The objective test

You can’t tell what the parties under a contract are obliged to do unless you know what the terms of the contract say. So it’s pretty crucial that you learn how to determine what the terms of the contract are. But, unfortunately, this is a subject which isn’t dealt with at well by any of the contract law textbooks. Their chapters on ‘The Terms of a Contract’ are far more concerned with explaining how the terms of a contract are to be classified; something which need not concern us at the moment. The prior issue of how you tell what the terms of a contract are is usually only touched on very lightly and discussed at a very superficial level. Hence the necessity for this essay.

Now, of course, you’ll never need to determine what the terms of a contract are if both parties are in agreement as to what the terms are. If they are both agreed then there is no issue between them to be settled. The question – What are the terms of this contract? – only comes up if the parties disagree as to what the terms are. Now I want to distinguish this kind of disagreement from the case where the parties agree what the terms are but disagree over how they should be interpreted. So if Farmer and Butcher reach an agreement under which Farmer undertakes to sell Butcher 10 tonnes of ‘good quality’ British beef and Butcher agrees to pay him £5,000 for said beef on delivery, Farmer and Butcher will basically agree as to what the terms of the contract are but they might not agree on what meaning should be given to the term ‘good quality’ – Butcher might have higher standards in this regard than Farmer. And Farmer and Butcher may end up asking the courts to rule on whether the beef supplied by Farmer to Butcher was of ‘good quality’. I’m concerned in this note with much more fundamental disagreements: cases where A and B cannot even agree as to what the terms of their contract say. Some examples:

(1) Lazy types a letter to Gardener saying that he will give him ‘£100’ if Gardener mows Lazy’s lawn. Lazy meant to type ‘£10’ but pressed the ‘0’ key once too often. Gardener went round to Lazy’s house and mowed Lazy’s lawn. Gardener contends that under the terms of their contract, Lazy has to pay him £100 for the work he did; Lazy contends that he only has to pay £10.

(2) Industrious goes door to door offering to clean people’s windows for them. He goes round to 65 Mill Road and knocks on the door. Happy opens the door and Industrious says ‘Can I clean your windows? I’ll do a good job for £50.’ Happy says, ‘Okay – £50 it is. I’m just going out but I should be back by the time you’ve finished and I’ll pay you then.’ Happy goes out and Industrious starts work. By the time he comes back, Industrious has finished cleaning all the windows at 65 Mill Road. Industrious asks Happy for £50 but Happy replies, ‘Why should I give you £50? You haven’t even started cleaning my windows.’ It turns out that Happy lives at 67 Mill Road, next door to 65 Mill Road. (Happy was in 65 Mill Road when Industrious came round because he was doing some redecorating work for his neighbour, who is on holiday.) Industrious contends that under the terms of their contract, Happy is obliged to pay him £50 for cleaning the windows at 65 Mill Road. Happy contends that he doesn’t have to pay Industrious anything: under the terms of their contract, he only undertook to pay Industrious £50 if he cleaned the windows at 67 Mill Road.

(3) Desolate places an advertisement in the paper: ‘Lost cat – black with a white nose. Responds to the name “Red”. £100 reward for anyone who returns him.’ Curious sees the advertisement and later finds Red dead by the side of the road; he had been run over. (Curious identified him by his description and a name tag around Red’s neck.) Curious returns the dead cat to Desolate and claims his £100 reward. Desolate refuses to pay Curious anything, claiming that he is only obliged to pay the reward to someone who returned Red in a safe condition. Curious claims that Desolate is obliged to pay the reward to anyone who returned Red to Desolate, whatever his condition.

(4) Professor specialises in International Law and placed the following advertisement in the paper: ‘Personal assistant wanted to work full time to assist busy academic with part-time practice in international law on the side. Some travel involved due to international nature of academic’s job.’ Graduate applied for the job and was successful. Soon after Graduate started working for Professor, Professor told her to pack her bags because they were going to Afghanistan to do some research on whether the US-led military action there involved any breaches of international law. Professor told Graduate that if she had any dependants, it might be an idea if she took out some life insurance ‘because things are still pretty dangerous out there’. Professor also told Graduate that his funding for the trip to Afghanistan was pretty limited, so they would have to share a room in the hotel he had booked for them. On hearing all this, Graduate refused to go to Afghanistan. Professor insists that Graduate is required under the terms of her contract of employment to accompany him to Afghanistan. Graduate claims that she is not.

