Contract Terms in English Law

Introduction

The terms of a contract define the obligations of the parties and the content of their agreement. English law distinguishes between express terms (those explicitly agreed by the parties) and implied terms (those supplied by the courts, statute, or custom). The interpretation of contractual terms is governed by the objective principles of construction, while statutory controls — particularly the Unfair Contract Terms Act 1977 (UCTA 1977) — regulate the enforceability of exclusion and limitation clauses.

Express Terms

Express terms are those that the parties have explicitly agreed, whether in writing, orally, or by conduct. Where a contract is contained in a signed written document, the party signing is generally bound by all the terms contained therein, regardless of whether they have read them (L’Estrange v F Graucob Ltd (1934)). The parol evidence rule — which provides that extrinsic evidence cannot be adduced to contradict, vary, or add to the terms of a written contract — has been relaxed in modern law, particularly to establish the factual matrix against which the contract was made.

Terms may be incorporated by notice where reasonable steps are taken to bring them to the attention of the other party before or at the time of contracting. In Parker v South Eastern Railway Co (1877), the court held that a term contained in a railway ticket was binding if the party seeking to rely on it took reasonable steps to bring it to the other’s attention. The more onerous or unusual the term, the greater the notice required (Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd (1989)).

Course of dealing may also incorporate terms: where parties have consistently dealt on particular terms over a series of transactions, those terms may be implied into subsequent contracts even where they have not been expressly incorporated.

Implied Terms

Terms may be implied into contracts by fact, law, or statute. Terms implied in fact are those necessary to give business efficacy to the contract or that are so obvious that they go without saying. The officious bystander test, formulated by MacKinnon LJ in Shirlaw v Southern Foundries (1926) Ltd (1939), asks whether the term is so obvious that if an officious bystander suggested it to the parties, they would both testily reply “oh, of course.” The business efficacy test, from The Moorcock (1889), implies a term necessary to make the contract workable.

Terms implied in law are generic terms implied by the courts into all contracts of a particular type, reflecting the nature of the relationship. The duty of mutual trust and confidence in employment contracts and the duty of skill and care in professional contracts are examples of terms implied in law. The Supreme Court in Scally v Southern Health and Social Services Board (1992) confirmed that terms may be implied in law where necessary for the proper functioning of the contractual relationship.

Terms implied by statute include the implied terms in the Sale of Goods Act 1979 (satisfactory quality, fitness for purpose, and correspondence with description) and the Supply of Goods and Services Act 1982 (reasonable care and skill).

Classification of Terms

Terms are classified as conditions, warranties, or innominate terms. A condition is a major term going to the root of the contract, breach of which entitles the innocent party to terminate the contract and claim damages. A warranty is a minor term, breach of which entitles the innocent party to damages only, not termination.

The innominate term approach, established in Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd (1962), allows the court to assess the effect of the breach rather than classifying the term in advance. If the breach deprives the innocent party of substantially the whole benefit of the contract, the breach is treated as a breach of condition, entitling termination. This approach provides greater flexibility than the rigid classification of terms as conditions or warranties.

Exclusion and Limitation Clauses

Exclusion and limitation clauses seek to exclude or restrict the liability of one party for breach of contract or negligence. At common law, such clauses are subject to the rules of incorporation and construction. The contra proferentem rule construes ambiguities against the party seeking to rely on the exclusion clause.

UCTA 1977 imposes significant controls on exclusion clauses. Section 2(1) renders void any clause excluding or restricting liability for death or personal injury resulting from negligence. Section 2(2) subjects exclusions of liability for other loss or damage from negligence to the requirement of reasonableness. Section 3 applies the reasonableness requirement to exclusions of liability for breach of contract in standard term contracts and consumer contracts. Schedule 2 to UCTA 1977 sets out guidelines for determining reasonableness, including the relative bargaining strength of the parties, the availability of insurance, and whether the customer knew or ought to have known of the term.

The Consumer Rights Act 2015 replaced UCTA 1977 for business-to-consumer contracts, subjecting exclusion clauses in consumer contracts to a test of fairness. A term is unfair if it causes a significant imbalance in the parties’ rights and obligations to the detriment of the consumer, contrary to the requirement of good faith.

Conclusion

The terms of a contract define the parties’ obligations and determine the remedies available for breach. The distinction between express and implied terms, the classification of terms as conditions, warranties, or innominate terms, and the statutory controls on exclusion clauses provide a comprehensive framework for the content and enforcement of contractual obligations.