Contractual term

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A contractual term is "any provision forming part of a contract". [1] Each term gives rise to a contractual obligation, the breach of which may give rise to litigation. Not all terms are stated expressly and some terms carry less legal gravity as they are peripheral to the objectives of the contract.

Contents

The terms of a contract are the essence of a contract, and tell the reader what the contract will do. For instance, the price of a good, the time of its promised delivery and the description of the good will all be terms of the contract.

Classification of term

Condition or Warranty

Conditions are terms that go to the very root of a contract. Breach of a condition will entitle the innocent party to terminate the contract. [2] A warranty [3] is less imperative than a condition, so the contract will survive a breach. Breach of either a condition or a warranty will give rise to damages.

It is an objective matter of fact whether a term goes to the root of a contract. By way of illustration, an actress's obligation to perform the opening night of a theatrical production is a condition, [4] whereas a singer's obligation to perform during the first three days of rehearsal is a warranty. [5]

Statute may also declare a term or nature of term to be a condition or warranty. For example, the Sale of Goods Act 1979 (UK) s15A [6] provides that terms as to title, description, quality, and sample (as described in the Act) are conditions save in certain defined circumstances.

Innominate term

Lord Diplock, in Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd , [7] created the concept of an innominate term, breach of which may or may not go to the root of the contract depending upon the nature of the breach. Breach of these terms, as with all terms, will give rise to damages. Whether or not it repudiates the contract depends upon whether legal benefit of the contract has been removed from the innocent party. Megaw LJ, in 1970, preferred the use of the classic categorizing into condition or warranty due to legal certainty. [8] This was interpreted by the House of Lords as merely restricting its application in Reardon Smith Line Ltd. v Hansen-Tangen . [9]

Enforceability

In general, parties can only sue for enforcement of valid contractual terms as opposed to representations or mere puffs.

Statements

Only certain statements create contractual obligations. Statements can be split into the following types:

Determination of nature of a statement

There are various factors that a court may take into account in determining the nature of a statement. These include:

The parol evidence rule limits what things can be taken into account when trying to interpret a contract. This rule has practically ceased operation under UK law,[ citation needed ] but remains functional in Australian Law. [13]

Implied terms

A term may either be expressed or implied. An express term is stated by the parties during negotiation or written in a contractual document. Implied terms are not stated but nevertheless form a provision of the contract.

Terms implied in fact

The Privy Council established a five-stage test in BP Refinery (Westernport) Pty Ltd v Shire of Hastings . [14] However, the English Court of Appeal sounded a note of caution with regard to the BP case in Philips Electronique Grand Public SA v British Sky Broadcasting Ltd in which the Master of the Rolls described the test as "almost misleading" in its simplicity. [15]

  1. Reasonableness and equitableness: The implied term must be reasonable and equitable. In Biotechnology Australia Pty Ltd v Pace, [16] it was held a term that imposes a significant detriment or burden on the other party is unlikely to be equitable.
  2. Business efficacy: The implied term must be necessary for the business efficacy of the contract. For instance, if the term simply causes the contract to operate better, that does not fit this criterion. This is the principle laid out in The Moorcock . [17] The presiding judge created a quaint concept of an officious bystander; if the officious bystander were to propose a term and both the parties would be likely to reply with a testy "oh, of course", the term is implied.
  3. Obviousness: The term is so obvious that it goes without saying. Furthermore, there must be one and only one thing that would be implied by the parties. For example, in Codelfa Construction Pty Ltd v State Rail Authority of NSW , [18] a term regarding the inability of construction company to work three shifts a day could not be implied because it was unclear what form it would have taken. In English law, this principle was established in the case of Spring v NASDS, [19] in the context of a trade union membership contract.
  4. Clear expression: The term must be capable of clear expression. No specific technical knowledge should be required.
  5. Consistency: The implied term may not contradict an express term.

The High Court of Australia has ruled that the test in BP applies only to formal contracts. In the case of an informal contract, where the parties have not attempted to stipulate the full terms, the courts should imply a term upon referring to the imputed intention of the parties, provided that the particular term is necessary for the effective operation of the contract. [20] [21] In implying terms in an informal contract, the High Court has suggested that a flexible approach is required. [20] [21] In a case where it is apparent that the parties have not attempted to spell out the full terms of their contract, the court should imply a term by reference to the imputed intentions of the parties if, but only if, it can be seen that the implication of the particular term is necessary for the reasonable or effective operation of a contract of that nature in the circumstances of the case. [20] Obviousness also remains an important element in implying a term in an informal contract. [22]

Terms implied in law

These are terms that have been implied into standardized relationships.

