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What is the Classification of Terms in a Contract?

An Overview on Classification of Terms

It is often regarded that the right to terminate a contract for a breach is one of the “most important rights recognised by the law of contract” (Carter, 2008, p. 226). Depending on the classification of terms, the right of termination may arise.

In Australia, the English decision in Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 was adopted representing a policy position shifting from a dualistic classification system to a tripartite classification system. This modern policy approach favoured “contractual performance over greater simplicity and certainty” in the classification of terms (Gamble, 2008, p. 457). It is a decision often regarded as the “few modern decisions” that have “captured the imaginations of contract lawyers” in contemporary contract law (Carter et al., 2006, p. 268).

The tripartite classification of terms can give rise to three different kinds of legal rights. A contractual term may be classified either as a condition, an intermediate term, or a warranty. In this article, we address the frequently asked questions on the classification of terms:

What is the Tripartite Classification of Terms?

Historically, the traditional approach on the classification of terms was rigidly analysed as either a condition or warranty. This dualistic classification system was adopted from the English statute, Sales of Goods Act 1893 (UK), by Bowen LJ in Bentsen v Taylor Sons & Co [1893] 2 QB 274. In this historical English model, if a term was not classified as a condition, then the term was a warranty, and the innocent party was not entitled to terminate a contract for a breach.

However, approximately more than 60 years after, the English decision of Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26, introduced a new concept called intermediate terms, also known as innominate terms. This English decision has been described as being “synonymous with [the] tripartite classification of contractual terms as conditions, warranties and intermediate (or innominate) terms” (Carter et al., 2006, p. 271). The more nuanced tripartite classification of terms system was “welcomed with open arms by most scholars” as legal academics were frustrated that the conditions-warranties dichotomy could not properly resolve contracts of more complex character (Carter et al., 2006, p. 268). Treitel (2002, p. 113) describes the tripartite classification of terms as:

“…being the most important judicial contribution to English contract law in the past century.”

Read More: What is Contract Law?” explores contemporary legal theories that explain the nature of contract law.

What is a condition?

Conditions are terms that “any breach of which entitles the promisee to terminate the performance of the contract” (Carter, 2008, p. 226). Others also share the view that if a term is a condition, then any breach of a condition will entitle an innocent party a right to terminate “regardless of the gravity of the contract” (Robertson & Paterson, 2020, p. 472). Carter (2018) views that if a hypothetical breach “of a term will give rise to serious consequence” then this “is a good indication that the parties” intended that a term should be a condition (p. 679). Regardless of the consequences of an actual breach, the innocent party may terminate a contract if a term is classified as a condition. The policy rationale for this strict contractual approach in the classification of terms is that a condition is “an essential term that ‘goes to the root of the contract’” (Gamble, 2008, p. 458).

Otherwise, the continued retention of conditions and warranties is described as a quasi-legislation “comfort that the Courts continue to apply from to time to declare which obligations (in the absence of express characterisation by the parties)” should be entailed (Andrews, 2018, para 6).

Read More: What is Termination of Contract in Australia?” draws an overview on the legal concept of termination in Australia.

When can a term be classed as a condition?

Whether a term may be classified as a condition “depends on the intention of the parties” (Carter, 2018. p. 675). This is a question of “construction of the contract as a whole” (Carter, 2018, p. 677). A term can be classed as a condition through various means. First, a term can be expressly classified as a condition between the parties, and secondly, a term can be impliedly classified as a condition.

Can the parties expressly classify a term as a condition?

A term can be classified as a condition if the parties’ uses words to that effect. However, the labelling, condition, is not conclusive and the Courts must objectively assess whether the parties’ intended for a term to be a condition (Robertson & Paterson, 2020; Carter 2018). This requires an assessment of the “construction of the contract as a whole” (Carter, 2018, p. 677).

Can a term be classified as a condition without express designation by the parties?

Other than expressly classifying a term as a condition, then in most cases, whether a term is a condition, is “implied or inferred by construction of the contract as a whole” (Carter, 2018, p. 675). This relies on an “inference of intention by construction of the contract” (Carter, 2018, p. 677).

During the classification of terms, Robertson & Paterson (2020) and Carter (2018) describe relevant factors that may assist in determining whether a term is a condition:

Relevant FactorsSummary of Reasons
Previous DecisionsIf a term that forms part of a standard form contract has been classified as a condition in a prior case law, then that classification is likely to be applied in other similar cases.
CertaintyIf a parties’ dealings require certainty, then this may be a relevant factor with classifying a term as a condition.
Language UsedThe contractual language used in describing a legal obligation and its importance may affect the classification of a term as a condition. Therefore, the language should be clear and precise.
Other TermsInfererences from other terms may be relevant in assessing whether a strict compliance with a term is required, such that the term should be classified as a condition.
Structure of the ContractA term should be read in the context of the contract as a whole. If a term confers a right of termination under defined and limited circumstances, then this may be inconsistent with the common right law of termination and be a relevant factor in not classifying a term as a condition.
Assessment of DamagesIf damages may be an adequate remedy for a breach, then this may be a relevant factor that a term is not a condition.

If there is uncertainty whether a term should be classified as a condition, the Courts will generally prefer a classification of terms that encourages contractual performance. In the High Court decision of Ankar Pty Ltd v Arnick Holdings Ltd v National Westminster Finance (Australia) Ltd (1987) 70 ALR 641, the majority stated this position:

“…in deciding whether a promise has the status and effect of a conditions, court are not too ready to construe a term as a condition…. This approach is explained by a preference for a construction that will encourage performance rather than avoidance of contractual obligations.” (page 645)

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What are intermediate terms in Australia?

