What Is a Contract Term?
A contract term (also called contractual term) refers to a specific rule, condition, or requirement that governs how the parties will execute the agreement. In contracts, terms manifest as the contractual element of offer, which is what the involved parties promise to do or not to do in the future.
To ensure the enforceability of a contract, its terms must be sufficiently certain, meaning they are definite and clear to all parties involved. Moreover, these terms should allow the parties to achieve their desired end goals in good faith, ensuring that no attempts at deception are made.
Classification of Contract Terms: Conditions, Warranties, & Innominate
Contract terms are generally classified based on what happens when one party fails to meet their obligation or breaches the agreement. These classifications include conditions, warranties, and innominate terms.
Here is a table providing a concise overview of the remedies available for contract breaches based on the classification of the term, along with practical examples.
1. Condition
A condition refers to a contract term that, if breached, provides the aggrieved party the right to either terminate the contract or still maintain it. Additionally, the aggrieved party can also claim damages.
An example of a condition are specific delivery deadlines. Using the marathon scenario from the table above, a specific delivery deadline is a condition because it is essential to the agreement between the event organizers and shirt supplier.
In this example:
- The deadline is absolute. If the deadline is missed, the organizer loses the entire benefit of the contract, given that the shirts are for a one-time event.
- The organizers have the right to terminate. The law grants the event organizers the right to reject the shipment entirely and end the contract because the breach of this term renders the shirts useless for their intended purpose.
- The organizers have the right to claim damages. Whether the organizers choose to terminate the contract or keep the late shirts, they can claim damages to recover any financial losses. This could include the cost of sourcing last-minute replacements or lost sponsorship revenue.
2. Warranty
A warranty is a term that does not give the aggrieved party the right to terminate the contract in cases of a contract breach, although it grants the right to claim damages.
Following the marathon scenario, an example of warranty is the packaging requirements. Should the shirts arrive on time but the supplier fails to bundle them in the wrong quantities, the:
- Contract remains enforceable. The organizers cannot reject the shipment or end the agreement because the core benefits, providing wearable shirts for the race, is fulfilled.
- Organizers must perform their obligations. The organizers are still required to accept the delivery and pay the supplier, as the packaging error does not affect the core of the agreement.
- Organizers have the right to claim damages. The organizers can seek financial compensations for losses caused by the breach, like the labor cost of re-sorting the bundles.
Important Note: In contract law, a "warranty" refers to a secondary term classification — it is not the same as a "warranty card" or a manufacturer’s product guarantee. Unlike a guarantee to repair or replace, a contractual warranty determines whether you have the legal right to terminate a deal or only the right to claim damages.
3. Innominate Term
An innominate term refers to a term that is not designated as a condition or warranty, given that the remedy will depend on the severity of the impact of the breach at the time it happens.
With reference to the marathon case, an example of an innominate term is fabric quality. The classification of this term depends on the extent of the deviation from the original agreement:
- If the fabric is slightly lower in quality. If the material is slightly less breathable than specified but still looks professional and is functional for a race, it is treated as a warranty. The organizers must keep the shirts but can claim damages for the lower value.
- If the fabric is completely unfit for purpose. If the material is so low-grade that it is transparent, causes skin irritation, or is non-breathable, it is treated as a condition. Because this renders the shirts unwearable for a marathon, the organizers have the right to terminate the contract and reject the shipment.
Notably, unlike conditions or warranties, innominate terms are evaluated following the actual consequences of the breach before deciding if the organizers have the right to terminate the contract or are limited to claiming damages.
Express vs. Implied Terms: How Contract Terms Are Formed
While terms are classified based on the actions available following a contract breach, contractual terms are also categorized based on their formation. They can be express or implied.
The table below provides an overview of the differences between express and implied terms regarding their form, validity, and practical application.
1. Express Term
An express term is a term that has been explicitly stated — whether verbally or in writing — by the involved parties in the contract. In business, express terms should ideally be documented in writing to serve as a clear guide for the agreement's execution. These terms are legally binding so long as the contract in which they are contained is valid.
Express terms typically manifest as the standard clauses found within a legal document. In fact, the specific sections and provisions you see in a written agreement are almost always express terms. An example of this would be a Price and Quantity clause stating the exact cost of $120,000 for 10,000 units of a product in a Supply Agreement between an event organizer and a supplier.
