Put simply, the terms of a contract refer to the parts of a contract that are legally binding. These can be in writing or agreed upon verbally. Terms may even be implied by law, the conduct or intentions of the parties involved, standards in a particular industry or even previous dealings. Read on to learn more about the different types of contractual terms and when they may arise.
Different Types of Contract Terms
Contracts may include a number of different terms, such as:
- Express Terms - This refers to specific terms mentioned and agreed upon by the parties during the negotiation stage. Although they are generally put in writing, they can be agreed upon orally.
- Implied Terms - This refers to a set of default rules in a contract that operates quietly in the background. In some cases, they may override express terms. For example, the court may assume that terms were intended to be in a contract, regardless of whether they are specified. Terms may also be implied by common law or statute.
- Conditions - This refers to the obligations of parties under a contract. If parties do not fulfil their obligations, they will be in breach of the contract.
Common Terms of Contract
There are a number of standard terms that are used in most contracts to govern business relationships and transactions. These terms may be specific to certain parties or transactions. Key contractual terms include:
- Payment Terms - These set out how and when contractors will be paid, as well as who invoices are sent to, how often they will be sent and who pays
- Delivery Terms - These govern the timeframes and conditions for the delivery of a product or service. They specify what the obligations of the seller are, minimising the risk of disputes.
- Warranties - These are statements made by sellers that provide an assurance about the existence or accuracy of a fact. An innocent party can claim damages if the other party breaches the contract.
- Liabilities - This is where one party agrees to pay for any damages or losses caused by another party.
- Termination Clauses - These set out when and how a party can bring the agreement to an end.
Interpreting Terms
When interpreting the terms of a contract, it is crucial that the meaning of the words is understood based on what a reasonable person, using common business sense and knowing the parties’ background and the rest of the contract, would have thought when it was made. This means that the words may not always mean what they seem to say when read in isolation or at first glance. In some cases, the reasonable person may conclude that the wording is incorrect and the intended meaning is different from the literal one. To avoid confusion and reduce the risk of potential disputes, it is important to use clear language.
If the language is ambiguous, the Court will need to interpret unclear terms in a contract by finding the objective meaning. It does this by looking at the contract as a whole, the natural meaning of the words, the purpose of the clause and the facts known to the parties at the time. The Court will determine how a reasonable person with the same background information would interpret the terms. But it is worth noting that the Court will not change the contract or fix bad agreements. It will only clarify what the parties agreed to, even if one side ends up worse off.
When interpreting contractual terms, the Court may consider evidence outside the written document to understand its context. This includes the facts known to the parties at the time, the commercial purpose of the contract, and the market they were in. However, the Court will not usually consider prior negotiations or personal intent.
What Happens If a Party Breaches a Contract Term?
If a condition is breached, the innocent party can terminate the contract or affirm it. Not to mention, they also have the right to claim damages. A breach of a warranty, on the other hand, does not allow the wronged party to terminate the contract. However, they do have the right to claim damages, which aim to restore the innocent party to the position they would have been in if the contract had been fulfilled. It is important to note that the innocent party must try to minimise their losses or they may receive less compensation.
How to Draft and Negotiate Contract Terms
When drafting and negotiating contracts, it is important to be clear and precise. It makes sense to start by clearly stating each party’s rights and obligations, using specific language to avoid confusion. If there are any technical or industry-specific terms, define them to ensure both parties have a clear understanding.
It is advisable to organise the contract logically, moving from general terms to more detailed clauses, covering key issues such as termination, dispute resolution, and remedies for breaches. For example, you may want to include a clause explaining how the contract can be terminated if one party breaches it and what remedies the other party has.
When negotiating terms, research both your needs and those of the other party, as well as market conditions. While it is a good idea to be flexible, it is crucial to always have your business’s best interests in mind. After all, you want to reach an agreement that works for both sides. A positive, respectful relationship with the other party can help.
Get the Legal Advice You Deserve
To make sure you fully understand the implications of your contract’s terms, It is wise to seek expert legal advice. Our commercial contract solicitors excel at spotting risks and ensuring contracts meet legal requirements. Contact us today and let us help you negotiate terms that best protect your interests.