Intermediate terms, also known as innominate terms, are terms that “the breach of which will entitle the promisee to terminate the contract only if the breach is sufficiently serious” (Carter, 2008, p. 226). This kind of term is neither a condition nor warranty but “capable of operating as either, depending on the gravity of the breach” (Seddon & Bigwood, 2023, para 21.22). Therefore, the fluidity in intermediate terms has been described as “convenient” because it integrates a dynamic notion that “parties have neither reached agreement that any breach of the term is to give rise to a right of termination nor agreed that no breach can ever justify termination” (Carter et al., 2006, p. 271). In contrast with the tripartite classification of terms, the condition-warranty dichotomy has been viewed as “a little too simplistic” because it ignores complex contracts and terms which cannot neatly be categorised as either conditions or warranties (Phang, 2003, p. 238). Ultimately, intermediate terms contribute to a more nuanced legal analysis by bringing “flexibility to the law” (Carter et al., 2008, p. 231).

Notwithstanding, contrary views claim that the concept of intermediate terms has an anti-termination bias, and this bias erodes the “protection of innocent parties” (Andrews, 2018, p. 117). Parties in a legal proceeding “are placed in the invidious position of having to calculate anxiously whether the courts will agree” whether a breach justifies a termination (Andrews, 2018, para 5). Instead, legal rules should “reflect the need for contractual compliance” such that “commercial discipline” upholds “exactitude and discipline” (Andrews, 2018, para 5). Others (Weir, 1976) also criticise that the decision of Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26, was “… perfectly in tune with the spirit of the times: designed to repress sharp practice, it operates to reward incompetence and promote inefficiency(p. 35). However, in 1988, this criticism was partially retracted by a subsequent statement conceding that while intermediate terms “admittedly prevent[ed] abuse, it certainly involves delay” (Weir, 1998, pp. 100-101).

Otherwise, in Australia, the majority in the High Court decision of Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] 233 CLR 113, adopted the tripartite classification of terms system in Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26. The High Court confirmed at paragraphs [52] – [53] that:

“The practical utility of a classification which includes intermediate terms, and the consequent greater flexibility of which the Court spoke in Ankar, appears from several consequences. First, the interests of justice are promoted by limiting rights to rescind to instances of serious and substantial breaches of contract. Secondly, a just outcome is facilitated in case where the breach is of a term which is essential.

As will appear later in these reasons, we rest our decisions in the appeal not upon the ground of breach of an essential obligation, but upon application of the doctrine respecting intermediate terms.”

There are competing policy rationales for the adoption of a tripartite classification of terms system. By adopting a more nuanced classification system, it represents a rebalancing in the policy tension between contractual certainty in the outcomes of classification of terms, and the promotion of contractual performance by restricting rights of termination (Gamble, 2008). The recognition of intermediate terms in Australia represents a preference for the latter approach (Gamble, 2008).

What are warranties?

Warranties are terms that has “no right of termination for a breach” and that the “promisee must be satisfied with a claim for damages” (Carter, 2008, p. 226). Therefore, if a term a warranty, then “there is generally no right of termination” (Carter et al., 2006, p. 273).

A policy position for the continued retaining with the classification of warranty is that it promotes certainty of results with damages as a remedy (Carter et al., 2006, p. 273).

Bibliography

  • Andrews, N. (2018). Breach of Contract: A Plea for Clarity and Discipline, Legal Studies Research Paper Series, 134(40), 117-137. 
  • Carter, J., Tolhurst, G., & Peden, E. (2006). Developing the Intermediate Term Concept. Journal of Contract Law, 22(3), 268 – 286.
  • Carter, J. (2008). Intermediate Terms Arrive in Australia and Singapore, Journal of Contract Law, 24(3), 226-250.
  • Carter, J. (2018). Contract Law in Australia (7th ed). LexisNexis.
  • Gamble, R. (2008). Australia and the intermediate term no country for old rules. Monash University Law Review, 34(2), 457-466.
  • Phang, A. (2003). On Architecture and Justice in Twentieth Century Contract Law. Journal of Contract Law, 19(3), 229 – 249. 
  • Robertson, A., & Paterson, J. (2020). Principles of Contract Law (6th ed). Thomson Reuters.
  • Seddon, N. & Bigwood, A. (2023). Cheshire & Fifoot Law of Contract. LexisNexis.
  • Trietel, G. (2002). Some Landmarks of Twentieth Century Contract Law. Oxford University Press.
  • Weir, T. (1976). Contract: The Buyer’s Right to Reject Defective Goods, Cambridge Law Journal, 35(1), 33-38.
  • Weir, T. (1998). Non-performance of a Contractual Obligation and its Consequences in English law. In L. Vacca (Ed.), Il contratto inadempiuto (pp.100-101). Turin: Giappichelli Editore.

Implied Terms | Enforceable Contract | Frustration | Legally Binding Agreement | Termination | Express Terms | Consideration | Intention to Create Legal Relations | Offer and Acceptance | Certainty | Repudiation | Privity | Contract Law (Theories) | Causation | Remoteness | Damages |

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Authored by:
Ben Franklin, Managing Partner (LIV Accredited Specialist – Property Law), &
Matthew Tran, Lawyer.

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