The terms of a contract

Contributed by Ian Macdonald and Su Mahalingham and current to 1 September 2005

A contract consists of various promises made by the parties. These promises are known as the terms of the contract. The terms of a contract determine the limits of expectations and they define what each party is prepared to do and what each expects in return.

All too often, disputes arise because it is not clear what is being offered and therefore what is being agreed to. In these situations, both parties are usually convinced that their interpretation is the only correct one and, unless both parties are prepared to negotiate, the matter will land in court to be determined by a judge.

Courts attempt to give effect to the contract agreed between the parties. The judge may declare the contract to be invalid on grounds of vagueness. Alternatively the judge will interpret the terms of the agreement for the parties. The court may examine the conduct of the parties and the written form of the contract if any, to ascertain objectively what the parties intended when they formed the contract.

EXPRESS AND IMPLIED TERMS

Usually the terms of the contract will be those the parties expressly agree to; however, sometimes terms may be implied in a contract.

If an agreement is in writing then the statement is more likely to be a term of the contract. The general rule is that a party is bound by all the terms set out in a contractual document if he or she has signed it. This applies whether or not he or she has read the terms or understood them. The exceptions to the general rule are mistakes as to the nature of the document, or if the party is induced to enter into the contract by false statements.

There are two broad categories of express terms: a condition or a warranty. A condition is a term of vital importance. A breach of a condition entitles the injured party to damages and to end the contract. A warranty is a term of less importance. A breach of warranty entitles the injured party to damages but they are not entitled to terminate the contract.

Implied terms are neither written nor verbal, but are understood to be in the contract. Terms can be implied by the parties, by the courts, by legislation or by custom or trade.

Legislation may affect certain contracts. In many cases legislation exists which imports implied terms into a contract. An implied term is a term that applies to the contract even though the parties did not specifically include the term in the contract. For instance, in many contracts of sale of goods, implied terms regarding the merchantable quality of the goods are implied in the contract.

Also at common law there are a number of terms which are implied in many contracts. Sometimes, the nature of the contract is such that trade or custom usage will operate to imply terms in a contract. There are, however, exceptions to many implied terms and the parties to the contract may in many cases expressly deny such implied terms or otherwise modify such terms. Examples of common terms which are implied in a contract are:

• That the parties will not breach other terms of the contract;
• With respect to contracts of service, that the work will be done in a workman – like manner; and
• With respect to business contracts, that time is of the essence.

WRITTEN AND ORAL TERMS

The terms of a contract may be in a document (signed or unsigned), or consist of oral statements, or be partly written and partly oral.

Sometimes the terms of the contract are in writing but not signed, for example, the terms on the back of a ticket. In order for such terms to be incorporated in the contract it must be shown that the other party knew that they were there or reasonable steps were taken to draw them to the other party’s attention before the contract was made.

EXCLUSION CLAUSES

It is quite common for traders to include an exclusion clause in the contract which excludes one of the parties from responsibility for something that may go wrong in the performance of the contract or which limits that responsibility.

The courts have generally taken the view that exclusion clauses are unfair and have tried to limit their application, especially by interpreting the exclusion clause against the party trying to rely on it, and at least by interpreting it narrowly.

If a document containing an exclusion clause is signed, the clause becomes part of the contract. If there is no signed document, then it must be shown that the exclusion clause was brought to the notice of the other party.