2. Implied Term
An implied term refers to the "silent" or unwritten rules of a contract that are presumed to exist even without explicit mention by the involved parties. This lack of documentation does not mean they are not legally enforceable. However, in a business context, reliance on implied terms should be kept to a minimum to ensure clarity and reduce the risk of legal disputes.
An example of an implied term would be that goods ordered must have “satisfactory quality” and fit their intended purpose.
Returning to the marathon example: if the event organizers inform the supplier that they require a specific cloth blend suitable for a high-heat environment, it is implied that the shirts delivered will be suited for that environment. If the shirts tatter or break down due to heat, the supplier may be in breach of an implied term, even if a specific "heat resistance index" was never stated in the written contract. Because the organizers communicated the intended use, the suitability of the fabric for that use is implied to be part of the agreement.
Contract Terms vs. Contract Clauses: The Difference
Contract terms and contract clauses are overlapping concepts that are often mistaken for the same thing. However, they serve different roles within an agreement.
Contract terms represent the entire scope of the agreement. They manifest as explicit provisions written in the document, as well as "silent" or implied rules that govern the parties even if they aren't stated on the page.
Contract clauses, on the other hand, must be specifically stated within the document. While contract terms govern the agreement as a whole, including the unwritten obligations, clauses are limited to the specific sections or paragraphs in which they are found.
In essence: Contract clauses are the specific building blocks that make up the broader terms of the contract.
Here’s a table summarizing the differences between contract terms and clauses.
Whether you are defining broad contract terms or drafting precise clauses, ensuring that they are compliant is crucial to prevent disputes and unnecessary legal risks. To stay protected, leading enterprises are moving away from manual workflows and turning to contract management systems like Lexagle to automate their contract risk management.
For example, a leading Philippine manufacturing conglomerate used Lexagle’s AI contract analysis feature to ensure that their key terms are compliant with internal standards and the rigorous standards of the manufacturing industry — one of the most highly regulated industries. Their Lexagle adoption led to 25% fewer contract disputes and $500,000 projected annual savings.
Standard Contract Terms in Business
Once you understand the mechanics of contract terms, translating that knowledge into effective contract drafting is your next step. Although every agreement is unique, keeping these common business terms in mind will significantly simplify how you write your contracts.
1. Non-Disclosure Provisions
A non-disclosure provision, or a confidentiality term, binds parties to an obligation not to disclose sensitive business information to any external party. This term plays a crucial role in protecting a company’s private information or “trade secrets.” Non-disclosure provisions should be carefully drafted to include a clear scope of what information is confidential and the specific duration for which the obligation remains effective.
2. Termination Terms
A termination term describes the procedures and remedies available if a party decides to prematurely end the contract. It outlines valid reasons for ending the agreement and may specify the payment of damages to the injured party. Including these terms is crucial for preparing your business for unexpected situations.
3. Force Majeure Terms
Force Majeure terms excuse parties from their obligations if an unforeseeable event beyond their control prevents them from acting, such as: natural disasters, acts of terrorism, or pandemics. This provision protects parties from being flagged for a breach of contract during an unavoidable disruption.
4. Dispute Resolution Terms
A dispute resolution term outlines how parties will handle a breach. This term establishes the formal process for seeking remedies, such as through an out-of-court settlement, mediation, or a formal lawsuit to sue for damages.
5. Assignment and Subcontracting Provisions
Assigning and subcontracting provisions are terms you put in contracts if you do not want the other party to transfer their duties to a third party via subcontracting, as obligations are often assignable unless a contract states otherwise. These provisions ensure that you know exactly who is performing the work you contracted for.
6. Attorney’s Fees Provisions
Including terms for attorney’s fees can help mitigate costs to your business in the event of a legal battle by ensuring that the losing party bears the legal expenses of the winning party. Without this provision, pirates are usually responsible for their own legal fees regardless of the outcome.
7. Choice of Law Terms
Choice of law terms are provisions placed in contracts to specify which jurisdiction’s laws will be used to interpret the agreement. Typically, businesses defer to the laws of the state or country where their headquarters is situated.
8. Choice of Court Terms
Under a choice of court term, parties agree to settle claims within a specific court system (such as a specific city or state), preventing the inconvenience of being sued in a distant or unfavorable location
Disclaimer: This article is intended for informational purposes only and should not be considered legal advice. Lexagle does not provide legal services. Readers should consult a qualified legal professional for advice regarding their specific legal matters.
