how are the terms of the contract to be interpreted
whether terms are implied into the contract
what controls are placed on unfair terms
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.
3 Historically restricted in common law jurisdictions but generally accepted elsewhere; availability varies between contemporary common law jurisdictions
A contractual "[a]ny provision forming part of a contract"[1] Each term gives rise to a contractual obligation, breach of which can 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.
Condition or Warranty.[2] Conditions are terms which go to the very root of a contract. Breach of these terms repudiate the contract, allowing the other party to discharge the contract. A warranty is not so imperative so the contract will subsist after a breach. Breach of either 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' obligation to perform the opening night of a theatrical production is a condition,[3] whereas a singers obligation to perform during the first three days of rehearsal is a warranty.[4]
Statute may also declare a term or nature of term to be a condition or warranty; for example the Sale of Goods Act 1979 s15A[5] provides that terms as to title, description, quality and sample (as described in the Act) are conditions save in certain defined circumstances.
Status as a term is important as a party can only take legal action for the non fulfillment of a term as opposed to representations or mere puffs. Legally speaking, only statements that amount to a term create contractual obligations. Statements can be split into the following types:
Puff (sales talk): If no reasonable person hearing this statement would take it seriously, it is a puff, and no action in contract is available if the statement proves to be wrong. It may also be referred to as "puffery". This is common in television commercials.
Representation: A representation is a statement of fact which does not amount to a term of the contract but it is one that the maker of the statement does not guarantee its truth. This gives rise to no contractual obligation but may amount to a tort, for example misrepresentation.
Term: A term is similar to a representation, but the truth of the statement is guaranteed by the person who made the statement therefore giving rise to a contractual obligation. For the purposes of Breach of Contract a term may further be categories as a condition, warranty or innominate term.
There are various factors that a court may take into account in determining the nature of a statement. These include:
Timing: If the contract was concluded soon after the statement was made, this is a strong indication that the statement induced the person to enter into the contract. Lapse of a week within the negotiations of a car sale was held to amount only to a representation in Routledge v McKay[9]
Content of statement: It is necessary to consider what was said in the given context, which has nothing to do with the importance of a statement.
Knowledge and expertise: In Oscar Chess Ltd v Williams,[10] a person selling a car to a second-handcar dealer stated that it was a 1948 Morris, when in fact it was a 1939 model car. It was held that the statement did not become a term because a reasonable person in the position of the car dealer would not have thought that an inexperienced person would have guaranteed the truth of the statement.
Reduction into Writing: Where the contract is consolidated into writing, previous spoken terms, omitted from the consolidation, will probably be relegated to representations.[11] The old case of Birch v Paramount Estates Ltd[12] provided that a very important spoken term may persist even if omitted from the written consolidation; this case concerned the quality of a residential house.
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 UKlaw, but remains functional in Australian Law.
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.
Reasonableness and equitableness: The implied term must be reasonable and equitable.
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.[14] 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 "oh, of course", the term is implied.
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 New South Wales,[15] 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,[16] in the context of a Trade Union membership contract.
Clear expression: The term must be capable of clear expression. No specific technical knowledge should be required.
Consistency: The implied term may not contradict an express term.
Necessity: The term must be necessary to ensure reasonable or effective operation of a contract of the nature before the court.
Consistency: The implied term may not contradict an express term (same as for formal contracts).
Clear expression: The term must be capable of clear expression (same as for formal contracts).
Obvious: McHugh and Gummow JJ have stated that it must also be obvious.
Terms implied in law
These are terms that have been implied into standardised relationships.
Common law.
Liverpool City Council v Irwin[18] 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.
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.[21][22]
Course of dealing
If two parties have regularly conduct 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[23] four occasions over five years was held to be sufficient. In British Crane Hire Corp Ltd v Ipswich Plant Hire Ltd[24] written terms were held to have been implied into an oral in which there was no mention of written terms.
It is common for lengthy negotiations to be written into a heads of agreement document 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, Australiancourts will imply an obligation to negotiate in good faith provided that certain conditions are satisfied[25]
Negotiations were well-advanced and the large proportion of terms have been worked out; and
There exists some mechanism to resolve disputes if the negotiations broke down.
