Contractual term

A contractual term is "Any 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.

Classification of term

Condition or Warranty

Conditions are terms that go to the very root of a contract. Breach of these terms gives the right to repudiate the contract, allowing the other party to discharge the contract. A warranty^[2] 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,^[3] whereas a singer's 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.

Innominate term

Lord Diplock, in Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd,^[6] 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.^[7] This was interpreted by the House of Lords as merely restricting its application in Reardon Smith Line Ltd. v Hansen-Tangen.^[8]

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:

• 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 the truth of. 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 categorized as a condition, warranty or innominate term.

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:

• 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-hand car 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 UK law, but remains functional in Australian Law.

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 Western Port v Shire of Hastings.^[13] 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^[14] 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.
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.^[16] 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 New South Wales,^[17] 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,^[18] 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, while the test in Byrne and Frew v Australian Airlines Ltd^[19] shall apply to informal contracts:

• 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 to all the people involved.

Terms implied in law

These are terms that have been implied into standardized relationships.

Common law

• Liverpool City Council v. Irwin^[20] 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.^[21] 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.^[22] 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.^[23][24]

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.^[25] four occasions over five years was held to be sufficient. In British Crane Hire Corp. Ltd. v Ipswitch Plant Hire Ltd.^[26] 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 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^[27]

• 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 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'. European legislation imposes this duty, but only in certain circumstances.

The Unfair Terms in Consumer Contracts Regulations 1999^[28] reg 8 renders ineffective any 'unfair' contractual term if made between a seller or supplier and a consumer.^[29] 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".^[30] 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,^[31] 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:^[32]

1. The parties are immediately bound to the bargain, but they intend to restate the deal in a 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 formalized contract; or
3. It is merely an agreement to agree, and the deal will not be concluded until the formalized contract has been drawn up.

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 give rise to a lawsuit for damages.

References

1. Martin, E [ed] & Law, J [ed], Oxford Dictionary of Law, ed6 (2006, London:OUP).
2. Not to be confused with a product warranty, which is always referred to as a 'guarantee' in law.
3. Poussard v Spiers and Pond (1876) 1 QBD 410
4. Bettini v Gye (1876) 1 QBD 183
5. As added by the Sale of Goods Act 1994 s4(1).
6. [1962] 1 All ER 474
7. ''Maredelanto Compania Naviera SA v Bergbau-Handel GmbH, The Mihalis Angelos [1970] 3 All ER 125.
8. [1976] 3 All ER 570
9. [1954] 1 All ER 855
10. [1957] 1 WLR 370
11. Routledge v McKay [1954] 1 All ER 855
12. (1856) 16 EG 396
13. (1977) 180 CLR 266 (PC)
14. [1995] EMLR 472
15. [1995] EMLR 472 at 481
16. (1889)14 PD 64
17. (1982) 149 CLR 337
18. [1956] 1 WLR 585
19. (1995) 185 CLR 410
20. [1976] 2 WLR 562
21. [1995] 4 All ER 745
22. For links and comparison among states on the adoption of the UCC, see Cornell Law Uniform Laws.
23. Con-stan Industries of Australia Pty Ltd v. Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226
24. 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.
25. [1972] QB 71; see also Balmain New Ferry Co Ltd v Robertson [1906] HCA 83 AusLii
26. [1975] QB 303
27. Coal Cliff Collieries Pty Ltd v. Sijehama Pty Ltd (1991) 24 NSWLR 1
28. SI 1999/2083
29. For definitions, see reg 3(1).
30. Unfair Terms in Consumer Contracts Regulations 1999 reg 5(1)
31. [2001] 3 WLR 1297
32. Masters v. Cameron (1954) 91 CLR 353
33. Meehan v. Jones (1982) 149 CLR 571