The terms of a contract


Parties to a contract are bound only by its terms, not by other statements made in pre-contract talk. If inducements were promised, they can sit alongside the main contract as a “collateral contract”. Contracts will always contain different types of terms, with “conditions” being more important than “warranties”. It’s possible to have a term that excludes one party from responsibility, but the courts generally view exclusion clauses as unfair.

What are the terms of a contract?

Before entering into a contract, various statements will often be made by one party in order to encourage or induce the other party to enter into the contract. A dispute may later arise as to which of the statements made should be considered a part, or a term, of the contract, and which should be taken as merely pre-contract talk, and therefore not a part or term of the contract. Parties to a contract are bound only by its terms, not by any peripheral statements that may have been made.

The courts can look at evidence of intention by one or other of the parties that the statement should be part of the contract. For example, the longer the interval is between the making of the statement and the reaching of the final agreement and contract, the less likely it is that the statement will be considered to be a term of the contract.

The fact that the maker of the statement had a special knowledge or skill compared with the other party will make the statement more likely to be a term. Where the agreement was subsequently reduced to writing and the statement was not included, it is less likely to be a term.

The effect of signing a document

If an agreement is eventually put into writing, then the statement is more likely to be a term of the contract.

The general rule is that a party is bound by all the terms set out in a contractual document if they have signed it. This applies whether or not they have read the terms or understood them. The exceptions to the general rule are mistakes as to the nature of the document and false statements (seeConsent”).

Collateral contracts

A “collateral contract” is a separate contract that exists alongside the main contract. Generally, where a contract is in writing, the written terms of that agreement form the basis of the contract. In addition, where statements have been made and intended as a promise, and intended to induce the making of the main contract, a collateral contract will be held to exist.

Courts have been prepared to find a collateral contract where one party refused to enter the main contract unless certain assurances were given or unless there was an assurance that one of the written terms of the main contract would not be enforced. For the court to hold that a collateral contract has been made, its terms must be consistent with the main written contract.

Terms may be conditions or warranties

Contracts will always contain different types of terms (said or written), some more important than others. The more important terms are called “conditions”, the less important terms are called “warranties”.

Conditions are so important that without them one or other of the parties would not enter into the contract. Consequently, to make a condition falsely, or to breach a condition, is viewed so seriously that the wronged party will be entitled to treat the contract as void, voidable or at least rescinded.

Where the term is a warranty, the wronged party will only be able to seek monetary damages for any loss suffered. The contract itself will remain binding on both parties.

The court looks at each case on its own merits. In making a decision as to whether a term is a condition or a warranty, the court will consider all the surrounding circumstances, including the seriousness of the consequences if the contract is held to be non-binding, and the intentions of the parties at the time they made the contract.

Just because a term is described in the contract, or by the parties as a condition or warranty, it does not mean that it will be regarded as such by the court.

The law of contract has been significantly affected by many Acts of parliament to protect consumers. No longer can the common law of contract be looked at to discover all the terms of a contract and whether those terms are conditions or warranties. There are various Acts of parliament that provide for minimum standards of trade behaviour and the standard of quality that the consumer ought to be able to expect. (For discussion of these extra factors, see Consumer protection laws and Consumer guarantees.)

Exclusion of responsibility terms

A contract can include a term that excludes one of the parties from responsibility for something that may go wrong in the performance of the contract or limits that responsibility. It is called an exclusion clause or an exemption clause. For example, an exclusion from liability for damage to the lawn might be included in a contract between the builder and a home owner who is having an extension built.

The courts have generally taken the view that exclusion clauses are unfair and have tried to limit their application. Courts generally interpret the exclusion clause against the party trying to rely on it and, at the least, interpret it narrowly.

When a contract is a document signed by the parties, they are generally bound by its exclusion clause.

Where a contract is an unsigned document (e.g. tickets, receipts and dockets), the court looks at what a reasonable person would assume the document to be. Only where a reasonable person would assume the document to be part of the contract between the parties will the exclusion clause in the document be able to be relied on. It must also be shown that the exclusion clause was brought to the notice of the other party. For example, if an automatic ticket machine in a car park had printed on it “issued subject to the conditions displayed in car park” and these conditions, or exclusion clauses, were on a pillar opposite the ticket machine, then this could potentially be held to be unreasonable notice. The driver may then be entitled to sue despite the exclusion clause in the conditions.

For consumer contracts, the ACL may imply conditions that do not allow an exclusion clause to form part of the contract, or that may limit its effect (see also Consumer guarantees).