Contract

A contract is any legally-enforceable promise or set of promises made between parties. In the civil law, contracts are considered to be part of the general law of obligations. This article describes the law relating to contracts in common law jurisdictions.

Express and implied terms

Different types of statements

Whether a statement is a term of a contract is important because only if a promise is a term of the contract can a party sue for the breach of the contract. Statements can be split into the following types:

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• Puff (sales talk): If no reasonable person hearing this statement would take it seriously, it is a puff, and no action in contract is available if the statement proves to be wrong.
• Representation: A representation is a statement of fact made to induce another person to enter into a contract and which does induce them to enter into a contract, but it is one that the maker of the statement does not guarantee its truth. If the statement proves to be incorrect, it cannot be enforced, as it is not a term of the contract, but it may prove to be a misrepresentation, whereupon other remedies are available.
• Term: A term is similar to a representation, but the truth of the statement is guaranteed by the person who made the statement. The test is an objective test.

Factors that a court may take into account in determining the nature of a statement include:

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• Timing: If the contract was concluded soon after the statement was made, this is a strong indication that the statement induced the person to enter into the contract.
• Content of statement: It is necessary to consider what was said in the given context, which has nothing to do with the importance of a statement.
• Knowledge and expertise: In Oscar Chess Ltd v. Williams 1 WLR 370, a person selling a car to a second-hand car dealer stated that it was a 1948 Morris, when in fact it was a 1939 model car. It was held that the statement did not become a term because a reasonable person in the position of the car dealer would not have thought that an inexperienced person would have guaranteed the truth of the statement.

Terms implied in fact

The Privy Council proposed a five stage test in BP Refinery Western Port v. Shire of Hastings:

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• Reasonableness and equitableness: The implied term must be reasonable and equitable.
• Business efficacy: The implied term must be necessary for the business efficacy of the contract. For instance, if the term simply causes the contract to operate better, that does not fit this criterion.
• Obviousness: The term is so obvious that it goes without saying. Furthermore, there must be one and only one thing that would be implied by the parties. For example, in Codelfa Construction Pty Ltd v. State Rail Authority of New South Wales (1982) 149 CLR 337, a term regarding the inability of construction company to work three shifts a day could not be implied because it was unclear what form it would have taken.
• Clear expression: The term must be capable of clear expression. No specific technical knowledge should be required.
• Consistency: The implied term may not contradict an express term.

In Australia, the High Court has ruled that the test in BP Refinery applies only to formal contracts, while the test in Byrne and Frew v. Australian Airlines Ltd (1995) 185 CLR 410 shall apply to informal contracts:

Related Topics:
Formal contract - Informal contract

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• Necessity: The term must be necessary to ensure reasonable or effective operation of a contract of the nature before the court.
• Consistency: The implied term may not contradict an express term (same as for formal contracts).
• Clear expression: The term must be capable of clear expression (same as for formal contracts).
• Obvious: McHugh and Gummow JJ have stated that it must also be obvious.

Terms implied in law

These are terms that have been implied into standardised relationships. The other difference between this and terms implied in fact is that the test is one of necessity (Liverpool City Council v. Irwin 2 WLR 562); a necessary term is one where the contract is rendered worthless or nugatory if it is without it.

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Terms implied by custom or trade

You are generally bound by the custom of the industry that you are in. To imply a term due to custom or trade, you must prove the existence of the custom, which must be notorious, certain, legal and reasonable (Con-stan Industries of Australia Pty Ltd v. Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226). See also Frigaliment Importing Co., Ltd., v. B.N.S. International Sales Corp., 190 F. Supp. 116 (S.D.N.Y. 1960) (plaintiff failed to prove what he meant by "chicken") and U.C.C. § 1-205.

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