A contract is a legally enforceable agreement between two or more parties. The terms of contract set out the rights and obligations of each party under that agreement. It is these terms that determine what the contracting parties are legally obligated to do in exchange for the promise of the other.
The following article provides an overview of the fundamentals of the terms of contract, including express and implied terms, classification of the different types of terms and the effect of their breach.
Express terms of contract
The terms of contract may be express or implied. Express terms are those explicitly agreed between the parties, either orally or in writing.
Even though these terms are, by definition, those openly expressed at the time a contract is made, issues often arise as to what constitutes an express term, whether a term has been incorporated into a contract or interpreting the meaning of an express term:
- contractual terms or representations – not all statements made by the parties during negotiations are intended to have contractual force. Some are only representations, meaning they are intended to induce the other party to enter into the contract, but not to be capable of imposing liability for breach of contract.
- incorporation of express terms – where terms are contained within different documents, or where a contract is made subject to standard terms, it is important to ascertain whether the party relying on the terms and conditions had taken reasonable steps to bring these to the attention of the other party.
- interpretation of express terms – once express terms have been identified, there is still the question of interpretation. Where parties disagree on the meaning of an incorporated term, it will be for the court to objectively construe the meaning of the term having regard to the words expressed, the contract as a whole and the factual matrix reasonably available or known to the parties at the time the contract was made.
Implied terms of contract
Implied terms are not expressly stated but rather arise by implication, often to reflect the intention of the parties at the time the contract was made or because the contract doesn’t make commercial sense without that term. These terms may be implied into a contract by fact, by operation of law or by custom and usage:
- implied by fact – terms of contract implied by fact are ones that are not expressly set out in the contract but which the parties must have intended to include. Whether such a term is implied depends on the wording of the contract and the surrounding circumstances known to both parties at the time of the contract. In particular, a term can only be implied if the officious bystander would consider inclusion of the term to be so obvious as to go without saying or, alternatively, the term is necessary to give business efficacy to the contract.
- implied by law – terms of contract may be implied by law even where such terms were not intended by the parties. These are terms that arise as a legal incident from the nature of the particular contractual relationship. For certain contracts the law seeks to impose a standardised set of terms as a form of regulation, for example, as between landlord and tenant or employer and employee.
- implied by custom or usage – terms of contract may be implied by custom or usage where there is clear and sufficient factual evidence that a custom operates within a particular trade or industry. However, the practice must be so well defined and recognised that contracting parties must be assumed to have had it in their minds when they contracted. Further, no such term will be implied if the term is unreasonable or if the contract evidences a contrary written intention of the parties.
Classification of the terms of contract
Contractual terms are often classified into one of three types: a condition, a warranty or an intermediate term (also referred to as an innominate term). These can be broadly defined as follows:
- condition – this is an important and fundamental term going to the very heart of the contract. In other words, the term is so essential to the very nature of the contract that its’ non-performance may fairly be considered by the other party as a substantial failure to perform the contract at all. A breach of a condition entitles the aggrieved party to terminate the contract and claim damages.
- warranty –a warranty is a minor term, not critical to the performance of the contract, breach of which does not entitle the aggrieved party to terminate the contract, but does allow for a claim in damages.
- intermediate term – this is a term that cannot be identified as amounting to either a condition or a warranty at the time of entering into the contract. Whether or not breach of an intermediate term will entitle the aggrieved party to terminate the contract will only be capable of being ascertained once the gravity of the breach has been considered. Here the court will look, in particular, to whether the aggrieved party was deprived of substantially the whole benefit of the contract.
Since breach of a condition entitles the aggrieved party to terminate the contract and claim damages, contractual disputes can often centre on whether or not a particular term of the contract takes effect as a condition or a warranty.
Some conditions are implied by law, for example, under the Consumer Rights Act 2015, the supply goods is to be treated as including a condition that those goods are of satisfactory quality. In other cases, the contract itself may seek to classify a term in a particular way. However, the labelling of a term does not necessarily resolve the issue as to how a term should be construed. This will be a matter of construction in each individual case.
Remedies for breach of the terms of contract
Under the terms of contract, the remedies available for breach will, as previously discussed, depend upon the nature and extent of the breach. The most common contractual remedies include:
- repudiation – if a condition of a contract is breached, the aggrieved party is entitled to terminate the contract and treat himself/herself as discharged from further performance under it. This is known as repudiation. The aggrieved party will also be able to claim damages. If a warranty is breached, the aggrieved party may claim damages but will not be able to repudiate the contract.
- damages – this is compensation used to put the aggrieved party in the position they would have been had the contract been properly performed. Damages will only be recoverable for loss suffered as a result of the breach provided it is not too remote. The aggrieved party is also under a duty to mitigate any loss.
- specific performance – this is an alternative remedy for breach of contract in which the court can compel a party to perform its contractual obligations. Unlike damages, which are available as of right, specific performance is granted at the court’s discretion.
Discovering more about the terms of contract
The law relating to terms of contract is complex. This article provides only an overview of some of the legal principles involved. For detailed guidance on terms of contract, students should refer to specific texts or critical analysis on the subject, with reference to any statutory provisions and all recent and leading case law.
The matters contained in this article are intended to be for information purposes only. This article does not constitute legal advice and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.