6.3 Contract terms

Contract terms are the building blocks of agreements, defining rights and obligations between parties. They encompass offer and acceptance, consideration, capacity, legality, and consent. Understanding these elements is crucial for creating valid, enforceable contracts.

Types of contract terms include express and implied, conditions and warranties, and exemption clauses. Interpreting these terms involves considering the parties' intentions, using literal or contextual approaches, and applying rules like contra proferentem. Breaches and remedies are key aspects of contract law.

Elements of contract terms

• Contract terms are the specific provisions that make up the agreement between parties
• These terms define the rights, obligations, and responsibilities of each party involved in the contract
• The elements of contract terms include offer and acceptance, consideration, capacity, legality, and consent

Offer and acceptance

Top images from around the web for Offer and acceptance

• 

  Contract Law - Free of Charge Creative Commons Legal Engraved image View original

  Is this image relevant?

• 

  Workflow Sample: Contract Progress Management in Workflow View original

  Is this image relevant?

• 

  Reading: What Is a Contract? | Introduction to Business View original

  Is this image relevant?

• 

  Contract Law - Free of Charge Creative Commons Legal Engraved image View original

  Is this image relevant?

• 

  Workflow Sample: Contract Progress Management in Workflow View original

  Is this image relevant?

1 of 3

Top images from around the web for Offer and acceptance

• 

  Contract Law - Free of Charge Creative Commons Legal Engraved image View original

  Is this image relevant?

• 

  Workflow Sample: Contract Progress Management in Workflow View original

  Is this image relevant?

• 

  Reading: What Is a Contract? | Introduction to Business View original

  Is this image relevant?

• 

  Contract Law - Free of Charge Creative Commons Legal Engraved image View original

  Is this image relevant?

• 

  Workflow Sample: Contract Progress Management in Workflow View original

  Is this image relevant?

1 of 3

• An offer is a clear and definite proposal by one party to enter into a contract with another party
• Acceptance is the unequivocal agreement to the terms of the offer by the party receiving it
• The offer must be communicated to the offeree, who then has the power to accept or reject it
• Acceptance can be expressed through words, actions, or silence (in certain circumstances)
• Once an offer is accepted, a binding contract is formed between the parties

Consideration in contracts

• Consideration is the bargained-for exchange of value between parties in a contract
• It can be in the form of money, goods, services, or a promise to do or refrain from doing something
• Consideration must be sufficient (have legal value) but need not be adequate (equal in value)
• Past consideration (something already done) is generally not valid for a new contract
• Consideration distinguishes a contract from a gift or a gratuitous promise

Capacity to contract

• Capacity refers to a person's legal ability to enter into a binding contract
• Minors (typically under 18) have limited capacity and can disaffirm most contracts
• Mental incapacity (due to illness, intoxication, or other factors) can render a contract voidable
• Corporations and other legal entities have the capacity to contract through their authorized agents
• Capacity ensures that parties understand the nature and consequences of the contract

Legality of subject matter

• The subject matter of a contract must be legal for the agreement to be enforceable
• Contracts involving illegal activities (crime, fraud, or violations of public policy) are void
• Contracts that restrain trade, limit competition, or promote monopolies may be deemed illegal
• Certain professions (doctors, lawyers) have additional legal and ethical considerations in contracts
• Legality ensures that contracts do not contravene the law or public policy

Consent and misrepresentation

• Consent to a contract must be given freely, without duress, undue influence, or misrepresentation
• Misrepresentation is a false statement of fact that induces a party to enter into a contract
• Fraudulent misrepresentation (intentional deceit) can make a contract voidable by the injured party
• Innocent misrepresentation (unintentional) may result in rescission or damages, depending on the circumstances
• Consent obtained through misrepresentation undermines the validity of the contract

Types of contract terms

• Contract terms can be classified based on their nature, source, and effect on the parties' obligations
• Understanding the different types of terms helps in drafting, interpreting, and enforcing contracts
• Key distinctions include express vs implied terms, conditions vs warranties, and fair vs unfair terms

Express vs implied terms

• Express terms are explicitly stated in the contract, either orally or in writing
• Implied terms are not expressly mentioned but are inferred from the context or the parties' intentions
• Implied terms can be derived from custom, trade usage, course of dealing, or legal principles
• Statute may imply certain terms into contracts (Sale of Goods Act, consumer protection laws)
• Express terms generally take precedence over implied terms in case of conflict

Conditions vs warranties

• Conditions are vital terms that go to the root of the contract, and their breach entitles the innocent party to terminate the contract and claim damages
• Warranties are less crucial terms, and their breach only allows the innocent party to claim damages (cannot terminate)
• Innominate terms fall in between and their classification depends on the severity of the breach and its consequences
• Parties can expressly designate terms as conditions or warranties in the contract
• The distinction affects the remedies available for breach and the contract's overall performance

