Contract terms: construction and interpretation

Contract terms: construction and interpretation

Main article: Contractual term

A contractual term is "an[y] provision forming part of a contract".^[56] 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 weight as they are peripheral to the objectives of the contract.^[57]

Uncertainty, incompleteness and severance

See also: Contra proferentem and Good faith (law)

If the terms of the contract are uncertain or incomplete, the parties cannot have reached an agreement in the eyes of the law.^[58] An agreement to agree does not constitute a contract, and an inability to agree on key issues, which may include such things as price or safety, may cause the entire contract to fail. However, a court will attempt to give effect to commercial contracts where possible, by construing a reasonable construction of the contract.^[59] In New South Wales, even if there is uncertainty or incompleteness in a contract, the contract may still be binding on the parties if there is a sufficiently certain and complete clause requiring the parties to undergo arbitration, negotiation or mediation.^[60]

Courts may also look to external standards, which are either mentioned explicitly in the contract^[61] or implied by common practice in a certain field.^[62] In addition, the court may also imply a term; if price is excluded, the court may imply a reasonable price, with the exception of land, and second-hand goods, which are unique.

If there are uncertain or incomplete clauses in the contract, and all options in resolving its true meaning have failed, it may be possible to sever and void just those affected clauses if the contract includes a severability clause. The test of whether a clause is severable is an objective test—whether a reasonable person would see the contract standing even without the clauses. Typically, non-severable contracts only require the substantial performance of a promise rather than the whole or complete performance of a promise to warrant payment. However, express clauses may be included in a non-severable contract to explicitly require the full performance of an obligation.^[63]

Classification of terms

Contractual terms^[64] are classified differently depending upon the context or jurisdiction. Terms establish conditions precedent. English (but not necessarily non-English) common law distinguishes between important conditions and warranties, with a breach of a condition by one party allowing the other to repudiate and be discharged while a warranty allows for remedies and damages but not complete discharge.^[65][66] Whether or not a term is a condition is determined in part by the parties' intent.^[66][67]

In a less technical sense, however, a condition is a generic term and a warranty is a promise.^[65] Not all language in the contract is determined to be a contractual term. Representations, which are often precontractual, are typically less strictly enforced than terms, and material misrepresentations historically was a cause of action for the tort of deceit. Warranties were enforced regardless of materiality; in modern United States law the distinction is less clear but warranties may be enforced more strictly.^[68] Statements of opinion may be viewed as "mere puff".

In specific circumstances these terms are used differently. For example, in English insurance law, violation of a "condition precedent" by an insured is a complete defense against the payment of claims.^[69]:160 In general insurance law, a warranty is a promise that must be complied with.^[69] In product transactions, warranties promise that the product will continue to function for a certain period of time.

In the United Kingdom the courts determine whether a term is a condition or warranty; for example, an actress' obligation to perform the opening night of a theatrical production is a condition,^[70] but a singer's obligation to rehearse may be a warranty.^[71] 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^[72] provides that terms as to title, description, quality and sample are generally conditions. The United Kingdom has also contrived the concept of an "intermediate term" (also called innominate), first established in Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962].

Representations versus warranties

Statements of fact in a contract or in obtaining the contract are considered to be either warranties or representations. Traditionally, warranties are factual promises which are enforced through a contract legal action, regardless of materiality, intent, or reliance.^[68] Representations are traditionally precontractual statements that allow for a tort-based action (such as the tort of deceit) if the misrepresentation is negligent or fraudulent;^[73] historically, a tort was the only action available, but by 1778, breach of warranty became a separate legal contractual action.^[68] In U.S. law, the distinction between the two is somewhat unclear;^[68] warranties are viewed as primarily contract-based legal action while negligent or fraudulent misrepresentations are tort-based, but there is a confusing mix of case law in the United States.^[68] In modern English law, sellers often avoid using the term 'represents' in order to avoid claims under the Misrepresentation Act 1967, while in America 'warrants and represents' is relatively common.^[74] Some modern commentators suggest avoiding the words and substituting 'state' or 'agree', and some model forms do not use the words;^[73] however, others disagree.^[75]

Statements in a contract may not be upheld if the court finds that the statements are subjective or promotional puffery. English courts may weigh the emphasis or relative knowledge in determining whether a statement is enforceable as part of the contract. In the English case of Bannerman v White^[76] the court upheld a rejection by a buyer of hops which had been treated with sulphur since the buyer explicitly expressed the importance of this requirement. The relative knowledge of the parties may also be a factor, as in English case of Bissett v Wilkinson^[77] where the court did not find misrepresentation when a seller said that farmland being sold would carry 2000 sheep if worked by one team; the buyer was considered sufficiently knowledgeable to accept or reject the seller's opinion.

Standard terms and contracts of adhesion

Standard form contracts contain "boilerplate", which is a set of "one size fits all" contract provisions. However, the term may also narrowly refer to conditions at the end of the contract which specify the governing law provision, venue, assignment and delegation, waiver of jury trial, notice, and escape clauses ("get-out clauses") such as force majeure. Restrictive provisions in contracts where the consumer has little negotiating power ("contracts of adhesion") attract consumer protection scrutiny.

Implied terms

A term may either be express or implied.^[78] 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

Terms may be implied due to the factual circumstances or conduct of the parties. In the case of BP Refinery (Westernport) Pty Ltd v Shire of Hastings,^[55] the UK Privy Council, on appeal from Australia, proposed a five-stage test to determine situations where the facts of a case may imply terms. The classic tests have been the "business efficacy test" and the "officious bystander test". Under the "business efficacy test" first proposed in The Moorcock [1889], the minimum terms necessary to give business efficacy to the contract will be implied. Under the officious bystander test (named in Southern Foundries (1926) Ltd v Shirlaw [1940] but actually originating in Reigate v. Union Manufacturing Co (Ramsbottom) Ltd [1918]), a term can only be implied in fact if an "officious bystander" listening to the contract negotiations suggested that the term be included the parties would promptly agree. The difference between these tests is questionable.

Terms implied in law

Statutes or judicial rulings may create implied contractual terms, particularly in standardized relationships such as employment or shipping contracts. The Uniform Commercial Code of the United States also imposes an implied covenant of good faith and fair dealing in performance and enforcement of contracts covered by the Code. In addition, Australia, Israel and India imply a similar good faith term through laws.

In England, some contracts (insurance and partnerships) require utmost good faith, while others may require good faith (employment contracts and agency). Most English contracts do not need any good faith, provided that the law is met. There is, however, an overarching concept of "legitimate expectation".

Most countries have statutes which deal directly with sale of goods, lease transactions, and trade practices. In the United States, prominent examples include, in the case of products, an implied warranty of merchantability and fitness for a particular purpose, and in the case of homes an implied warranty of habitability.

In the United Kingdom, implied terms may be created by:

• Statute, such as the Sale of Goods Act 1979, the Consumer Rights Act 2015 and the Hague-Visby Rules;

• Common Law, such as The Moorcock,^[79] which introduced the "business efficacy" test;

• Previous Dealings, as in Spurling v Bradshaw.^[80]

• Custom, as in Hutton v Warren.^[81]

Terms implied by custom

A term may be implied on the basis of custom or usage in a particular market or context. In the Australian case of Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur (Aust) Limited,^[82] the requirements for a term to be implied by custom were set out. For a term to be implied by custom it needs to be "so well known and acquiesced in that everyone making a contract in that situation can reasonably be presumed to have imported that term into the contract".^{[82]:paras 8–9}