Common law

  • Liverpool City Council v Irwin [23] established a term to be implied into all contracts between tenant and landlord that the landlord is obliged to keep the common areas in a reasonable state of repair.
  • Wong Mee Wan v Kwan Kin Travel Services Ltd [24] established that when a tour operator contracts to provide services, a term is implied that those services will be performed with reasonable duty and care.

Statutory

The rules by which many contracts are governed are provided in specialized statutes that deal with particular subjects. Most countries, for example, have statutes which deal directly with sale of goods, lease transactions, and trade practices. For example, each American state except Louisiana has adopted Article 2 of the Uniform Commercial Code, which regulates contracts for the sale of goods. [25] The most important legislation implying terms under United Kingdom law are the Sale of Goods Act 1979, the Consumer Protection (Distance Selling) Regulations 2000 and the Supply of Goods and Services Act 1982 which imply terms into all contracts whereby goods are sold or services provided.

Terms implied by custom or trade

One is generally bound by the custom of the industry that one is in. To imply a term due to custom or trade, one must prove the existence of the custom, which must be notorious, certain, legal and reasonable. [26] [27]

Course of dealing

If two parties have regularly conducted business on certain terms, the terms may be assumed to be same for each contract made, if not expressly agreed to the contrary. The parties must have dealt on numerous occasions and been aware of the term purported to be implied. In Hollier v Rambler Motors Ltd [28] [29] four occasions over five years was held to be sufficient. In British Crane Hire Corp Ltd v Ipswich Plant Hire Ltd [30] written terms were held to have been implied into an oral contract in which there was no mention of written terms.

Good faith

It is common for lengthy negotiations to be written into a heads of agreement document (sometimes unsigned, and sometimes labelled 'subject to contract') that includes a clause to the effect that the rest of the agreement is to be negotiated. Although these cases may appear to fall into the category of agreement to agree, Australian courts will imply an obligation to negotiate in good faith provided that certain conditions are satisfied: [31]

The test of whether one has acted in good faith is a subjective one; the cases suggest honesty, and possibly also reasonableness. There is no such implied term under UK common law: an attempt was made by Lord Denning in a series of case during the 1970s and 1980s but they are no longer considered 'good law'.[ citation needed ] European legislation [32] imposes this duty, but only in certain circumstances.[ citation needed ]

The Unfair Terms in Consumer Contracts Regulations 1999 [33] reg 8 renders ineffective any 'unfair' contractual term if made between a seller or supplier and a consumer. [34] Regulation 5 of the statutory instrument further elaborates upon the concept of 'unfair', which is rather novel to English law. 'Unfair' is a term in standard form (specifically that was not individually negotiated) that "causes a significant imbalance in the parties' rights and obligations arising under the contract to the detriment of the consumer". [35] It must also be shown the term lacks 'good faith'; the claim failed in Director General of Fair Trading v First National Bank plc , [36] as striking down a relatively high interest rate (falling short of extortionary rates) would mean borrower could have safely ignored the interest rates in its loan agreements (see UK requirements for consumer financial advice/advice waivers in major consumer loan agreements) and that high-rate lenders would receive no interest.

"Subject to" contracts

Four Categories

If a contract specifies "subject to contract", it may fall into one of three categories as identified in Masters v Cameron: [37]

  1. The parties are immediately bound to the bargain, but they intend to restate the deal in a more formalized contract that will not have a different effect; or
  2. The parties have completely agreed to the terms, but have made the execution of some terms in the contract conditional on the creation of a formal contract; or
  3. It is merely an agreement to agree lacking the requisite intention to create legal relations, and the deal will only be binding unless and until the formalized contract has been drawn up.

Subsequent authorities have been willing to recognize a fourth category in addition to those stated in Masters v Cameron. [38]

  2. The parties intend to immediately bound by the terms agreed upon and expect to create a further contract as a replacement for the initial contract which will contain additional terms (if agreed upon).