The test of whether one has acted in good faith is a subjective one; the cases suggest honesty, and possibly also reasonably. There is no general obligation to act in good faith term under English contract law: an attempt was made by Lord Denning in a series of case during the 70s and 80s but they are no longer considered 'good law'. European legislation imposes this duty, but only in certain circumstances. For the circumstances when an obligation of good faith may in certain circumstances be implied see Yam Seng PTE Ltd v International Trade Corporation Ltd.[26]
The Unfair Terms in Consumer Contracts Regulations 1999[27] reg 8 will render ineffective any 'unfair' contractual term if made between a seller or supplier and a consumer.[28] Regulation 5 of the Statutory Instrument further elaborates upon the concept of 'unfair', which is rather novel to English law. 'Unfair' is a term that was not individually negotiated (i.e. standard form) that "causes a significant imbalance in the parties' rights and obligations arising under the contract to the detriment of the consumer".[29] This is not possible if the term is not contrary to 'good faith'; such as in Director General of Fair Trading v First National Bank,[30] wherein the lack of a seemingly unfair interest term would leave the bank open to a very poor deal whereby no interest could be charged.
"Subject to" contracts
If a contract specifies "subject to contract", it may fall into one of three categories:[31]
The parties are immediately bound to the bargain, but they intend to restate the deal in a formalised contract that will not have a different effect; or
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 formalised contract; or
It is merely an agreement to agree, and the deal will not be concluded until the formalised contract has been drawn up.
Subsequent authorities have been willing to recognize a fourth category in addition to those stated in Masters v Cameron.[32]
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).
If a contract specifies "subject to finance", it imposes obligations on the purchaser:[33]
The purchaser must seek finance; and
When offers of finance arrive, the purchaser must make a decision as to whether the offers of finance are suitable.
This may also refer to 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 With conditions subsequent, parties have to perform until the condition is not met. Failure of a condition repudiates the contract this is not to necessarily discharge it. Repudiation will always gives rise to an action for damages.[citation needed]
Notes
↑ Martin, E [ed] & Law, J [ed], Oxford Dictionary of Law, ed6 (2006, London:OUP).
↑ Not to be confused with a product warranty, which is always referred to as a 'guarantee' in 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.
In common law jurisdictions, an implied warranty is a contract law term for certain assurances that are presumed to be made in the sale of products or real property, due to the circumstances of the sale. These assurances are characterized as warranties regardless of whether the seller has expressly promised them orally or in writing. They include an implied warranty of fitness for a particular purpose, an implied warranty of merchantability for products, implied warranty of workmanlike quality for services, and an implied warranty of habitability for a home.
Anticipatory repudiation or anticipatory breach is a concept in the law of contracts which describes words or conduct by a contracting party that evinces an intention not to perform or not to be bound by provisions of the agreement that require performance in the future.
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.
An exclusion clause is a term in a contract that seeks to restrict the rights of the parties to the contract.
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.
The law of contract in Australia is similar to other Anglo-American common law jurisdictions.
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.
The Unfair Contract Terms Act 1977 is an Act of Parliament of the United Kingdom which regulates contracts by restricting the operation and legality of some contract terms. It extends to nearly all forms of contract and one of its most important functions is limiting the applicability of disclaimers of liability. The terms extend to both actual contract terms and notices that are seen to constitute a contractual obligation.
A contractual term is "any provision forming part of a contract". 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.
A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more mutually agreeing 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. A binding agreement between actors in international law is known as a treaty.
Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 [1961] EWCA Civ 7 is a landmark English contract law case. It introduced the concept of innominate terms, a category between "warranties" and "conditions".
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.
In English contract law, an innominate term is an intermediate term which cannot be defined as either a "condition" or a "warranty".
The Supply of Goods Act 1973 was an Act of the Parliament of the United Kingdom that provided implied terms in contracts for the supply of goods and for hire-purchase agreements, and limited the use of exclusion clauses. The result of a joint report by the England and Wales Law Commission and the Scottish Law Commission, First Report on Exemption Clauses, the Act was granted royal assent on 18 April 1973 and came into force a month later. It met with a mixed reaction from academics, who praised the additional protection it offered while at the same time questioning whether it was enough; several aspects of the Act's draftsmanship and implementation were also called into question. Much of the Act was repealed by the Sale of Goods Act 1979, which included many of the 1973 Act's provisions.
South African contract law is "essentially a modernized version of the Roman-Dutch law of contract", and is rooted in canon and Roman laws. In the broadest definition, a contract is an agreement two or more parties enter into with the serious intention of creating a legal obligation. Contract law provides a legal framework within which persons can transact business and exchange resources, secure in the knowledge that the law will uphold their agreements and, if necessary, enforce them. The law of contract underpins private enterprise in South Africa and regulates it in the interest of fair dealing.
The South African law of sale is an area of the legal system in that country that describes rules applicable to a contract of sale, generally described as a contract whereby one person agrees to deliver to another the free possession of a thing in return for a price in money.
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.
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.
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