Exemption clauses

• Exemption clauses (exclusion clauses) are terms that seek to limit or exclude a party's liability for breach, negligence, or other issues
• They are commonly found in standard form contracts and tickets (parking, travel)
• Courts interpret exemption clauses strictly and may void them if they are unreasonable or unconscionable
• Exemption clauses must be clearly incorporated into the contract and brought to the other party's attention
• Consumer protection laws (Unfair Contract Terms Act) restrict the use of exemption clauses in certain contexts

Unfair contract terms

• Unfair terms are those that significantly disadvantage one party or are contrary to good faith and fair dealing
• They are often found in consumer contracts where there is an imbalance in bargaining power
• Unfair terms can relate to price, termination, variation, or limitation of liability
• The Unfair Contract Terms Act and the Consumer Rights Act regulate the use of unfair terms
• Courts can refuse to enforce unfair terms or interpret them in favor of the weaker party

Void and voidable terms

• Void terms are those that are automatically invalid and unenforceable from the outset
• They may be void for illegality, public policy reasons, or lack of essential elements (consideration)
• Voidable terms are those that can be canceled or rescinded by one party due to factors like misrepresentation, duress, or undue influence
• The affected party has the option to affirm or reject a voidable term
• Void and voidable terms highlight the importance of ensuring the validity and fairness of contract provisions

Interpretation of contract terms

• Contract interpretation involves determining the meaning and effect of the terms agreed upon by the parties
• Courts aim to give effect to the parties' intentions while adhering to established rules and principles of interpretation
• Key factors in interpretation include the language used, the context, and the purpose of the contract

Intention of the parties

• The primary goal of contract interpretation is to ascertain and give effect to the intention of the parties
• Courts look at the words used in the contract and the surrounding circumstances to determine the parties' intentions
• The objective approach focuses on the reasonable meaning of the terms rather than the parties' subjective intentions
• Extrinsic evidence (negotiations, previous dealings) may be considered to establish the context and purpose of the contract
• Clear and unambiguous terms are generally given their plain and ordinary meaning

Literal vs contextual approach

• The literal approach (plain meaning rule) interprets the terms according to their natural and ordinary meaning, without considering the context
• The contextual approach (commercial common sense) interprets the terms in light of the contract's overall context and commercial purpose
• The contextual approach is preferred in modern contract law, as it better reflects the parties' intentions and the reality of their transaction
• However, courts cannot rewrite the contract or deviate from clear and unambiguous terms under the guise of contextual interpretation
• The extent to which context is considered depends on the clarity of the language and the nature of the contract

Parol evidence rule

• The parol evidence rule excludes the use of extrinsic evidence (oral or written) to contradict, vary, or add to the terms of a written contract
• It applies when the parties intend the written contract to be the final and complete expression of their agreement
• Exceptions to the rule include evidence of subsequent modifications, collateral agreements, or the existence of conditions precedent
• The rule does not preclude evidence to explain ambiguous terms, prove misrepresentation or fraud, or establish the parties' intentions
• The parol evidence rule promotes certainty and stability in contract law by prioritizing the written terms

Contra proferentem rule

• The contra proferentem rule states that ambiguous terms in a contract should be interpreted against the party who drafted or proposed them
• It applies when there is doubt or uncertainty about the meaning of a term, and other interpretation rules have not resolved the ambiguity
• The rule is based on the principle that the drafting party had the opportunity to clarify the terms and should bear the consequences of any ambiguity
• It is commonly applied in standard form contracts and consumer agreements where one party has little or no ability to negotiate the terms
• The contra proferentem rule encourages drafters to use clear and precise language and protects the weaker party from unfair interpretations

Good faith in interpretation

• The principle of good faith requires parties to act honestly, reasonably, and fairly in the performance and interpretation of contracts
• Courts may interpret terms in a way that promotes good faith and prevents a party from taking unfair advantage of the other
• Good faith can be used to imply terms that are necessary for the contract's effective operation or to give business efficacy
• However, good faith cannot override clear and unambiguous terms or create obligations inconsistent with the contract's express provisions
• The role of good faith in interpretation varies across jurisdictions and contract types, with some legal systems placing greater emphasis on it than others

Breach and remedies

• A breach of contract occurs when a party fails to perform their obligations under the contract, either completely or satisfactorily
• Breaches can be categorized as actual or anticipatory, and minor or material, depending on their nature and timing
• Remedies for breach aim to compensate the innocent party and restore them to the position they would have been in had the contract been properly performed

Types of contract breaches

• Minor breaches (partial breaches) occur when a party performs their obligations but not to the full extent or quality required by the contract
• Material breaches (fundamental breaches) are serious violations that go to the root of the contract and substantially deprive the innocent party of the expected benefit
• Actual breaches happen when a party fails to perform their obligations by the due date or performs defectively
• Anticipatory breaches occur when a party indicates, before the due date, that they will not or cannot perform their obligations
• The type and severity of the breach determine the remedies available to the innocent party