Contingent Condition

If a contract specifies "subject to finance", it may impose certain obligations on the purchaser: [39]

If the contract is silent on the level of effort required by the finance seeker (usually purchaser) to obtain finance, the finance seeker may come under an implied duty to cooperate. Furthermore, whether the finance seeker may validly claim non-fulfillment of a contingent condition, despite being genuinely satisfied with finance he or she obtained before the expiration of the contingent condition, was not decided in Meehan v Jones. [39]

"Subject to finance" provisions may be also referred to as contingent conditions, which come under two categories: condition precedent and condition subsequent. Conditions precedent are conditions that have to be complied with before performance of a contract is required by both parties With conditions subsequent, parties do not need to perform the contract if a condition is not yet (such as official certification to practice in a particular course of business). The non-fulfillment of a contingent condition means that the parties are not required to perform their side of the respective bargain.

Related Research Articles

Breach of contract Type of civil wrong in contract law

Breach of contract is a legal cause of action and a type of civil wrong, in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party's performance. Breach occurs when a party to a contract fails to fulfill its obligation(s), whether partially or wholly, as described in the contract, or communicates an intent to fail the obligation or otherwise appears not to be able to perform its obligation under the contract. Where there is breach of contract, the resulting damages have to be paid to the aggrieved party by the party breaching the contract.

Parol evidence rule Common law rule relating to contracts

The parol evidence rule is a rule in the Anglo-American common law that governs what kinds of evidence parties to a contract dispute can introduce when trying to determine the specific terms of a contract. The rule also prevents parties who have reduced their agreement to a final written document from later introducing other evidence, such as the content of oral discussions from earlier in the negotiation process, as evidence of a different intent as to the terms of the contract. The rule provides that "extrinsic evidence is inadmissible to vary a written contract". The term "parol" derives from the Anglo-Norman French parol or parole, meaning "word of mouth" or "verbal", and in medieval times referred to oral pleadings in a court case.

Fiduciary Person who holds a legal or ethical relationship of trust

A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties. Typically, a fiduciary prudently takes care of money or other assets for another person. One party, for example, a corporate trust company or the trust department of a bank, acts in a fiduciary capacity to another party, who, for example, has entrusted funds to the fiduciary for safekeeping or investment. Likewise, financial advisers, financial planners, and asset managers, including managers of pension plans, endowments, and other tax-exempt assets, are considered fiduciaries under applicable statutes and laws. In a fiduciary relationship, one person, in a position of vulnerability, justifiably vests confidence, good faith, reliance, and trust in another whose aid, advice, or protection is sought in some matter. In such a relation, good conscience requires the fiduciary to act at all times for the sole benefit and interest of the one who trusts.

A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.

Unconscionability Doctrine in contract law

Unconscionability is a doctrine in contract law that describes terms that are so extremely unjust, or overwhelmingly one-sided in favor of the party who has the superior bargaining power, that they are contrary to good conscience. Typically, an unconscionable contract is held to be unenforceable because no reasonable or informed person would otherwise agree to it. The perpetrator of the conduct is not allowed to benefit, because the consideration offered is lacking, or is so obviously inadequate, that to enforce the contract would be unfair to the party seeking to escape the contract.

Anticipatory repudiation

Anticipatory repudiation or anticipatory breach is a term in the law of contracts which describes a declaration by the promising party to a contract that he or she does not intend to live up to his or her obligations under the contract. It is an exception to the general rule that a contract may not be considered breached until the time for performance.

Collateral contract

A collateral contract is usually a single term contract, made in consideration of the party for whose benefit the contract operates agreeing to enter into the principal or main contract, which sets out additional terms relating to the same subject matter as the main contract. For example, a collateral contract is formed when one party pays the other party a certain sum for entry into another contract. A collateral contract may be between one of the parties and a third party.

Exclusion clause

An exclusion clause is a term in a contract that seeks to restrict the rights of the parties to the contract.

Misrepresentation Untrue statement in contract negotiations

In common law jurisdictions, a misrepresentation is a false or misleading statement of fact made during negotiations by one party to another, the statement then inducing that other party to enter into a contract. The misled party may normally rescind the contract, and sometimes may be awarded damages as well.

Australian contract law

The law of contract in Australia is similar to other Anglo-American common law jurisdictions.

<i>LEstrange v F Graucob Ltd</i>

L'Estrange v F Graucob Ltd [1934] 2 KB 394 is a leading English contract law case on the incorporation of terms into a contract by signature. There are exceptions to the rule that a person is bound by his or her signature, including fraud, misrepresentation and non est factum.

