Core principles of contract law - Contract terms

Learning Outcomes

By the end of this article, you will be able to identify and classify contract terms, distinguish terms from representations, explain how contractual terms are incorporated and implied, understand how courts interpret contract terms, and apply the main rules regulating exclusion clauses. You will also be able to spot and avoid common exam pitfalls in relation to these core areas.

SQE2 Syllabus

For SQE2, you are required to understand contract terms from both an advisory and a contentious standpoint. Focus your revision on:

• the distinction between contractual terms and representations during negotiations
• the incorporation of express terms, especially in oral contracts
• the different ways that terms may be implied into a contract
• classification of terms as conditions, warranties, or innominate terms and the resulting remedies for breach
• rules of interpretation used by the courts and consequences of uncertainty
• incorporation and effectiveness of exclusion clauses and statutory controls (Unfair Contract Terms Act 1977, Consumer Rights Act 2015)
• the practical application of these principles to client advice and problem scenarios

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What are the key differences between an express term and an implied term of a contract?
2. How does a court decide whether a pre-contractual statement is a term or a representation?
3. What is an innominate term and how does a breach of it affect the available remedies?
4. Give one statutory and one common law rule that may render an exclusion clause ineffective.

Introduction

Contract terms form the basis of rights and obligations in all enforceable agreements. Accurate identification and classification of these terms are essential when advising clients or analysing contractual disputes for SQE2. This article explains the practical rules governing contractual terms, their classification, methods of incorporation, the process and principles behind implying terms, and the control of exclusion clauses.

Express Terms

An express term is a contractual provision agreed by the parties either orally or in writing. Express terms must be clearly communicated and agreed before or when the contract is formed. In oral agreements, proof of intention can be harder to establish and is often tested by objective evidence such as behaviour or pre-contractual statements.

Key Term: express term
A provision explicitly and specifically agreed by the parties to a contract, whether written or oral.

Terms vs Representations

Pre-contractual statements may be either terms or representations. Determining which is essential, as breach of a term entitles a party to a contractual remedy (damages and possibly termination), while a misrepresentation does not always allow termination and may give rise only to rescission or damages depending on the type.

When deciding if a statement is a contractual term, courts apply several factors:

• Importance: Did the recipient rely on it when deciding to contract?
• Timing: Was it made at, or immediately before, contract formation?
• Skill Level: Did the maker have special knowledge or skill?

Key Term: representation
A statement made to induce another to enter into a contract, but which does not itself form part of the contract as a binding promise.

Incorporation of Terms

For a term to be binding it must be incorporated before or at the time of contract formation. There are three main ways of incorporation:

• Signature: If a party signs a contractual document, they are bound by all terms in it, even if unread (except for misrepresentation or fundamental misunderstanding).
• Reasonable Notice: Where not signed, a term will be incorporated only if reasonable steps were taken to draw attention to it before or when the contract was made. Unusual or onerous terms require greater prominence.
• Previous Course of Dealings: If parties contracted regularly in the past on standard terms, those terms may be incorporated even if not expressly mentioned in the latest contract, but only if dealings were regular and consistent.

Implied Terms

Implied terms supplement express contract terms. These can arise:

• By statute: Most notably under the Sale of Goods Act 1979, Supply of Goods and Services Act 1982, and Consumer Rights Act 2015. These statutes imply minimum terms, e.g. the right to sell, satisfactory quality, or services provided with reasonable care and skill.
• By the courts (“in fact”): Courts will imply a term only if necessary to give business efficacy to the contract (the “business efficacy” test), or if so obvious that it “goes without saying” (the “officious bystander” test).
• By custom or usage: Where a particular term is so well known in a trade or locality that the parties must be taken to have intended it to apply, unless excluded.
• By course of dealings: Long-standing, regular transactions on standard terms can result in those terms being implied.

Key Term: implied term
A contractual provision not expressly stated by the parties but incorporated by law, custom, court decision, or course of dealing.

Classification: Conditions, Warranties, Innominate Terms

Understanding the type of term is essential for determining remedies on breach.