(5) Student was in charge of arranging the drinks for her College’s Winter Ball. She contacted Merchant and Merchant agreed to supply Student with 100 bottles of champagne at £20 a bottle; the wine to be delivered on the night of the ball. Come the night of the ball, one of Merchant’s employees turned up with 100 bottles of Farmer Giles’ Natural Sparkling Wine, worth about £2 a bottle. When Student protested, she was informed that according to Merchant’s standard terms, ‘In the event that we have difficulties obtaining the wine ordered, we reserve the right to supply another brand of wine in its place, at the same price as the wine that was originally ordered.’ Merchant contends that Student is obliged to pay him £2000 for the 100 bottles of sparkling wine supplied on the night of the ball (which Student reluctantly accepted, for fear that a riot would break out if she didn’t supply any alcohol). Student contends that she is not; and further contends that Merchant committed a breach of contract when he supplied the bottles of sparkling wine instead of the champagne originally agreed on.

So – how do we determine what the terms of a contract are? The answer is – we apply what is known as the objective test for determining the terms of a contract. No one has yet come up with a definitive statement as to how the objective test works – mainly because the contract law textbooks shy away from the whole issue of how we determine what the terms of a contract are. But I think the following fairly summarises the law.

Suppose that A and B are parties to a contract and they disagree over what the terms of the contract are. Now one of them will invariably be claiming that the other is bound by a particular term and the other will be claiming that he or she isn’t. Let’s say that in the case we’re considering A is claiming that B is bound by term x (that term x imposes an obligation on her) and B is claiming that she isn’t. In order to determine whether B is bound by term x, you simply ask two questions:

(i) When B entered into the contract with A, did A think B was agreeing to term x’s being part of the contract? If the answer is ‘no’ then that’s the end of the game: B will not be bound by term x. A cannot claim that B is bound by a term if he knew that she hadn’t agreed to it when she entered into the contract with A. (This is the message of Hartog v Colin & Shields (1939).) But if the answer is ‘yes’, you ask:

(ii) Was it reasonable for A to think this? If the answer is ‘no’ then, again, B will not be bound by term x. But if the answer is ‘yes’ then B is bound by term x (unless, of course, some statutory provision makes term x unenforceable).

So going back to the cases set out above –

In case (1), Gardener is claiming that Lazy is bound by the following term: ‘Lazy will pay Gardener £100 if Gardener mows Lazy’s lawn.’ To see whether this term is part of the GardenerLazy contract, we ask first of all – when Gardener mowed Lazy’s lawn, did he think that Lazy was promising to pay him £100 for doing so? Maybe he didn’t – maybe he knew that Lazy had made a mistake in typing his letter. If so, then Lazy doesn’t have to pay Gardener £100 for mowing his lawn. (Does he even have to pay him £10? Under the contract, probably not as Lazy never offered to pay Gardener £10 for mowing the lawn. He only offered to pay Gardener £100, an offer which – we’re supposing – Gardener knew was a mistake. But Gardener may still be entitled to bring a non-contractual claim for a reasonable sum – a quantum meruit – for the work he did.) But maybe Gardener thought Lazy was being generous and genuinely did think that Lazy was promising to pay him £100 for mowing his lawn. If that is the case, we then have to ask whether it was reasonable for Gardener to think this, given all the circumstances. There seems no reason why it wouldn’t have been reasonable for Gardener to think this, and so Lazy will be bound to pay Gardener £100 for mowing Lazy’s lawn.

In case (2), Industrious is claiming that, under the terms of the contract, Happy is required to pay him £50 for washing the windows of 65 Mill Road. For this to be true, it has to be established first of all that when Industrious and Happy talked, Industrious thought Happy was promising to pay him £50 if Industrious cleaned the windows of the house Happy was in when he talked to Industrious. Presumably he did; otherwise why would Industrious have done what he did? Secondly, it has to be established that it was reasonable for Industrious to think this. And I think it is – it was reasonable for Industrious to think that when Happy agreed to pay Industrious £50 for washing Happy’s windows, Happy was referring to the windows of the house he was in when he talked to Industrious. So I would have thought that Industrious would have a good claim against Happy in case (2).

