Last month we explained how contracts are formed. This month, we strive further to provide you with a greater understanding of Contract Law by discussing the different types of contractual term and in what circumstances they arise.
Every contract will have key terms and they fall into different categories. The terms of a contract can be expressly agreed orally or in writing. In addition, terms may even be implied by law, the conduct of the parties, custom in a particular trade, previous dealings or the parties’ intentions.
Three types of term
Contractual terms are defined as conditions, warranties or innominate terms.
This may be specified in the contract, implied by the nature of it, or implied by law. For example, the Sale of Goods Act 1979 provides that a seller’s title to goods and their quality and fitness for purpose are conditions in a business-to-consumer contract.
A condition is a term that, if breached, gives the aggrieved party the right either to terminate the contract or affirm it. In addition, the aggrieved party can also claim damages.
A warranty is a term that, if breached, does not give the aggrieved party the right to terminate the contract; it gives rise only to a right to claim damages.
A condition is a fundamental term and goes to the heart of a contract. A statement or assurance about a factual matter would usually be a warranty. The ‘opera singer’ cases of Poussard v Spiers (1875) L.R. 1 QBD 410 and Bettini v Gye (1875) L.R. 1 QBD 183 provide examples of the distinction: in the former, a singer’s obligation to sing on the first night of a three-month series of concerts was held to be a condition; in the latter, the singer’s obligation to attend rehearsals was a warranty.
In between, there are innominate terms, where the remedy for breach will depend on the effect of that breach at the time it happens. If there is a substantial effect on the aggrieved party, it will be likely a fundamental term and give the right to that party to terminate the contract (and claim damages). If not, that party may only claim damages.
Express 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.
The distinction is important: if a statement is a term, as stated above a breach will give rise to contractual liability and damages; if it is a representation, liability will only be for misrepresentation. The latter raises a key battle ground: for misrepresentation to be claimed, it must be shown that the aggrieved party relied on the statement.
Whether a statement is a term or representation will depend the parties’ intentions and therefore a variety of factors, such as the period of time between the statement being made and contract being formed; the importance of the statement; whether the statement is written into the contract; and whether one or both parties possesses the skill and knowledge to determine if the statement is true.
Implied terms
Terms may be implied by a number of methods:
- Usage or custom relating to a particular place or trade, provided that there is nothing contrary in the contract.
- Previous course of dealings, in which case a court may imply certain terms which have been regularly and consistently used before between the parties, provided there was a reasonable expectation that the term would apply again and there is no contrary term in the contract.
- Intention of the parties where, for example, there is a gap in the contract and it is apparent that the parties must have intended that term to form part of the contract. A court would consider the position from a reasonable person’s understanding of the intentions and the background at the time of the contract, i.e. if it gives business efficacy to the contract and causes the reasonable person to think, “oh, of course” that term should be present.
- Law, for example, those implied by the Sale of Goods Act 1979 or Supply of Goods and Services Act 1982 in respect of the quality and fitness of goods and services provided to consumers and the skill and care used in the provision of services to consumers. Another example is the Late Payment of Commercial Debts (Interest) Act 1998, which creates an implied interest clause in business-to-business contracts for the supply of goods or services, allowing a creditor to claim interest at 8% over base rate.
Next month, we shall consider a specific type of contractual term in more detail, exclusion clauses, and discuss the extent to which liability can (or cannot) be excluded or limited.
Whether you are putting together a set of terms and conditions for clients, suppliers, for website use or a contract for a specific transaction or relationship, Fortune Law has the necessary expertise to advise and assist you with all aspects of Contract Law. Please get in touch by telephone on020 7440 2540 or by e-mail at enquiries@fortunelaw.com .
