Collateral Contract

Gossip GirlsMy attempt at question 3 on terms and representations. This is a tough nut to crack. According to the question, S and T were in negotiations but certain terms were not included by T in the written contract. T claims that the Evidence Act would not allow oral terms to be included if a written contract is in place. The question is whether these statements are still legally binding nonetheless.

My gut instinct tells me that they have to be, but let’s look at the Law.

Oral Terms
Establish the 4-tests.

Parol’s Rule
The parol evidence rule prohibits a person from adducing oral evidence where the terms of the contract have been put into writing. This means that where a written document exists to record the agreement, the court will not allow the introduction of oral evidence to contradict the terms of the agreement.

The reason for this is established in Tindok Besar Estate S/B v Tinjar Co where it was decided that introduction of extra evidence that modify the terms of the agreement would open the floodgates to all manners of dispute and no agreement would be safe from being re-written in court.

Therefore, T is preliminarily right in telling S that those negotiated terms that are not included in the written contract cannot be introduced in court, if S were to bring the case to court – except that there are exceptions to the parol evidence rule that have reduced the effectiveness of S.92 of the Evidence Act.

However, in Tan Chong and Sons Motor Co v Alan McKnight it was decided that the rule only applied when all the terms negotiated had been reduced to writing. If some terms agreed to orally were left out, those terms could still be introduced as evidence.

Collateral Contracts
In addition, S.92(b) of the Act allows the admission of parol evidence on the existence of any separate oral agreement on matters where the document is silent and that are not inconsistent to it. This device is a collateral contract and is particularly useful where an oral statement is made which induced the party to enter into contract.

The oral contract is considered a separate contract but exists side-by-side with the main contract. Therefore, it does not violate the parol rule but is a work-around for the limited situation where the oral terms induced the party to enter into contract.

It was held in Kluang Wood Products S/B v Hong Leong Finance Bhd that the requirements for this are that there exists a representation that was intended to be relied upon and used to induce the party into signing the contract. Therefore, the representation itself must amount to a warranty, collateral to the main contract.

Therefore, the issue now is whether the representations made during the negotiations between S and T were relied upon and induced the other party into signing the contract and therefore exists as a collateral contract, side-stepping the parol evidence rule.

From this, it is quite possible that the representations made by T during the course of negotiations form a collateral contract and are legally binding. The rule to determine this depends on whether they were intended to be relied upon and used to induce S into signing the contract.

The question itself is not clear on this but this can be inferred from the insistence by S that T include those representations in the written contract. Those terms must have been important to S. Therefore, I would argue that the representations are legally binding in the sense that they exist as a collateral contract.

ABC v Hotel

HotelThis is question 4 that I needed to attempt. The story for this question is that three people – A, B, and C – booked into the hotel using different means. The hotel had an exemption clause for damage or losses and these people had their rooms broken into and items stolen.

The first issue that needs to be established is if and when a contract is in place. The next issue would be whether the exemption clause was incorporated into the contract. The third issue is whether they can take action, and what remedial action.

Formation of Contract
It was established in Thornton v Shoe Lane Parking that the T&C must be made know at the point of contract formation. Clauses cannot be added into the contract after formation, without sufficient notice. Terms were printed on the pillars of a car-park only readable after the person has entered the car-park were held to be invalid as the contract was formed at the entrance.

The first case – A – is a classic case of a click-wrap contract and the receipt rule applies. The contract is formed by the acceptance of the room and by payment of the 10% deposit with credit card, which was received by the hotel.

The second case – B – is a classic case of a telephone contract and the same rule applies. The contract was formed at the point where B agreed to book the room and was heard over the phone by the hotel operator.

The third case – C – is a classic case of a normal store counter contract. The contract was formed when C walked in over the counter to rent a room for the night and the hotel accepted the offer by giving C the keys to the room.

Incorporation of Exclusion Clause
The general rule is that any incorporation of exclusion clauses must be brought to the notice of the adhering party up clearly and before or during the formation of contract.

For A, the signature rule applies. It was established in L’Estrange v F Graucob Ltd that having signed the document, the excuse of not reading it cannot be heard, as long as there was no fraud or misrepresentation. The clause was communicated multiple times up-front and it was possible for A to know of it with usual diligence. A’s tardiness does not excuse the fact that the exemption clause now forms part of the contract.

For B, internet access may not have been available and is the reason why B was booking through the phone. In Parker v South Easter Railway it was held that presuming knowledge of the exclusion is incorrect. When enquired, the T&C given orally were different and did not include the exemption clause. This is a clear case of misrepresentation as in Curtis v Chemical Dyeing Co. Therefore, the exemption clause does not form part of the contract with B.

For C, the clause was given by notice as it was displayed on the back wall of the registration desk. However, the writing was blur and the staff did not clarify this matter to C at any point in the course of dealing. In Sanggaralingam v Wong Kook Wah the court held that there was no evidence that the appellant knew of the notice nor had his attention brought to it, therefore the clause was not incorporated. Therefore, the exemption clause does not form part of the contract with C.

In all three cases, the exemption clause printed behind the doors of each hotel room does not matter at all as the contract was formed before entering the room. This was clearly established in Olley v Marlborough Court Ltd where the court held that the contract was formed before entering the hotel room and the exclusion clause was not incorporated into the contract.

Based on this, I will advise B and C that the exemption clause was not incorporated into their contracts and they are definitely capable of action against the hotel for losses. However, the case for A requires further analysis.

Interpretation of Exclusion Clause
I’m not quite sure about this part yet.

Effect of Negligence
If the thief had managed to enter their hotel rooms due to the cleaning crew negligently leaving the doors unlocked, then things may change. In Canada Steamship Lines Ld v The King it was established that the exclusion clause must express clearly the exclusion of liability for negligence. Since the hotel’s disclaimer does not mention negligence expressly, it means that negligence is not part of the exclusion clause. Therefore, if the loss is due to the cleaning crew negligence, action can be taken by all of them.

New law.

Pinnel’s Case

As part of my ongoing studies of Contract, I have to do a couple of past year questions and this is question 2b.

Pinnel’s Case, is a landmark case that decided on the issue of part performance – whether part performance of a contract can constitute full satisfaction. In it, a rule was established – Pinnel’s Rule – that essentially states that part performance cannot constitute full satisfaction unless there is additional consideration in place.

Essentially, what Pinnel’s Rule does with the additional consideration is to put a new contract in place of the old contract. The offer to settle in full by making part payment must be accepted by the other party with new consideration.

For example, a person may make part payment to settle a debt in full if they paid it early as an early payment would constitute additional consideration.

However, the situation in S.64 of the Malaysian Contract Act is a little different on this. It allows for full satisfaction with only part payment as established in the case of Kerpa Singh v Bariam Singh. Not only does it not require any additional consideration to be made, it does not even require an agreement of part-payment to be made between the parties.

Yow! Our law has many peculiarities and this is one of it.