• Condition: A fundamental term going to the root of the contract. Breach gives the innocent party the right to terminate and claim damages.
• Warranty: A less important term. Breach entitles the innocent party only to damages (not termination).
• Innominate term: Neither clearly a condition nor a warranty. Available remedies depend on the seriousness of the actual consequences of breach: if it deprives the innocent party of substantially the whole benefit of the contract, they may terminate; otherwise, damages only.

Key Term: condition
A major term of a contract. If breached, the innocent party may terminate the contract and claim damages.

Key Term: warranty
A minor term of a contract. If breached, the innocent party can claim damages but cannot terminate.

Key Term: innominate term
A term that cannot be classified as a condition or a warranty in advance; the available remedy for breach depends on its effect.

Interpreting Contract Terms and Certainty

Courts interpret contract terms objectively, giving unclear words their ordinary meaning. Ambiguity is resolved against the party seeking to rely on an exclusion clause (the contra proferentem rule). If a clause is too uncertain or the agreement is incomplete, the contract may be unenforceable.

In commercial contracts, courts strive to give effect to reasonable expectations, especially where the contract provides a mechanism to resolve uncertainties.

Key Term: contra proferentem rule
A rule where ambiguities in contract terms are interpreted against the party seeking to rely on them, often applied to exclusion clauses.

Exclusion Clauses

Exclusion clauses attempt to limit or exclude liability for breach. Their effectiveness depends on three factors:

1. Incorporation: Was the clause properly brought to the other party's attention?
2. Construction: Does the clause clearly cover the loss and event in question?
3. Statutory control: Statutes prevent or restrict the use of exclusion clauses in some circumstances.

Statutory controls:

• UCTA 1977 prohibits exclusion of liability for death or personal injury caused by negligence in business-to-business contracts.
• CRA 2015 prohibits exclusion of similar basic obligations in consumer contracts and any exclusion of liability for death or personal injury caused by negligence.

Clauses are often struck out if unreasonable (business-to-business) or unfair (consumer contracts).

Key Term: exclusion clause
A contract term that seeks to exclude or limit a party’s liability for breach or other specified situations.

Worked Example 1.1

A party purchases a machine after being assured by the seller, an expert, that it can process 100 units per hour. The written contract is silent as to processing speed. The machine processes only 60 units per hour. Is the seller’s assurance a term or a representation?

Answer:
Where a seller with special knowledge gives a specific assurance about a key characteristic, especially as an inducement, it is likely to be a term. The buyer may claim damages for breach of contract.

Worked Example 1.2

Tina buys a used car from Carla’s Cars. The receipt has a small print clause: “No liability accepted for defects.” Tina was not told about the clause and didn’t read the back of the receipt. Is the clause likely to be effective to exclude liability?

Answer:
The clause was not incorporated. Unless specific, reasonable notice was given to Tina before or at the time of contract, the clause is not binding. Carla’s Cars remains liable for defects, and statutory implied terms may also apply.

Worked Example 1.3

A contract for delivery of building materials says “time for delivery is not of the essence.” Delivery is late. What remedies are available to the buyer?

Answer:
Where time is not of the essence, breach is unlikely to be a repudiatory breach (condition). The buyer can claim damages for losses, but cannot refuse delivery or terminate the contract.

Exam Warning

Many students confuse terms implied "in law" (necessary minimum requirements, often statutes) with terms implied "in fact" (necessary for this particular contract as agreed by the parties). The courts imply terms "in fact" only in rare circumstances. Do not assume every contract can be supplemented by implied terms on fairness grounds.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• The difference between contractual terms and representations, and why it matters for remedies
• Incorporation of terms: signature, notice, previous dealings
• Main sources of implied terms: statute, court, custom, course of dealing
• Classification: conditions, warranties, innominate terms and effect on remedies
• How courts interpret contract terms, and the effect of uncertainty or incomplete agreements
• Exclusion clauses: requirements for incorporation, construction, and statutory controls

Key Terms and Concepts

• express term
• representation
• implied term
• condition
• warranty
• innominate term
• contra proferentem rule
• exclusion clause