Keith Mack
A contractual term is any provision that forms part of a contract. Contracts are legally binding agreements that outline the rights and responsibilities of the contracting parties. Each term gives rise to a contractual obligation, and the breach of a term may give rise to litigation. Contracts are made up of two types of contractual terms: expressed terms and implied terms. Expressed terms are those that are specifically mentioned and agreed upon by the contracting parties during the negotiation stage, while implied terms are a set of default rules for contracts on points that are silent or not explicitly mentioned. Common law jurisdictions typically distinguish three categories of contractual terms: conditions, warranties, and innominate terms, which vary in their enforceability as part of a contract.
| Characteristics | Values |
|---|---|
| Definition | "Any provision forming part of a contract" |
| Types | Expressed terms, implied terms, conditions, warranties, innominate terms |
| Categories | Critical terms, standard terms, specific terms |
| Importance | Critical to business success, limit risk, protect parties' best interests |
| Litigation | Breach of contract may give rise to litigation |
| Legally binding | Binding until the contract ends or is terminated |
| Common law | Distinguished between important conditions and warranties |
| Unfairness | The Unfair Contract Terms Act renders unfair terms void |
| Good faith | No implied term under UK common law, but European legislation imposes this duty in certain circumstances |
| Obviousness | Must be obvious and go without saying |
| Governing law | Union, country or state/province laws applicable to a contract |
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What You'll Learn
Expressed and implied terms
A contractual term is any provision or clause that forms part of a contract. Each of these terms creates a contractual obligation, and a breach of this obligation may lead to litigation. Contracts are made up of two types of terms: expressed terms and implied terms.
Expressed terms are openly discussed and documented during negotiations, leaving little room for ambiguity. They are the explicit stipulations laid out in writing or orally by the parties during negotiations that form part of the final contract. Express terms can cover a wide range of topics, including the scope of work, payment terms, delivery schedules, and any specific warranties or guarantees provided.
Implied terms, on the other hand, are not explicitly stated in the contract but are inferred based on factors such as the nature of the transaction, industry customs, statutes, and the parties' intentions. They are born out of context, industry practices, and statutes, making them more nuanced and requiring careful consideration of the circumstances. Implied terms are a set of default rules for contracts on points that are essentially "silent". These mandatory rules quietly operate in the background and can override the expressed terms. For example, in the case of Wong Mee Wan v Kwan Kin Travel Services Ltd, it was established that when a tour operator contracts to provide services, there is an implied term that those services will be performed with reasonable duty and care.
In the event of a conflict between an express term and an implied term, the express term will generally prevail. Courts are usually reluctant to interfere with a commercial bargain reached between two parties, particularly when they are businesses with equal bargaining power and access to legal advice.
Understanding the difference between expressed and implied terms is crucial for businesses to protect their interests, manage risks, and resolve disputes. It helps them draft stronger agreements, minimise uncertainty, and avoid costly disputes.
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Conditions, warranties, and innominate terms
Contractual terms are classified into three distinct categories: conditions, warranties, and innominate terms. This classification is significant as it determines the consequences of a breach and the remedies available to the aggrieved party.
Conditions are vital contract terms that are central to the agreement. The performance of a condition is essential to the contract's main purpose, meaning that without its fulfilment, the contract cannot function as intended. A breach of a condition allows the innocent party to terminate the contract and seek damages. For instance, in a commodity trading contract, the buyer is obligated to pay the seller within a certain timeframe.
Warranties are less critical terms that are important but less central to the agreement. A breach of a warranty typically results in damages without termination of the contract. For example, in the case of Galtrade Ltd v BP Oil International, the contract contained specifications as to the sulphur content of the fuel oil. BP attempted to deliver off-specification fuel oil, and Galtrade rejected the cargo and returned it to BP. Galtrade then sued BP for breach of contract and claimed damages for the wasted expenditure.
Innominate terms are contractual terms that do not fit neatly into the categories of conditions or warranties. They offer a more flexible approach, and the remedies for breaching an innominate term depend on the severity of the breach and its impact on the contract. For instance, in the case of BP Oil International v Galtrade Ltd, the court classified the specification clause as an innominate term, meaning that Galtrade was not entitled to terminate the contract but was entitled to damages.
