Terms of a contract


Godwin is a sales representative for Richmond Pharmaceuticals in Jos, Plateau State. His primary assignment is the marketing of the company’s brand of paracetamol syrup. While supplying retail outlets on a Monday morning, he comes across Daily Need Pharmacy on CBN Road. On getting into the pharmacy, he is warmly received by Aisha, the sales attendant. Godwin introduces the product, informing her that the drug is very effective and in high demand. He offers her a carton to sell on a trial basis. Aisha inspects the medication and considers putting it up for sale in the pharmacy. Eventually, she agrees to sell. She explains that her boss is out of town till the weekend. She would try to sell the product as long as her boss approves of it.

On Thursday, Godwin calls Daily Need Pharmacy. He is pleased to hear that four bottles of the syrup have been sold. The following Monday, he arrives at the pharmacy with an invoice for one carton of paracetamol syrup. Unfortunately, Aisha has bad news for him. Her boss had returned over the weekend. He saw the product and decided against selling it. The unsold bottles have been packed to be returned. Considering that the drugs are already being sold, Godwin suggests that they sell the rest and pay for the carton afterwards. From a legal perspective, what are the effects of the terms of this transaction?

In every business transaction with a valid contract, it is necessary to determine the measure of obligations committed by each party. This can only be done by identifying the terms and the importance of each one. The terms of a contract will vary in weight, from the fundamental terms (the most important), to the conditions and the warranties. The nature of the term of a contract will determine the liability of the party committed to it and the consequences of a breach.

The legal issues to be considered in this situation are:

  1. The distinction between a contractual term and a mere representation.
  2. The nature and effect of terms of a contract.
  3. The incidence of collateral contracts.

While negotiating an agreement leading to the conclusion of a contract, parties may communicate certain things aimed at securing the other person’s commitment. If a dispute on a term of contract arises, it may become necessary to determine whether the issue involved was a ‘contractual term’ or a ‘mere representation’. This is because, in the case of a breach of a term of the contract, the aggrieved party can sue and receive a remedy in damages or in both damages and cancellation of the contract (depending on the seriousness of the breach). On the other hand, should the issue involved be a mere representation, the remedies available may be little or none at all.

The case of Shawel v. Reade established the principle that if the person who made the statement had special knowledge or skill, as compared to the other party, then the statement is taken to be a term of the contract. In our scenario above, during the presentation of the paracetamol syrup, Godwin asserted that the medication was “very effective and in high demand”. This would rightly be taken as expert information, inducing the other party to rely on it.

Having seen that the obligations in a contract are not of equal significance, it is understandable that the consequence of a breach of terms will vary. For this reason, a distinction should be made between a warranty, a condition and a fundamental term. Section 11(1)(b) of the Sale of Goods Act 1893 defined a condition as a stipulation in a contract of sale, the breach of which may give rise to a right to treat the contract as repudiated (or right to damages), and a warranty as a stipulation, the breach of which may give rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated.

Going by this definition, a term of contract which gives a party the right to cancel is a condition. Thus, an agreement which is premised on the occurrence of a specific factor is one subjected to a condition precedent. That agreement is not binding until the specific factor has occurred. In our case with Godwin and Daily Need Pharmacy, there was an agreement to sell the product on the condition of the approval of the boss. This situation is similar to the facts of Pym v. Campbell. In that case, an agreement by the defendant to buy the plaintiff’s invention was made subject to the approval of an engineer. It was held that there was no binding agreement until that approval was obtained.

Finally, some statements by a party may not qualify as terms of the contract but are still relevant to the incidence of it. These will come under the doctrine of collateral contracts. The rule established in the City & Westminster case is this: if a person makes a statement or promise which is intended to induce the other party to enter into a contract, then if that party makes a commitment on reliance on that promise, the person who made the promise will be held bound by it. The statement or promise is regarded as part of a preliminary or collateral contract.

In view of this, it should be noted that Aisha received a carton of paracetamol syrup from Godwin to sell “on a trial basis”. This trial basis was the premise on which she entered into the transaction in the first place. That means that the attempt to sell the product was simply a test which could be cancelled in the event of any vitiating factor.

Principles and cases are drawn from Sagay: Nigerian Law of Contract