What is a Legally Binding Contract?
A contract is an agreement recognised by law as legally binding. Because it’s legally binding, legal rights – a cause of action – arises if it is breached, and the terms are enforceable against the party in breach.
There really is no definition of a contract, other than it is (1) an agreement, (2) which is legally binding.
A legally binding agreement is made when it satisfies 5 elements to form a contract.
The fundamental principles of contract law then apply to the agreement.
What are the Elements of a Breach of Contract?
To make out a claim for breach of contract, you need:
- a legally binding contract, whether it’s an:
- express contract, or
- implied contract.
- non-compliance with one of the legally binding terms of that contract.
There are two possibilities for the term which is breached. It could be an:
- express term, or
- implied term of the contract.
- The express term or implied term will be one of:
- a condition
- a warranty, or
- innominate term (also known as an “intermediate” term).
So, an express or implied term of a contract must be breached by a party to the contract (which may be express or an implied contract).
Then you have a cause of action for breach of contract, and can sue.
The breach of contract doesn’t necessarily need to cause damage (the money remedy which awards compensation) to obtain a remedy for the breach.
Compensation in damages might not be the appropriate or even best remedy for the innocent party.
The remedy with most value might be an injunction to restrain further breaches of contract by the offending party, or force performance with an order for specific performance.
Types of Breach of Contract
If it is a breach of:
- condition: the innocent party may claim damages for the breach, as well as terminate the contract. This is known as a “repudiatory breach of contract”.
Conditions are sometimes referred to as “fundamental terms”. They’re the same thing.
- warranty: the innocent party may claim damages caused to them by the breach of contract. They are not entitled to terminate the contract.
- “innominate” or “intermediate” term: whether the contract can be terminated depends upon the nature and seriousness of the consequences of breach of the term. “Innominate” and “intermediate” are interchangeable. They’re referring to the same thing.
An innominate term can be a breach of warranty or a breach of a condition. It depends on the terms of the contract and the circumstances of the case. More on that below.
How do you tell which is which?
Differences between conditions, warranties and innominate terms
Why is the difference important?
When you have a breach of condition, it doesn’t matter what the consequences of the breach might be. You can terminate the contract: the gravity or seriousness of the breach and/or the consequences are irrelevant.
That’s not the case with warranties. No right to terminate arises. Only a claim for damages.
If it’s an innominate term, whether you can terminate or not … depends. It depends on the seriousness of the consequences of the breach of contract.
But before that, here’s an example of an innominate term.
This may come as a surprise:
Paying punctually under a commercial contract is an innominate term, not a condition unless special circumstances are satisfied.
That’s because time is not of the essence in respect of obligations to pay unless it’s expressly stated, or it’s drawn from the circumstances of the contract.
And that’s rare. They usually aren’t in commercial and business contracts.
In the meantime, let’s look at the differences between the types of terms.
The starting point is that a term is innominate unless it is clear that it is intended to be a condition or a warranty.
That’s the default position: it’s an innominate term unless you can show otherwise.
Most of the time, it’s hard to tell.
So it makes sense to know what conditions and warranties actually are first. You’ll know what innominate terms aren’t.
Conditions are the most important terms of a contract. They are major ones.
But then, there’s no fixed definition of what amounts to a condition.
However, conditions of contracts are:
- “essential stipulations” which the party guarantees will be performed. Performance of the term is essential to compliance with the contract
- said to “go to the root of the contract“.
That is, they are terms that were essential for the contract to be formed in the first place.
The expression “condition” describes the seriousness required to give rise to a right to terminate for breach of the condition.
You’ll get a better sense of the expression in a moment.
- breach of the contractual term would frustrate the commercial purpose of the contract for one of the parties.
It comes to this:
The innocent party would lose substantially the whole benefit they expected to derive from the contract.
Conditions will vary from contract to contract. The sort of factors which point towards a term being a condition include:
- Whether the innocent party thought the term would be strictly complied with
- The likely effects of any breach of the term
- How important it was to the innocent party
A series of legal factors have been developed over time to help decide when a term of a contract is a condition or not.
Breaches of conditions are so serious, that it justifies the innocent party ending the contract altogether. When the innocent party ends or cancels the contract, it is known as “termination” of the contract: it’s one of the 4 ways to end a contract.
So conditions are a fundamental part of the deal that was agreed by the contract.
Next up, warranties.
Warranties are lesser or minor terms of the contract. They’re collateral to the main purpose of the contract.
This lesser status of importance means the innocent party can only claim damages when a warranty is breached, but not terminate the contract. That’s the technical meaning of a warranty in law: it’s a term of the contract which does not entitle the innocent party to terminate for its breach.
The definition of a warranty is a negative definition: if the term of the contract is not a condition and not an innominate term, it’s a warranty.
The most frequent type of term found in contracts are innominate terms.
Innominate terms are also known as “intermediate” terms.
They are different to conditions and warranties.
Whether or not a party can terminate the contract depends on the seriousness of the consequences of the breach of the term. Not the status or importance of the term itself (as with warranties and conditions).
The seriousness of the breach is assessed at the time of the termination, having regard for:
- what happened leading up to the breach of the term, and
- what’s likely to happen next, if the contract is not terminated.
Business Case Example: Innominate Term – Payment Clause
A contractor was entitled to be paid £50 per hour for consultancy services, plus expenses. He paid expenses out of his own pocket and was reimbursed by the company.
The contract was the contractor’s only contract. It was the only means of support beyond the use of savings. Both parties knew it. The contract was quite important to the contractor.
None of the contractor’s invoices were paid on time. And delays in payment increased over time. Payments were made between 1 and 9 months after their due date.
The contractor knew that his work for the company was being paid for on time (by the ultimate customer). He made it clear he knew that he was being used as an overdraft facility.
When the contractor moved to another company, the company paid up, so that it could claim on a restrictive covenant.
The judge said he suspected that the consultant was seen as a soft target by the company.
The breaches of payment provisions were held to be substantial, persistent and … cynical. It was a repudiatory breach.
The customer paid its supplier for facilities services late on a number of occasions. Payment was required within 90 days of invoice.
The delays to payment in full were relatively short: between 2 and 20 days. On average, 8 days a piece. The reason for the lateness was known to the suppliers: the purchasers were paying from the receipts made by onward sale of the goods delivered.
The suppliers well knew and understood the reasons why payments were late.
The supplier also had no doubt that they would receive payment in full. The loss suffered by the suppliers was marginal, and recoverable.
That belief (that they would be paid in full) was one of several factors taken into account to decide that the late payments didn’t add up to a repudiation of the contract.