Law of Contract and Terms of Contracts - Essay Example

Law Of Contract Introduction A contract is an agreement between two parties in which each party exchanges consideration in return for consideration from the other party1. Since Australian Law is in sync with English Law, a contract can only be valid if each of the two party gives a thing of value and also receives a thing of value through the agreement2. Terms Basically, a contract begins with an offer by one party to deliver a consideration to another party. When the offer is accepted and there is a consensus, a contract is established. The consensus of a contract is based on the terms of the offer and acceptance of the consideration3. This, therefore, means that a contract is discharged with the terms being the reference point and guide for the execution of the contract. The terms of a contract determines the rights and obligations of each and every party of the contract4. In other words, the terms is the basis on which the promises of a contract are carried out and it sets the standards of the contract. Chris Field states that before entering a contract, various statements must be made to induce the contract5. Since a contract involves the promises to exchange consideration, the parties to a contract are bound by the contract by the terms of the contract. The terms of a contract can be stated expressly or implied6. In other words, the terms of a contract can be stated in clear and defined terms. Typical examples of an express term include terms that are disclosed orally or in writing. Such terms are clear and definite. They can be acted upon with much more easily and in a clear and defined manner. On the other hand, there are terms of contracts that are implied. This includes terms that are inferred by a reasonable person by observing the conduct of the other party or by comparing a party's action to the normal behavior or by statute7. Aside classifying terms of contracts into implied and explicit, there is the classification of contracts based on their significance to the entire legal process. In this vein, there are conditions and warranties as well as intermediate terms8. These classifications are based on the significance of the terms to the fundamental consideration and the significance of other related elements of the contract and the consideration of the contract. Conditions The conditions of a contract are the important terms of the contract that affect the fundamental consideration that defines the contract9. The are vital elements of the contract that brings the contract into being and without it, the contract is fundamentally flawed. Conditions usually include the description of the subject matter of the contract10. In other words, the conditions are often the basis for the exchange of the main substance or essence of the entire contract. Failure to live up to the conditions of a contract will usually mean that the contract becomes non-existent and cannot be considered a contract anymore. A practical example of a condition is where Mr. A offers a car to Mr. B for AUD10,000. The fundamental term of the contract or the condition of the contract involves a car and AUD10,000. Whereas Mr. B is bargaining for a car, Mr. A is also hoping to get AUD10,00 from Mr. B. So these two items form the basis of the contract and are the conditions for the contract. So conditions include the issues directly relating to the consideration that is being bargained for by both parties of a contract11. They are major matters which bind the parties into the contract for the primary purpose for which the contract was formulated in the first place. In Poussard V Spiers (1876), Poussard was engaged to perform in an opera in London that was to last for three months12. Poussard fell ill a few days before the opera was to begin and a different performer was contracted in her stead. A week later, Poussard became well and sought to take her place in the opera. It was ruled that her sickness led to a fundamental breach of the contract. In other words, her sickness made it impossible for her to discharge her fundamental role in the opera, which entailed her performing from the beginning of the opera to the end. So such a situation led to the breach of a major condition of the contract. Warranties A warranty, on the other hand, is "an agreement with reference to goods which are subject to the contract of sale but collateral to the main purpose of the contract"13. This means that warranties are the agreements that although are material to a contract, do not alter the main purpose of the contract. This implies that although warranties are important in contracts, they cannot affect the fundamental nature of the consideration of the contract. Using the example of Mr A's car offer and Mr. B's agreement to pay AUD10,000 for the car, let us assume that Mr. A guarantees that the car is good and it is in top shape and as a proof of the quality of the car, he promises to replace any part of the car that would be damaged within 1 year of transfer, this becomes a warranty. This is because such a promise, although is connected to the contract at hand, does not affect the fundamental nature of the contract at hand. This means that the promise to fix up a car can be seen as a motivation and an important reason why a Mr. B might want to buy Mr. A's car. However, this does not significantly affect the substance of the contract significantly. It rather changes some components of the contract but it cannot be the basis for the termination of the contract because it is more of an incidental matter to the main contract and not a fundamental component of the contract itself. In Bettini V Gye (1876), Bettini was engaged by Gye to perform in a season of concerts for Gye in London14. In the contract, Bettini agreed to arrive in London 6 days before the beginning of the series of concerts. She fell sick and arrived in London 3 days later (that is three days before the commencement of the concerts). Gye attempted to terminate her contract and the matter was taken to court. It was held that the inability of Bettini to turn up on time