable for that use. The correspondence of goods with their description is a condition under the Sale of Goods Act 1979. What remedies does Hartley have?

   • A) Damages only, because the contract must continue
   • B) Specific performance only, requiring the seller to supply kiln-dried boards
   • C) No remedy unless the seller knowingly delivered the wrong boards
   • D) It may reject the boards and treat the contract as terminated, and/or claim damages
   Show answer & explanation

   Answer: D) It may reject the boards and treat the contract as terminated, and/or claim damages

   Section 13 Sale of Goods Act 1979 implies a condition that goods sold by description will correspond with the description. Breach of a condition entitles the innocent party to treat the contract as discharged (in a sale of goods, to reject the goods) and to claim damages; alternatively it may affirm and claim damages only. In a business sale, s15A removes the right to reject where the breach is so slight that rejection would be unreasonable, but delivering boards unsuitable for their intended use is not slight. Specific performance is rarely ordered for ordinary goods, and liability does not depend on the breach being deliberate.

2. Question 2

   Which of the following statements made during negotiations is LEAST likely to amount to an actionable misrepresentation?

   • A) A seller with no farming experience says she thinks an orchard could produce about 20 tonnes of apples a year, a figure she has never tested
   • B) A seller states that a business's turnover last year was £400,000, when it was actually £250,000
   • C) A seller states the premises have planning permission for retail use, when the application was refused
   • D) A seller tells a buyer that the lease has 15 years left to run, when it has 5
   Show answer & explanation

   Answer: A) A seller with no farming experience says she thinks an orchard could produce about 20 tonnes of apples a year, a figure she has never tested

   A misrepresentation is an untrue statement of fact (or law) that induces the contract. A statement of opinion honestly held by someone with no special knowledge is generally not a statement of fact (Bisset v Wilkinson, where an inexperienced seller's estimate of a farm's sheep-carrying capacity was opinion). The other options are statements of existing fact about turnover, planning status and lease length, and each could be an actionable misrepresentation if relied on.

3. Question 3

   Brook Events hires a marquee for a client's conference. A term requires the supplier to deliver the marquee 'freshly cleaned'. It arrives with some dirty side panels, which Brook's staff clean in an hour at a cost of £150, and the conference goes ahead normally. The court classifies the cleaning term as a warranty. What follows?

   • A) Brook may claim damages for the cost of cleaning but may not terminate the contract
   • B) Brook may terminate the contract and refuse to pay the hire charge
   • C) Brook has no remedy, because a warranty is not part of the contract
   • D) Brook may claim damages only if the supplier acted deliberately
   Show answer & explanation

   Answer: A) Brook may claim damages for the cost of cleaning but may not terminate the contract

   A warranty is a term subsidiary to the main purpose of the contract. Its breach entitles the innocent party to damages only, not to treat the contract as discharged. Brook can therefore recover its £150 loss but must still pay the hire charge. A term whose breach always allows termination is a condition. A warranty is a term of the contract, unlike a mere representation, and liability for breach of contract is strict, so the supplier's state of mind is irrelevant.

4. Question 4

   A five-year contract requires a contractor to keep a client's fleet of refrigerated lorries 'in good working order'. This obligation could be breached in trivial ways, such as a faulty cab light, or very seriously, such as refrigeration failing across the whole fleet. The contract does not say what happens on breach. How will the court decide whether the client may terminate for breach of this term?

   • A) By treating the term as a condition, so that any breach allows termination
   • B) By looking at whether the consequences of the breach deprive the client of substantially the whole benefit of the contract
   • C) By treating the term as a warranty, so that termination is never available
   • D) By asking whether the contractor acted dishonestly
   Show answer & explanation

   Answer: B) By looking at whether the consequences of the breach deprive the client of substantially the whole benefit of the contract

   A term that can be broken in ways ranging from trivial to very serious is an innominate (intermediate) term, as recognised in Hongkong Fir Shipping v Kawasaki Kisen Kaisha. The right to terminate depends on how serious the consequences of the breach are. Termination is allowed only if the breach deprives the innocent party of substantially the whole benefit it was intended to obtain. Otherwise damages are the only remedy. Dishonesty is not the test.

5. Question 5

   Jonah pays for a one-day pass, which includes use of a locker, at the front desk of a climbing centre. In the changing room he later sees a notice excluding the centre's liability for property lost through staff negligence. His laptop is stolen from a locker because a member of staff carelessly leaves the master key unattended. Can the centre rely on the notice?

   • A) Yes, because Jonah could have read the notice before using the locker
   • B) Yes, because leisure businesses may always exclude liability for customers' property
   • C) No, because the notice was not brought to Jonah's attention before the contract was made
   • D) No, because exclusion clauses are never effective against negligence
   Show answer & explanation

   Answer: C) No, because the notice was not brought to Jonah's attention before the contract was made

   To be incorporated, an exclusion clause must be brought to the other party's notice before or at the time the contract is made (Olley v Marlborough Court). The contract was made at the front desk, so a notice seen afterwards in the changing room is not part of it. Liability for negligence can sometimes be excluded, so the clause fails because it was not incorporated, not because it covers negligence.