Anticipatory breach

• Anticipatory breach (repudiatory breach) happens when a party, before the performance date, demonstrates an intention not to perform or an inability to perform
• This can be through express statements, conduct, or circumstances that make future performance impossible
• The innocent party has the option to accept the repudiation and terminate the contract immediately or wait until the performance date and then claim damages
• Accepting the repudiation releases both parties from further performance and allows the innocent party to sue for damages
• If the innocent party does not accept the repudiation and the breaching party changes their mind and performs, the right to terminate is lost

Damages for breach

• Damages are the primary remedy for breach of contract, aiming to compensate the innocent party for their losses
• Expectation damages seek to put the innocent party in the position they would have been in had the contract been fully performed
• Reliance damages compensate the innocent party for expenses incurred in reliance on the contract, aiming to restore them to their pre-contract position
• Restitutionary damages require the breaching party to return any benefits received from the innocent party, preventing unjust enrichment
• Liquidated damages are predetermined amounts agreed upon by the parties in the contract, payable in case of breach
• The calculation of damages is subject to rules of causation, remoteness, and mitigation

Specific performance

• Specific performance is an equitable remedy that orders the breaching party to fulfill their contractual obligations as originally agreed
• It is granted at the court's discretion when damages are inadequate, and the subject matter of the contract is unique or irreplaceable (land, rare goods)
• Specific performance is not available for personal service contracts or contracts requiring constant supervision
• The innocent party must have clean hands (not have acted unfairly) and be ready and willing to perform their own obligations
• Specific performance ensures that the innocent party receives the actual performance they contracted for, rather than monetary compensation

Rescission and restitution

• Rescission is an equitable remedy that allows the innocent party to cancel the contract and be restored to their pre-contract position
• It is available for certain types of breaches, such as misrepresentation, duress, undue influence, or mistake
• Rescission operates retrospectively, treating the contract as if it never existed and requiring the parties to return any benefits received
• Restitution works alongside rescission to prevent unjust enrichment and ensure that neither party retains an unfair advantage
• The right to rescind may be lost if the innocent party affirms the contract, delays unreasonably, or if third-party rights have intervened
• Rescission and restitution provide a way to unwind the contract and restore the parties to their original positions when the contract is fundamentally flawed

Discharge of contract terms

• Discharge of contract terms refers to the various ways in which the parties' obligations under a contract can come to an end
• Once a contract is discharged, the parties are released from further performance and the contractual relationship is terminated
• The methods of discharge include performance, agreement, breach, frustration, and the expiry of time limits

Performance of obligations

• Performance is the primary and most straightforward way of discharging a contract, where the parties fulfill their respective obligations as agreed
• Complete performance by both parties discharges the contract and releases them from further liability
• Partial performance may be sufficient if the parties have agreed to accept it or if the court deems it substantial and the defects are minor
• Tender of performance (offering to perform) can be considered sufficient if the other party wrongfully refuses to accept it
• Performance must be in accordance with the terms of the contract, including any time limits, quality standards, and other specifications

Agreement to terminate

• The parties can mutually agree to terminate the contract and release each other from further obligations
• This is known as discharge by agreement, release, or waiver
• The agreement to terminate can be express (through words) or implied (through conduct)
• Consideration is generally required for the agreement to be binding, unless the contract is executed under seal (deed)
• Discharge by accord and satisfaction occurs when the parties agree to accept a different performance in place of the original obligations
• Novation is a form of agreement where a new contract replaces the original one, either with the same parties or by substituting a new party

Breach and repudiation

• A fundamental breach by one party entitles the innocent party to terminate the contract and claim damages
• This is known as discharge by breach, and it releases the innocent party from further performance
• Repudiation (anticipatory breach) occurs when a party indicates, before the due date, that they will not or cannot perform their obligations
• The innocent party can accept the repudiation, terminate the contract, and sue for damages immediately or wait until the performance date
• If the breach is minor, the innocent party cannot terminate but may claim damages and continue with their own performance
• The right to terminate for breach must be exercised promptly and unequivocally, or it may be lost by affirmation of the contract

Frustration of contract

• Frustration occurs when an unforeseen event, beyond the control of either party, makes the contract physically or commercially impossible to perform or fundamentally changes its nature
• The event must not have been caused by either party and must not have been foreseeable at the time of contracting
• Examples include the destruction of the subject matter, the death of a key person, or a change in the law
• Frustration automatically discharges the contract and releases both parties from further performance
• The Law Reform (Frustrated Contracts) Act 1943 allows for the adjustment of rights and liabilities, such as the recovery of money paid or the compensation for benefits conferred
• Frustration is a narrow doctrine and does not apply to mere inconvenience, hardship, or increased expense

Statute of limitations

• The statute of limitations sets time limits within which a party must bring a claim for breach of contract or enforce their rights
• In England and Wales, the limitation period for contract claims is generally six years from the date of the breach (Limitation Act 1980)
• If a claim is not brought within the limitation period, the remedy is barred, and the claim becomes unenforceable
• The limitation period can be extended in certain circumstances, such as fraud, concealment, or disability
• The expiry of the limitation period does not discharge the contract itself but bars the enforcement of remedies for breach
• Parties can agree to shorten the limitation period in the contract, but cannot extend it beyond the statutory limits