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Unfair terms
A contractual term is any provision that forms part of a contract, giving rise to a contractual obligation. In the event of a breach, litigation may occur. Terms are the essence of a contract, outlining the rights and obligations of the parties involved.
In the context of consumer contracts, an unfair term is one that causes a significant imbalance in the parties' rights and obligations to the detriment of the consumer. This is a novel concept in English law, addressed in the Unfair Terms in Consumer Contracts Regulations 1999.
Additionally, Article 36 of Law #12,529/2013, also known as the Antitrust Law, addresses unfair terms in contracts that impact free competition. This law defines certain acts as economic infractions, including those that limit or distort free competition or dominate the relevant market for goods or services.
It is important to note that if an unfair term is declared null and void, the remainder of the contract typically remains in force unless the clause is essential to its nature.
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Governing law
The governing law is essential for resolving contractual disputes between parties from different legal systems. For example, if a contract dispute arises between a company based in the United States and a company based in the United Kingdom, the governing law clause would specify which country's laws should be used to interpret and enforce the contract. This clause ensures clarity and consistency in how the contract is understood and applied, regardless of the parties' locations.
The governing law clause is typically accompanied by a jurisdiction clause, which designates the legal jurisdiction in which disputes will be resolved. This clause determines the courts or arbitration centres that will handle any legal proceedings related to the contract. Together, the governing law and jurisdiction clauses provide a clear framework for resolving cross-border contractual disputes.
In addition to cross-border contracts, governing law clauses are also used in domestic contracts to specify the applicable state or provincial laws. This is particularly important in countries like the United States, where each state may have different laws and regulations impacting contracts. By specifying the governing law, even within the same country, parties can ensure that their contract is interpreted and enforced consistently and in accordance with the chosen legal framework.
The choice of governing law can have significant implications for the rights and obligations of the contracting parties. Different jurisdictions may have varying laws on issues such as warranties, representations, and remedies for breach of contract. Therefore, it is crucial for parties to carefully consider and negotiate the governing law clause to ensure that it aligns with their interests and provides a fair and predictable legal framework for their contractual relationship.
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Termination
The right to terminate a contract often depends on the termination clauses of the contract. Most contracts detail under what circumstances and for what reasons any party can terminate the agreement. Therefore, termination rights will vary widely between contracts. If a contract does not have a termination clause, the involved parties may defer to common law to find grounds for termination.
There are several reasons why a contract may be terminated, including:
- Mutual agreement between the parties to end the contract under specific circumstances.
- Fraud or mistakes during formation.
- Changes in law that render the contract illegal.
- Breaches by any party.
- Impossibility of performance (Force Majeure): Unforeseen, unpredictable, uncontrollable events make it impossible to fulfil the contract obligations, such as serious injury, illness, death, weather, war, natural disasters, or legislated law changes that impact the project.
- Termination for convenience (T for C clause): One party terminates the contract for practical reasons, without any breach by the other party.
Upon termination, the non-breaching party may pursue claims for damages under common law or the contract's termination conditions. However, the parties must assess their grounds for termination by reviewing the terms of the contract, consulting the termination clauses, and ensuring their actions are legally justified.
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Frequently asked questions
A contractual term is any provision or term that forms part of a contract. Each of these terms provides a contractual obligation, which can lead to litigation if breached.
Contractual terms can be defined into three categories: conditions, warranties, or innominate terms. Conditions are essential or fundamental terms in a contract, the failure of which results in a breach of contract. Warranties are more like assurances or promises given by one party, and the breach of a warranty allows the other party to claim damages but not terminate the contract. Innominate terms are those that cannot be defined as either a condition or warranty, and it is up to the court to determine the appropriate remedy for the breach of an innominate term.
Examples of contractual terms include express terms, which are written in a contract or verbally agreed before or at the time the contract is made. Implied terms are those that are implied by law, custom and practice, or are assumed to be accepted by both parties, but not expressly mentioned. Other examples include indemnity, injunction, and confidentiality.
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