Contract Law 102

By Ross Dillon | Litigation

Contractual Terms: Express, Implied and Exclusions

In the realm of contract law, parties must clearly define the terms of their agreement to avoid misunderstandings and disputes. These terms fall into different categories, including express terms, implied terms (implied by statute, the courts, or in fact), and exclusion clauses. This article explores each of these categories and discusses notable cases that shed light on their significance and application in contract law.

I. Express Terms

Express terms are the explicit provisions that the parties have agreed upon (and hopefully put into writing in the contract). These terms outline the rights and obligations of each party, thereby forming the core of the contractual relationship. Express terms can be found in various forms, including written agreements, oral agreements (although more difficult to prove), and even through conduct if both parties have acted consistently in a particular manner.

The clarity of express terms is crucial, as they provide the foundation for assessing the performance of the contract and determining whether a breach has occurred. Ambiguities in express terms can lead to legal disputes and interpretation challenges, emphasizing the significance of clear and unambiguous language in contract drafting.

II. Implied Terms

While express terms are specifically stated in the contract, implied terms are not explicitly written down but are nonetheless understood to be included. Implied terms can arise through various means, including statutes, common law, and implied by the courts.

a. Implied by Statute

Certain terms are implied into contracts by virtue of relevant statutes. For instance, consumer contracts often have implied terms that provide consumers with certain protections and guarantees. These statutory terms are automatically included (unless excluded where that is possible) ensuring a basic level of consistency, fairness and consumer protection in commercial dealings.

b. Implied by the Courts

The courts may imply terms into contracts based on long-standing trade customs and practices. These terms are considered part of the agreement, even though they were not explicitly mentioned. An influential case in this context is BP Refinery (Westernport) Pty Ltd v Shire of Hastings, where the court articulated the essential elements necessary in order to imply a term into a contract. Those elements (in summary) are that the term is reasonable, necessary to make sense of the contract, so obvious it “goes without saying”, clear and not contradict anything expressly stated in the contract.

c. Customary terms

Implied terms can also arise from the customs of a particular type of contract in a particular industry.   This appears to be a particular gloss on the previous category although it may imply many more terms than envisaged in the BP Refinery case above. These terms are inferred from the course of dealings between parties, their conduct and the presumed intentions of the parties.   While not expressly stated, they are deemed necessary for the contract's proper functioning and effectiveness.

III. Good Faith and Honest Performance

In recent years, the concept of "good faith" in contractual dealings has gained prominence in many jurisdictions. Good faith entails the parties acting honestly and not engaging in conduct that undermines the core purpose of the contract. Some jurisdictions, like Canada, have explicitly recognized a duty of "honest performance."

In Bhasin v Hrynew  the Canadian Supreme Court established the duty of honest performance, holding that parties must not lie or knowingly mislead each other in contractual matters. This landmark decision emphasized the importance of integrity and transparency in contractual relationships and set a precedent for similar cases in other jurisdictions.

In New Zealand cases such as Prime Commercial Ltd v Wool Board Disestablishment Co and Stanley v Fuji Xerox NZ Ltd have explored the concept of good faith and its application in specific contractual contexts, but without finally providing clarity on its application.

IV. Exclusion Clauses

Exclusion clauses are provisions within contracts that aim to limit or exclude certain obligations or liabilities that would otherwise be included. These clauses are often employed to protect one party from specific risks or liabilities that may arise during the contractual relationship.  The most common and familiar types of exclusion clauses arise in insurance contracts – defining what type of loss is not covered by the policy.

Inevitably, the enforceability of exclusion clauses is subject to close legal scrutiny. Courts may examine such clauses to ensure that they are reasonable and fair, particularly when dealing with consumer contracts or situations involving unequal bargaining power between the parties.

The effectiveness of an exclusion clause may be challenged if it is found to have been misrepresented, where the party seeking to rely on the clause intentionally misled the other party about its effect. Additionally, statutes like the Fair Trading Act or Consumer Guarantees Act may limit the scope and enforceability of exclusion clauses, especially when they seek to restrict consumer rights.

Conclusion

Understanding the different types of contractual terms is essential for ensuring clarity and fairness in commercial relationships. Express terms form the explicit basis of the agreement, while implied terms can be inferred from various sources such as statutes, common law, and the factual circumstances surrounding the contract. The concept of good faith and honest performance promotes integrity and transparency in contractual dealings, but may not apply to all contracts.   Meanwhile, exclusion clauses offer parties the ability to limit their liabilities, but their enforceability is subject to careful scrutiny and may be restricted by statutory laws. By carefully considering these elements and how they mesh together in any particular set of circumstances, parties can create well-drafted contracts that accurately reflect their intentions and reduce the likelihood of disputes.

Disclaimer:
We have taken care to ensure that the information given is accurate, however it is intended for general guidance only and it should not be relied upon in individual cases. Professional advice should always be sought before any decision or action is taken.