Interpretation of Contract Determining Express and Implied Terms of Contract

Introduction

Most contractual disputes involve questions relating to the scope of each party's obligations under a contract. When a contract is formed, usually the parties do not take the time and effort to express all of the obligations to be performed. Thus, to cater for this commercial reality, courts retain the power to imply terms into a contract where the justice of the case requires.

Incorporation of Express terms

An express term is only incorporated into a contract if it is expressed by one party before the contract comes into existence and is accepted by the other party. Contracts can comprise of both written and oral terms.

Terms may be incorporated into a contract in a number of ways. The most obvious is a written contract. They can also be incorporated orally; however, whether a term has been incorporated into an oral contract is a matter to be decided by a court.

Representations

Statements made during the course of contractual negotiations can be either terms or mere representations.

Mere representations are statements which do not form part of the contract itself but which go some way to inducing the formation of the contract.

Whether a statement becomes an express term of the contract depends upon the intention of the parties. When considering the existence of such an intention, the court may consider various factors, including:

1. The importance of the statement to the parties

The more significant the statement, the more likely it will be regarded as a term of the contract. The price to be paid, and the goods or services to be provided under the contracts would be considered terms of the contract.

In the case of Bannerman v White (1861), the buyer was interested in buying hops, but not if they contained sulphur. He was assured that they did not. The hops were found to contain sulphur and the buyer was entitled to reject them as the assurance was held to be a term of the contract.

If there had not been a false statement there would not have been a contract. The statement was more than a mere representation.

2. The respective knowledge and expertise of the parties

Where the person who makes the statement is in a position to know more about the facts, for example an expert making a statement to a non-expert, it is more likely that it will be treated as a term of the contract.

3. Written contracts

Terms of a written contract are usually the statements which are incorporated into the written contract.

There are circumstances where statements can not be incorporated into a contract, usually where the Parol Evidence Rule applies which prevents parties from producing evidence to add to, vary or contradict a written contract. Where this is the case, it is possible for a collateral contract to exist. This is where an oral contract exists alongside a written contract.

Express terms

The express terms of a contract outline the primary obligations of the parties. A distinction has been made between different types of express terms. This distinction is important as it distinguishes between the remedies available to the innocent party in the event of a breach.

Express terms fall into three main categories:

1. Conditions

Conditions are major terms of a contract, ie: a statement of fact or promise that go to the heart of the contract. If a condition is breached where the statement made is untrue or the promise is not fulfilled, the innocent party can terminate the contract or treat it as having been discharged and claim damages.

2. Warranties

Warranties are minor terms of a contract, ie: Subsidiary statements or promises. If a warranty is breached, the innocent party is only entitled to claim damages and can not terminate the contract or treat it as having been discharged.

3. Inominate terms

Inominate terms are not classified as either conditions or warranties. They can be major or minor terms. In deciding if the innocent party can terminate the contract, the consequences of the breach will need to be considered.

Implied terms

Parties do not express all obligations to be performed under a contract as this would be impracticable. Therefore, in addition to expressly agreed terms, other terms may be implied into a contract.

An implied term can not contradict an express term, but where the express term is flexible it may be widened or narrowed by an implied term if necessary.

There are three ways in which terms can be implied into a contract:

1. Terms implied by custom

A contract may incorporate as an implied term any relevant custom. A custom must be well known within a particular trade and business and be accepted within the trade as such.

In the case of Hutton v Warren (1836) there was an implied term that the tenant of a farm could receive an allowance improvement to land as it was a local custom.

2. Terms implied by statute

The most common terms implied by statute are those relating to the sale and supply of goods and services. In particular, the Sale of Goods Act 1979 (as amended) provides for implied terms in respect of:

i) that the seller has the right to sell the goods;

ii) that goods sold by description correspond with the description;

iii) that goods sold are of satisfactory quality;

iv) that goods sold are reasonably fit for the purpose they were bought for; and

v) that goods sold by sample correspond with the sample.

The Supply of Goods and Services Act 1982 related to an implied term in a contract for service that the service will be carried out with reasonable care and skill, within a reasonable time and for a reasonable price.

3. Terms implied by the court

With regard to common contractual relationships, in Shell UK v Lostock Garages Ltd (1977), Denning MR stated that the problem relating to implied contractual terms could be solved by asking whether "the law had already defined the obligations or the extent of it?"

Courts do not like to interfere in the construction of contracts to a great extent. They will only imply terms into a contract in certain circumstances and with certain pre-conditions.

Terms can either be implied in fact or in law. Terms implied in fact are implied on the basis of an unexpressed intention on the parties. A term may be implied in this situation when:

i) it is necessary to give business efficacy to the contract; or

ii) it'satisfies the 'officious bystander' test where a term is so obvious it goes without saying. It must be obvious to both parties. Such a term must be reasonable, necessary and obvious.

The type of terms the court imply as fact vary and rely on the terms of the particular contract and surrounding circumstances.

There are circumstances when terms will not be implied into a contract:

i) Where one party may have agreed to certain terms, but the other party would not have.

ii) In rigorous contracts with detailed written terms where any omission would be deemed to be deliberate.

Terms implied by law are implied into contracts of a particular kind where such terms are normally implied.

In the case of Liverpool CC v Irwin (1977), there was an implied obligation that the landlord of a block of flats had to keep them in good repair.

The intention of the parties in irrelevant when considering terms implied by law. The courts consider the contractual relationship between the parties and whether it would be reasonable to insert an implied term.

Conclusion

Construing contractual documents is an art form in its own right, taking many years of skill and experience to perform properly. A large number of problems may be averted by contracting contemplating what happens in the event of a breakdown of the contractual relationship, and setting out expressly what will be done in the event of a failure in the document prior to executing it.

Improperly drafted agreements that do not cater for failure, that is, the event that one party wishes to terminate for breach, leave the contracting parties in difficult position. Properly drafted agreements take account of failures to perform by the contracting parties and specify the circumstances and conditions for termination of contract, where there is a breach of contract. Accordingly, contract disputes may be managed and the relationship brought to an end in appropriate circumstances.