In case (3), Desolate will be bound under the terms of the contract to pay Curious the reward if Curious thought Desolate was offering to pay £100 to whoever returned Red even if Red was dead and it was reasonable for Curious to think this. Curious may find it difficult to show that it was reasonable for him to think that Desolate was offering to pay a reward for the return of his cat, even if the cat was dead. Given this, Curious probably will not have a claim against Desolate in case (3).

In case (4), Professor wants to claim that under the terms of his contract with Graduate, Graduate is required to accompany him on foreign trips even if those trips require her to put her life at risk, and that she is also required to share a room with him if he doesn’t have enough money for separate rooms. It’s highly unlikely that Professor will be able to establish this under the objective test. For one thing, it’s unlikely that Professor seriously thought Graduate was agreeing to do these kinds of thing (put her life in danger, share a room with Professor) when she took up her position with him. Even if it did, it’s highly unlikely that Graduate did anything that made it reasonable for Professor to think Graduate had agreed to do these kinds of things when she signed up to work for him. Of course, if Professor had made it clear at the interview that his job often required him to travel to war-torn countries and that he would expect his personal assistant to accompany him and that on such trips they would often have to ‘rough it’ together, then that would be different. Under the objective test, Graduate would be required – under the terms of her contract with Professor – to go with him to Afghanistan. (Unless, of course, a statutory provision intervened to make this aspect of her contract of employment unenforceable.)

Case (5) is the most complex because it involves two disputes over the terms of the contract between Student and Merchant. First of all, Merchant is claiming that – under the terms of the StudentMerchant contract – Student is required to pay him £2,000 for the sparkling wine that he supplied on the night of the ball (even though the sparkling wine was only worth £200). Under the objective test, Student will be required to pay up if, when she entered into the StudentMerchant contract, (i) Merchant got the impression that Student was agreeing to pay £20 a bottle for the champagne or whatever wine Merchant chose to substitute for the champagne and it was reasonable for Merchant to believe that Student was agreeing to do this. It’s hard to see that this could be made out if, when Student and Merchant agreed their deal, Student had no idea that there was a term in Merchant’s standard form contract allowing him to supply different wine from the wine ordered, at the same price as the original wine, and Merchant was aware that Student had no idea about the existence of this term. But if the existence of the term was brought to Student’s attention and Student said, ‘Fine – I don’t care’ then under the objective test, Student probably will be obliged to pay £2,000 for the sparkling wine supplied by Merchant. Student will have given Merchant the reasonable impression that she was happy to pay £2,000 for whatever wine Merchant supplied her – either the original champagne bargained for or, if that was hard to obtain, whatever Merchant supplied in its place. But if the term wasn’t brought to Student’s attention then Merchant almost certainly won’t be allowed to sue Student for the £2,000 he wants (though he may be allowed to bring a non-contractual claim for the value of the wine that he supplied – this sort of claim is known as a claim for a quantum valebant; a claim for as much as they (the goods) were worth). Secondly, Student is claiming that Merchant was required – under the terms of the StudentMerchant contract – to supply her with champagne and that he therefore committed a breach of contract in failing to supply her with champagne. When we apply the objective test to resolve this question, our attention to switches to Student and we ask – did Student think that Merchant was agreeing to supply her with champagne when they concluded their deal and was it reasonable for her to think that? Our answer to this question will depend on whether the clause in Merchant’s standard terms had been brought to her attention. If it was, it would not have been reasonable for Student to think that Merchant was agreeing to deliver her 100 bottles of champagne, no matter what. If it wasn’t, it seems it would have been pretty reasonable for Student to have thought that Merchant was guaranteeing to supply her with 100 bottles of champagne. So case (5) all turns on whether the term in Merchant’s standard terms – which purported to allow him to supply a different wine from the one ordered, at the original price – was brought to Student’s attention. If it was, then Merchant will be able to sue Student for £2,000 for the sparkling wine that he delivered on the night of the ball and Student won’t be able to claim that Merchant committed a breach of contract in supplying the sparkling wine. But if the clause was not brought to Student’s attention, then the whole thing switches round: Merchant won’t be able to sue Student for £2,000 for the champagne (though he may be able to bring a non-contractual quantum valebant claim against Student) and Student will be able to claim that Merchant committed a breach of contract in supplying sparkling wine on the night of the ball.

