Business Law Terms of Contract

Before two parties entering into a contract, often one party will make numbers of statements that would encourage the other party to enter the contact. Those statements will be considered as terms of contract, they also determined the legal rights and obligation of both parties. A contract is only bound by its terms, not by any statements that made after contract is completed. It is important for both parties to understand the terms of contract in order to perform it and provide remedies for innocent party when the contract is breached.

1. Terms of contract

The terms of contract can be express or implied. Express terms usually be written statements or spoken in the oral contract. However implied terms are not apparent but will be enforce under the common law or the Trade Practice Act 1974 by the court or statute .

In determining if a statement become term of the contract that will bind two parties together, whether it has been breached and if it is breached what remedies might be applied. So we classify the terms of contract by their importance into three possible categories: Conditions, Warranties and intermediate/innominate terms.

1.1 Conditions

When a statement is made for a contract, we need to consider the importance of the terms and what terms' category it is belong to. To classify the terms as either conditions or warranties, we will do objective test them base on their essentiality.

Conditions are most important terms of the contract; it 'goes to the root of contract' . They are the critical statements for both parties. Parties will not be entering the contract or legally bind without any assurance of strict . Therefore, in any case of breach the conditions will result a serious legal consequences. The innocent party will be able to terminate the contract and claim for further obligations. Jordan CJ has fully defined the Essentiality in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 623 , which it stated 'depends upon the intention of the parties are appearing in or from the contract. ... that he would not had entered into the contract unless he had been assured of a strict or a substantial performance of the promise.'

Best and most commonly used example for condition is Poussard v spiers and pond (1876) 1 QBD 410 . Poussard sued spiers and pond for breach of contract, that they refused and replaced her which she was ill and absent for 10 days from 23 November when opening was scheduled in 28 November. She failed simply because the singing was key of the contact, opera can't start without singing which the condition has been breached and the company has the legal rights to terminate the contract and replace her.

1.2 Warranties

Compare to condition, warranties of the contract are minor terms. Warranties can be a guarantee for one party to the other party to perform the parts of contract or conditions. However they are considered as subsidiary to conditions, but they still have the power to a contract .

In general, when breach of warranty will not terminate the contract by any party but compensation will be enforceable, base on warranties are not main purpose of the contract that the contract may still be performed in substance. For instance, see Bettini v Gye (1876) 1 QBD 183 that Bettini sued Gye for breach of contract that he did not participate the rehearsal for six days before the show, which time was not the essential of the contract. The contract's main purpose was for Bettini to perform the show, which attending rehearsal will only be a requirement in this context, so late arrival will not consider as failed to perform therefore the contract still exist. Bettini was only breached the warranties that as required rehearsal time was not as important as to overall amount, also late arrival to rehearsal will not effect Bettini to completely perform the show.

Anyway, from the case we can easily define the condition and the warrant which time period for rehearsal was the warranty to the condition that Bettini has to perform the show in order to carry out the contract.

1.3 Intermediate/innominate term

It is not always the case that the importance will be clear-cut and obvious, to simply classify for terms as either conditions or warranties will not be suffice. For this reason we have another class of terms called intermediate/innominate terms that are capable to both major and minor terms, but court only classify them after the breach of contract has occurred . In court judge will review the case and consider the seriousness of the effects of the breach.

To fully explain this class of terms, we can look at Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 that ship owners have failed to delivery the service due to engine run down which they only be able to perform 17 month under the 24 month contact. The shipping company sued for breach of contract and claimed damages for wrongful repudiation. To provide a seaworthy ship is key to complete the service, however the shipping was delayed, it did provide and completed the service under the contract. In this context court said commercial purpose lost from the delay is much greater then the time lost cause by breakdown and repair that ship owners' only breach the warranties not the condition . In other way, if the ship was breakdown and could not be fix and resulted fail to delivery the service and then the shipping company will have legal rights to claim breach of condition.

After all the statements are classified parties have been legally bound and enter the contract, it is important for parties to understand and distinct between conditions and warranties, because any breaching of contract will bring both parties to court and court