was just a breach of a warranty. In other words, the ability of Bettini to arrive six days before the concert was a warranty and not a condition. It, therefore, carried a lower significance than the precedence set in Poussard V Spiers which stated that the inability of a performer to turn up in the first week was a breach of a condition rather than a warranty. Intermediate An intermediate or innominate term of a contract which is lies in-between a condition and a warranty15. In a classical case of Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd, the shipowners granted a ship that was not seaworthy to a party that was chartering the ship16. The ruling of this case by Megaw LJ was as follows: "… such a term in a charterparty ought to be regarded as being a condition of the contract, in the old sense of the word "condition"; that is that when it has been broken, the other party can, if he wishes, by intimation to the party in breach, elect to be released from performance of his further obligations under the contract; and he can validly do so without having to establish that, on the facts of the particular case, the breach has produced serious consequences which can be treated as "going to the root of the contract" or as being "fundamental," or whatever other metaphor may be thought appropriate for a frustration case." We learn from this ruling that although the defendants presented a ship that the plaintiff sought, it is apparent that they did so with little consideration for an important element of the contract – the lives of the individuals involved. Although it is important for them to have provided the ship as they promised in the terms of the contract, they had a duty of care of providing a ship that was compliant with all relevant legal requirements. This duty cannot be considered a condition because it is not stated explicitly in the contract but had to be inferred by common sense. On the other hand, it cannot be considered a warranty otherwise because the two parties did not mention it in the terms or discuss it. However, it can be inferred logically that the company providing the ship should have thought about the safety of their clients. And such a term is neither a condition or a warranty, so it forms part of the third category of terms in contract – intermediate or innominate terms. Remedies for Breach Perhaps the nature of each of the terms of a contract is determined by the remedies parties of a contract are entitled to when a certain set of terms are not discharged. Basically, a breach in the discharge of the terms of a contract renders the contract either void, voidable or unenforceable17. A void contract is an invalid contract and it is as if the parties never contracted in the first place18. A voidable contract, on the other hand, is a contract that one party is free to continue with or opt out19. An unenforceable contract is one which one or both parties cannot enforce in a court of law. In a contract where the promisor breaches a fundamental condition, the promisee the contract can either be void or voidable. In other words, the promisee or aggrieved party can choose to terminate the contract and opt out and/or claim damages20. This is because the breach of a condition of a contract means failure to discharge an important element of the contract. This, therefore, means that the aggrieved party of the contract can choose to walk out of the contract and claim damages as well. In Lombard North Central V Butterworth 1987, the plaintiff entered a contract where he agreed to make prompt payments of installments for a computer he bought from the defendant21. The case came up because there was a time where he failed to pay his agreed installment on time and the defendant seized the computer and sold it at a very low price. It was held that the promise to pay on time was a condition and NOT a warranty. Thus failure to meet that condition gave the defendant the right to terminate the contract. A breach in warranties, on the other hand, does not give the aggrieved party the right to terminate the contract. Rather, it gives the aggrieved party the right to sue for damages22. This, therefore, means that the aggrieved party can sue to be restored to his former position or apply for an injunction or order of specific performance to ensure that the other party does not continue to breach the contract further23 Conclusion Terms of contracts are important since it forms the foundations on which contracts are based. Terms of contracts can be classified as conditions, warranties or intermediate. Conditions are fundamental terms that relate directly to the substance of the consideration being exchanged in the contract. Warranties are incidental to the consideration and do not directly influence the consideration of the contract. Intermediate or innominate terms lie in-between the two extremes. A breach in conditions entitles the aggrieved party to terminate the contract and/or sue for damages. A breach of warranty gives the aggrieved party the right to sue for damages but the rights to terminate the contract. Bibliography ANU Law (2006) Termination for Breach Available online at: Austen, Baker. “A Relational Law of Contract” Journal of Contract Law Vol. 20 Issue 2 pp 124 – 141 (2004) Australian Capital Territory Consolidated Act (2009) Sale of Goods Act Available online at: Beck, Andrew. “Contract Law” New Zealand Law Review Issue 1 page 83. January 2009. Brody Gerard (2011) Court Remedies Available online at: Carter, J. W. 'Terms &Warranties'. Halsburg's Laws of Australia. (2008) Carter, John W., Harland David, Lindgren, Kevin, E. Contract law in Australia Sydney: Butterworth Publishing Clarke Julie. Terms of a Contract (2011) Australian Contract Law Ellis, Elizabeth. Principles & Practice of Australian Law. Pyrmont NSW: Lawbook Co. (2009) Field Chris. What are The Terms of a Contract? (2011) The Law Handbook Gilles, Peter. Concise Contact Law. (2008). Federation Press Handford, Peter. “Law of Contract” University of Western Australia Law Review 12/1982 Vol. 94 Issue 4. Page 510. 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