Case (5) is a very common situation, where two parties (call them, A and B) agree to deal with each other, and one of the parties (say it’s B) makes it clear (either explicitly or implicitly) that he is only willing to deal with A on his, B’s, standard terms. (When you buy something from a supermarket or buy a ticket at a railway station, you are in this kind of situation: you know when you make your purchase that the supermarket or the railway company is only willing to deal with you on its standard terms.) The rules on ascertaining the terms of a contract in this kind of situation are easy enough to state:

(1) A will be bound by all of B’s standard terms, however unreasonable, if he was supplied a copy of them and indicated with his signature that he was happy to be bound by all those terms: L’Estrange v Graucob (1934). Though it will be different if A was misled as to the effect of one of the terms before signing; in that case A will not be bound by that term: Curtis v Chemical Cleaning (1951).

(2) Where A does not specifically indicate that he is happy to be bound by all of B’s standard terms, but he does not object to his agreement with B being governed by B’s standard terms, he will be bound by all of the reasonable/non-onerous/ordinary terms in B’s standard terms and by any unreasonable/onerous/unusual terms in B’s standards terms which were drawn specifically to his attention and which he did not object to: Thornton v. Shoe Lane Parking (1971); Interfoto v Stiletto Visual Programme (1988).

These rules are merely examples of the objective test for determining the terms of a contract at work. If someone presents you with a standard form contract and you look at it and sign at the bottom, you’re bound by all the terms in that standard form contract, however onerous and obscure because it’s reasonable for the other guy to think that your signature means you’re happy to be bound by all the terms in the contract. If you don’t sign but merely don’t raise an objection when the other guy indicates he wants your deal with him to be governed by his standard terms, then you’re bound by those of his standard terms that are reasonable and those unreasonable terms in his standard terms which were drawn to your attention and you didn’t object to. Why? Well, with regard to the reasonable terms, it’s reasonable enough for the other guy to think that you are happy to deal on those terms. And as regards any unreasonable terms, if they have been specifically drawn to your attention and you haven’t objected to them then it’s reasonable for him to think you’ve agreed to those terms as well. So don’t fall for the idea that cases like Thornton and Interfoto are examples of the courts intervening to protect the little guy from being oppressed by big companies inserting oppressive clauses in their standard form contracts. Thornton and Interfoto are simply examples of the objective test being applied to determine the terms of the contract in situations where one party has indicated his willingness to deal on the other party’s standard terms.

In fact, virtually all of the cases normally dealt with in the contract textbooks in their chapters on ‘Terms of the Contract’ can be seen as applications of the objective test.

For example, A buys a car from B, thinking – on the basis of things B said while A was looking at it – that B has contractually guaranteed that it is of a certain age. Is there such a warranty in the contract? It depends on whether it was reasonable to think that B was making such a guarantee – and that will depend a lot on who B is. If he’s a professional car dealer then it’s more reasonable to think that he’s guaranteeing the age of the car than if he’s a private seller, getting rid of his car to buy a new one: compare Oscar Chess Ltd v Williams (1957) (ordinary car owner sells car to dealer; held owner not bound by her representation that the car was made in 1948) with Dick Bentley Productions Ltd v Harold Smith Motors (1965) (sale by dealer to ordinary consumer: held that dealer was bound by his representation that the car had only done 20,000 miles).

Similarly, A rents a crane from B, as he has many times before. Each time in the past, he has signed a standard form contract which expressly states that he is to cover the cost of any repairs which the crane may need after it’s been used by A. But this time nothing is signed. The crane needs to be repaired after A’s finished with it. Is A liable for the costs of repair? Applying the objective test, he is if B thought – when A hired the crane – that he was agreeing to cover the costs of any repairs that were needed and it was reasonable for her to think that. Well, she certainly thought that he was and it was reasonable for her to think that given that A had always agreed in the past to cover the costs of repair and knew when he ordered the crane this time that B was expecting him to cover the costs of repair. This was the result reached by the Court of Appeal in British Crane Hire Corporation Ltd v Ipswich Plant Hire Ltd (1973), holding that the defendant, who had urgently hired a crane from the claimant without signing the claimant’s standard terms of hire, was bound by the term in the claimant’s standard terms requiring him to pay for any costs involved in returning the crane to the claimant on the basis that a continuous ‘course of dealing’ between the two parties on the claimant’s standard terms meant that it was reasonable for the claimant to believe that the defendant was agreeing on to hire the crane on the claimant’s standard terms even though on this occasion nothing had been signed.

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