English contract law Law of contracts in England and Wales

English contract law is the body of law that regulates legally binding agreements in England and Wales. With its roots in the lex mercatoria and the activism of the judiciary during the industrial revolution, it shares a heritage with countries across the Commonwealth, from membership in the European Union, continuing membership in Unidroit, and to a lesser extent the United States. Any agreement that is enforceable in court is a contract. A contract is a voluntary obligation, contrasting to the duty to not violate others rights in tort or unjust enrichment. English law places a high value on ensuring people have truly consented to the deals that bind them in court, so long as they comply with statutory and human rights.

<i>Burger King Corporation v Hungry Jacks Pty Ltd</i> Australian court case between Burger King and Hungry Jacks

Burger King Corporation v Hungry Jack's (2001) 69 NSWLR 558 was an Australian court case decided in the New South Wales Court of Appeal on 21 June 2001, concerning a dispute between United States-based fast food chain Burger King, and its Australian franchisee Hungry Jack's. It related to the breach of a business development agreement between the two companies, and the resulting attempts of Burger King to terminate the contract. The Court of Appeal decided that Burger King could not terminate the contract, for several reasons, one of which was that it was in breach of an implied term of good faith, having taken steps to engineer the breach of the contract.

Contract Legally binding document establishing rights and duties between parties

A contract is a legally enforceable agreement that creates, defines, and governs mutual rights and obligations among its parties. A contract typically involves the transfer of goods, services, money, or a promise to transfer any of those at a future date. In the event of a breach of contract, the injured party may seek judicial remedies such as damages or rescission. Contract law, the field of the law of obligations concerned with contracts, is based on the principle that agreements must be honoured.

Contractual terms in English law is a topic which deals with four main issues.

Interpreting contracts in English law is an area of English contract law, which concerns how the courts decide what an agreement means. It is settled law that the process is based on the objective view of a reasonable person, given the context in which the contracting parties made their agreement. This approach marks a break with previous a more rigid modes of interpretation before the 1970s, where courts paid closer attention to the formal expression of the parties' intentions and took more of a literal view of what they had said.

Implied terms in English law are default rules for contracts on points where the terms which contracting parties expressly choose are silent, or mandatory rules which operate to override terms that the parties may have themselves chosen. The purpose of implied terms is often to supplement a contractual agreement in the interest of making the deal effective for the purpose of business, to achieve fairness between the parties or to relieve hardship.

<i>Great Peace Shipping Ltd v Tsavliris (International) Ltd</i> English contract law case

Great Peace Shipping Ltd v Tsavliris (International) Ltd [2002] EWCA Civ 1407 is a case on English contract law and on maritime salvage. It investigates when a common mistake within a contractual agreement will render it void.

<i>Commonwealth Bank of Australia v Barker</i> Judgement of the High Court of Australia

Commonwealth Bank of Australia v Barker is a leading Australian judgment of the High Court which unanimously and firmly rejected the proposition that contracts of employment in Australia should contain an implied term of mutual trust and confidence.

BP Refinery (Westernport) Pty Ltd v Shire of Hastings is a leading judgment of the Privy Council which summarised the test for whether a term should implied ‘in fact’ into a contract, to give effect to the intentions of the contracting parties. While the formulation of the test is not without criticism, it is usually accepted as setting out the tests for the implication of a term into a contract.

<i>Codelfa Construction Pty Ltd v State Rail Authority of NSW</i> Judgement of the High Court of Australia

Codelfa Construction Pty Ltd v State Rail Authority of New South Wales, ("Codelfa") is a widely cited Australian contract law case, which serves as authority for the modern approach to contractual construction. The case greatly influenced the development of the Eastern Suburbs railway line. In terms of contract law, the case addresses questions of frustration, construction and the parol evidence rule. The case diverged from the well established English approach regarding the use of extrinsic evidence in contractual interpretation.

