LEGAL PERSPECTIVE: Business Contracts

By Dr AbdelGadir Warsama, Legal Counsel

Dr AbdelGadir Warsama, Legal Counsel
Asia 728x90

As a matter of law, when we say contract, we mean set of promises and obligations which the law enforces. The obligations agreed upon by the parties are known as the “terms of the contract”. A contract, as we say, is the will of the contracting parties as they put its terms by themselves. If disputes arise the task for the Court is to establish exactly what was really agreed upon by the parties. This may appear to be simple but, in fact, certain problems can arise. The parties to the contract may have failed to express their intentions clearly or the written document may contradict what was said or agreed upon during the oral negotiations. Where the contract is made by word of mouth or gestures it becomes, sometimes, even more difficult. The “terms of a contract” are matters of express agreement between the parties. However, it should be noted, additional terms can be implied in an agreement and there are certain terms which have been clearly ineffective by operation of the law.

How to determine contents of a contract during negotiations, and what is the relative importance that may be attached to the obligations undertaken by the parties.. etc. This process, is very important to exclude or limit the legal liability of each  party. The express terms of an agreement between the parties may be so vague and indefinite. The presence of a vague term will not prove fatal in every case, and the terms of each contract should be interpreted on the merits of each case. Various devices and means could exist to ascertain the meaning of the terms of the contract. The terms of a contract delineate the obligations of the parties and these may vary greatly in importance according to the nature of the contract and the intention of the parties at the time of negotiations.

Traditionally, terms of a contract have been divided in two categories, conditions and warranties. A “condition” is a major term which is vital to the main purpose of the contract. A breach of condition will entitle the injured party to repudiate the contract and claim damages. The breach does not automatically end the contract and the injured party may choose to go on with the contract, despite the breach, and recover damages instead. A “warranty”, is a less important term. We could say, it does not go to the root of the contract. A breach of warranty will only give the injured party the right to claim damages or correcting the error or non-performance , the injured cannot repudiate the contract as in the case of breach of a condition.

In many cases in recent years, Courts have recognized that it may be impossible to classify a term in advance as either a condition or a warranty.We have to admit that this would be very difficult in practice. Some undertakings may occupy an intermediate position, in that the term can be assessed only in the light of the consequences of a breach. If a breach of the term results in severe loss and damage, the unjured party will be entitled to repudiate the contract, where the breach only involves minor loss, the injured party remedies will be restricted to damages. These intermediate terms have become known as “innominate terms”.

Another way in which the contents of a contract can be classified is according to whether the terms are express or implied at the time of negotiations. “Express terms” are all the details of a contract which have been specifically agreed wholly in a written document or ascertained entirely from what the parties said to each other and agreed to be part of the contract. In some cases, the terms may be partly written and partly verbal.The most common types of express terms, which are often a particular feature of standard form contracts include, liquidated damage, exemption and price variation clauses. The term “exemption clause”, is used to describe an express term in a contract or a statement in a notice which seeks to exclude or limit the responsibilities that might otherwise belong to a party, such as “disclaimer clauses”.

The term “liquidated damage clause”, in a contract lays down the amount of damages that will be payable to the aggrieved party in the event of a breach of contract. Calculating a contract price in a period of inflation can be a very hit and miss operation. A contractor may find himself bound by a fixed price which has failed to take sufficient account of increases in the cost of raw materials, wages or other overheads. One solution to this problem, is to insert a specefic term in the contract which allows variation to the contract price under certain circumstances that could happen at the time of executing the contract. Construction contracts for big projects is a good example wherein such term should be included to safeguard prices differences.

In certain “ready-made contracts”, there are certain terms which require the attention and discussion of the parties before signature. A good example could be insurance or bank loans contracts. Terms in these contracts are standard and normally the insurance or the bank inserts their terms and conditions, this is why I call them “ready-made contracts”. Herein, the interested party is adviced to understand these terms before signature so as not to be taken by surprise in future or when it is too late.