6. Question 6

   Odile, a sole trader, is about to sign a printed equipment-hire agreement. She asks the supplier's sales representative what the small print covers, and he tells her it only limits liability for late delivery. In fact a clause also excludes all liability for defects in the equipment. She signs without reading the agreement, and the equipment proves defective. Can the supplier rely on the defects exclusion?

   • A) No, because the representative misrepresented the effect of the clause, so the supplier can rely on it only to the extent he described
   • B) Yes, because a person who signs a contractual document is bound by every term in it, whatever she was told
   • C) Yes, because Odile is a business, so the clause is not subject to any legal controls
   • D) No, because an exclusion clause in a signed document is valid only if it is separately initialled
   Show answer & explanation

   Answer: A) No, because the representative misrepresented the effect of the clause, so the supplier can rely on it only to the extent he described

   The general rule in L'Estrange v Graucob is that a person who signs a contractual document is bound by its terms whether or not they have read them. That rule does not apply where the other party has misrepresented the effect of the term. In Curtis v Chemical Cleaning and Dyeing Co, an innocent misrepresentation about the scope of a clause meant the defendant could rely on it only to the extent represented. Odile was told the clause covered only late delivery, so the supplier cannot rely on the defects exclusion. There is no requirement for separate initialling, and her business status does not affect the misrepresentation point.

7. Question 7

   In a contract between two businesses, a supplier's standard terms exclude 'all liability for negligence, howsoever caused'. Under the Unfair Contract Terms Act 1977, how will the clause be treated?

   • A) It is wholly valid because both parties are businesses
   • B) It is wholly void because negligence liability can never be excluded
   • C) It is valid for death or personal injury if reasonable, and void for other loss or damage
   • D) It is void in so far as it excludes liability for death or personal injury caused by negligence, and valid for other loss or damage only if reasonable
   Show answer & explanation

   Answer: D) It is void in so far as it excludes liability for death or personal injury caused by negligence, and valid for other loss or damage only if reasonable

   Under UCTA 1977 s2(1), a person cannot exclude or restrict liability for death or personal injury resulting from negligence, whatever the circumstances. Under s2(2), exclusion of liability for other loss or damage caused by negligence is effective only if it satisfies the reasonableness test. Being in a business-to-business contract does not take the clause outside the Act.

8. Question 8

   An insurance policy excludes cover for 'damage caused by water other than rainwater'. It is unclear whether this covers a burst pipe in the insured's office. How will the court resolve the ambiguity?

   • A) It will construe the clause in favour of the insurer, as the party that drafted it
   • B) It will construe the clause against the insurer, as the party seeking to rely on it
   • C) It will treat the whole policy as void for uncertainty
   • D) It will ask an industry expert to decide the meaning conclusively
   Show answer & explanation

   Answer: B) It will construe the clause against the insurer, as the party seeking to rely on it

   Under the contra proferentem rule, an ambiguous exclusion clause is interpreted against the party who wants to rely on it, usually the party that drafted it. The court resolves the ambiguity itself rather than leaving it to an expert. One ambiguous clause does not make the whole contract void.

9. Question 9

   A haulier contracts to carry a seafood supplier's live lobsters from a port to a London market in its 'refrigerated lorry'. The contract says nothing about whether the haulier will keep the refrigeration unit switched on during the journey. A court is asked to imply such a term. On what basis is a court most likely to imply it?

   • A) It would make the contract fairer to the weaker party
   • B) One party would have preferred the term to be included
   • C) Implying it would produce a better commercial result than the contract as written
   • D) It is necessary to give the contract business efficacy, and both parties would obviously have agreed to it
   Show answer & explanation

   Answer: D) It is necessary to give the contract business efficacy, and both parties would obviously have agreed to it

   Courts imply terms in fact only where the term is necessary to give the contract business efficacy (The Moorcock), or where it is so obvious that it goes without saying (the officious bystander test, Shirlaw v Southern Foundries). In Marks & Spencer v BNP Paribas the Supreme Court confirmed that reasonableness or fairness alone is not enough. Courts will not imply a term just because it seems fair, would be preferred by one party, or would improve the bargain.

10. Question 10

    Kamala, a consumer, buys a washing machine from an online retailer. The retailer's terms state: 'We accept no responsibility if goods are not of satisfactory quality.' The machine is faulty on arrival. What is the effect of the term under the Consumer Rights Act 2015?

    • A) It is binding if it was displayed clearly on the retailer's website before purchase
    • B) It is binding if it passes the test of reasonableness
    • C) It is not binding on Kamala, because a trader cannot exclude or restrict liability for the statutory right that goods are of satisfactory quality
    • D) It makes the whole contract void, so Kamala must return the machine and has no remedy
    Show answer & explanation

    Answer: C) It is not binding on Kamala, because a trader cannot exclude or restrict liability for the statutory right that goods are of satisfactory quality

    Under s31 Consumer Rights Act 2015, a term that excludes or restricts a trader's liability for the statutory rights about goods, including satisfactory quality (s9), is not binding on the consumer. It does not matter how prominently it was displayed, and there is no reasonableness test for these terms. The rest of the contract stands, so Kamala keeps her statutory remedies.