References

  1. ↑ Martin, E; Law, J, eds. (2006). Oxford Dictionary of Law (6th ed.). London: OUP.
  2. ↑ Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd [1938] HCA 66 , (1938) 61 CLR 286, High Court (Australia); see also Associated Newspapers Ltd v Bancks [1951] HCA 24 , (1951) 83 CLR 322, High Court (Australia).
  3. ↑ Not to be confused with a product warranty, which is always referred to as a 'guarantee' in law.
  4. ↑ Poussard v Spiers and Pond (1876) 1 QBD 410.
  5. ↑ Bettini v Gye (1876) 1 QBD 183.
  6. ↑ As added by the Sale of Goods Act 1994 (UK) s4(1).
  7. ↑ Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1961] EWCA 7 , [1962] 1 All ER 474, Court of Appeal (England and Wales)
  8. ↑ Maredelanto Compania Naviera SA v Bergbau-Handel GmbH, The Mihalis Angelos [1970] EWCA 4 , [1970] 3 All ER 125, Court of Appeal (England and Wales).
  9. ↑ Reardon Smith Line Ltd. v Hansen-Tangen [1976] 3 All ER 570
  10. 1 2 Routledge v McKay [1954] EWCA 8 , [1954] 1 All ER 855, Court of Appeal (England and Wales).
  11. ↑ Oscar Chess Ltd v Williams [1956] EWCA 5 , [1957] 1 WLR 370, Court of Appeal (England and Wales).
  12. ↑ Birch v Paramount Estates Ltd (1956) 16 EG 396
  13. ↑ Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55 at [33], (2005) 218 CLR 471, High Court (Australia).
  14. ↑ BP Refinery (Westernport) Pty Ltd v Shire of Hastings [1977] UKPC 13 , (1977) 180 CLR 266, Privy Council (on appeal from Victoria).
  15. ↑ Philips Electronique Grand Public SA v British Sky Broadcasting Ltd [1995] EMLR 472 at 481.
  16. ↑ Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130 Court of Appeal (NSW, Australia).
  17. ↑ The Moorcock (1889) 14 PD 64.
  18. ↑ Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24 , (1982) 149 CLR 337, High Court (Australia).
  19. ↑ Spring v NASDS [1956] 1 WLR 585.
  20. 1 2 3 Hawkins v Clayton [1988] HCA 15 , (1988) 164 CLR 539, High Court (Australia).
  21. 1 2 Byrne v Australian Airlines Ltd [1995] HCA 24 , (1995) 185 CLR 410, High Court (Australia).
  22. ↑ Byrne v Australian Airlines Ltd [1995] HCA 24 , (1995) 185 CLR 410 at p. 446 per McHugh & Gummow JJ, High Court (Australia).
  23. ↑ Liverpool City Council v Irwin [1976] UKHL 1 , [1976] 2 WLR 562, House of Lords (UK).
  24. ↑ Wong Mee Wan v Kwan Kin Travel Services Ltd [1995] UKPC 42 , [1995] 4 All ER 745, Privy Council.
  25. ↑ For links and comparison among states on the adoption of the UCC, see Cornell Law Uniform Laws.
  26. ↑ Con-stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd [1986] HCA 14 , (1986) 160 CLR 226(11 April 1986), High Court (Australia).
  27. ↑ Frigaliment Importing Co., Ltd., v. B.N.S. International Sales Corp., 190 F. Supp. 116 (S.D.N.Y. 1960) (plaintiff failed to prove what he meant by "chicken") and U.C.C. § 1-205.
  28. ↑ Hollier v Rambler Motors Ltd [1971] EWCA 12 , [1972] QB 71, Court of Appeal (England and Wales).
  29. ↑ see also Balmain New Ferry Co Ltd v Robertson [1906] HCA 83 , (1906) 4 CLR 379 (18 December 1906), High Court.
  30. ↑ British Crane Hire Corp Ltd v Ipswich Plant Hire Ltd [1973] EWCA 6 , [1975] QB 303, Court of Appeal (England and Wales).
  31. ↑ Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 Court of Appeal (NSW, Australia).
  32. ↑ Council of the European Union (PDF) https://www.consilium.europa.eu/media/29529/general-conditions-june-2016-en.pdf.{{cite journal}}: Missing or empty |title= (help)
  33. ↑ Unfair Terms in Consumer Contracts Regulations 1999 (UK) SI 1999/2083
  34. ↑ For definitions, see reg 3(1).
  35. ↑ Unfair Terms in Consumer Contracts Regulations 1999 reg 5(1)
  36. ↑ Director General of Fair Trading v First National Bank plc [2001] UKHL 52 , [2001] 3 WLR 1297, House of Lords (UK).
  37. ↑ Masters v Cameron [1954] HCA 72 , (1954) 91 CLR 353, High Court (Australia).
  38. ↑ Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd 40 NSWLR 622 Court of Appeal (NSW, Australia).
  39. 1 2 Meehan v Jones [1982] HCA 52 , (1982) 149 CLR 571, High Court (Australia).
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