Contract Terms - Types, Differences and Most Used

Contract Terms Explained

This is the Definitive Contract Terms Guide, where you'll learn everything you need to grasp about:

• The various types of contract terms

• The most frequently used commercial contract terms

• The distinction between implied and expressed terms

• How software can aid in the negotiation of contract terms

What Are Contract Terms?

A contract term is any provision or term that forms part of a contract. Each of these terms provides a contractual obligation, which can lead to litigation if breached.

Every contract a business enters will have critical terms that fall into various categories. The terms of an agreement can bind parties by law to meet a set of minimum obligations, which is why the groups involved will commonly go back and forth during negotiations on clauses and terms until both are satisfied.

The terms of a contract are there to protect the parties' best interests by establishing deadlines, fees, and compensation. Some terms are standard and are used in many different types of contracts. But others can be exclusively specific to the parties involved.

How do Unfavourable Contract Terms Affect Business Relationships and Outcomes?

Taryn Walker, Implementation Manager & Trainee Solicitor at Summize, explains the importance of the terms used in a contract and the impact they can have in your overall business.

What Are the Types of Contract Terms?

Contractual language is often used without ensuring each party knows the correct legal terms. To make this easier, we've broken down the types of contract terms you may come across in a standard contract.

Typically, contract terms can be defined into three categories: conditions, warranties, or innominate terms. By categorising contract terms into categories, it determines the available remedies if either party is ever in breach of the contract.

1. Condition

If a term is a condition that is not followed, then the acting party will be in breach of contract, entitling the counterparty to terminate the contract and claim damages.

2. Warranties

If a term is a warranty, the acting party can claim damages if the counterparty breaches the contract. However, they will not be able to terminate the agreement.

3. Innominate

A term will be innominate if it is neither a condition nor a warranty. In the case of a breach of an innominate term, the type of action available to the acting party will depend on how severe the violation is. For example, if the given breach deprives the innocent party of the benefit stated in the contract, it will be classed as a breach of condition. The innocent party can then terminate the contract and claim damages. If the violation is minor and not significant enough to undermine the contract, it will be classified as a breach of warranty. The innocent party will only be able to claim damages.

The individual acting on a business's behalf and drafting the contract must understand the different categories of contract terms as it will reduce the financial and operational risk to the company in the event of a breach.

What Are Some Common Contract Terms?

Contracts are universal and are needed for any business to hire employees, onboard customers, and partner with suppliers. But what are the key terms that go into these commercial contracts?

We have listed some of the most common terms that can be found in your standard commercial contract.

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1. Confidentiality

When a business enters a contract, there will be a significant exchange of information between the parties involved. It is standard practice that both parties keep sensitive information about their agreement confidential.

2. Termination

The termination clause is found in every contract. This section lays out in which circumstances a party can terminate the agreement. In business, it is sometimes more financially beneficial to terminate the contract.

3. Force Majeure

This phrase and clause translate to "greater force". This clause aims to protect parties from circumstances beyond anyone's control. For example, commonly, this clause refers to natural forces such as a hurricane or a pandemic, such as COVID-19. This clause is included to protect the party from being in breach of contract in the event of an unforeseeable disruption.

4. Dispute

Contracts form the basis of the terms and conditions in business relationships, and even well-written agreements can result in a dispute between the involved parties. The disputed clause clarifies the plans for any dispute resolution that arises.

5. Damages

If either party breaches the contract, then damages are awarded to the innocent party or they are entitled to compensation.

What’s The Difference Between Contract Terms and Contract Clauses?

A contract describes the conditions of a business relationship, typically in legal jargon. Whether the agreement has come from a law firm or an in-house team, it will be full of complex terminology and phrases. Therefore, it's helpful to break this down and know the difference between a contract term and a contract clause.

Clauses are what a contract is composed of. Contract clauses are blocks of text within an agreement that addresses and explains each part of the contract for the parties in more detail. For example, a standard contract clause would be a termination clause. This clause will explain how either party can terminate the contract and what repercussions will be involved.

Contract terms, while they also form the basis of a contract, differ from contract clauses. The terms of an agreement can be categorised into three separate categories and are there to protect the parties' best interests. They establish the remedies available to either party in case of a breach of contract.

What’s the Difference Between Implied Terms and Expressed Terms?

Contracts are legally binding agreements that you must continue to meet the obligations until the contract ends or is terminated. They set the groundwork and expectations for your relationship with the involved parties. Contracts are made up of two types of contractual terms: expressed terms and implied terms.

Express terms have been specifically mentioned and agreed upon by the contracting parties at the negotiation stage. Expressed terms can either be in writing or agreed upon orally.

However, occasionally, there will be terms within a contract that have yet to be mentioned by either party involved. This does not mean they are not enforceable, and the agreement would not make sense without them. These are known as implied terms. Implied terms are a set of default rules for contracts on points that are essentially "silent". These mandatory rules quietly operate in the background and can override the expressed terms.

Implied terms and are made up of two individual types:

1. Terms Implied by Court

Implied terms only occur because every contract can be deemed incomplete in a world we cannot control. Terms implied by the court are items that a court will assume were intended to be in the contract, regardless of whether they are physically present.

2. Terms Implied by Statute

With contracts that involve the sale of goods and a supply of services, basic provisions are implied by statute to give the purchaser greater protection. For example, if you're selling goods by a sample – you show the customer one sample of beef mince, and they order 1000kg, their order must be the same quality as the sample.

How Can Software Help With Contract Terms?

Contracts are not known for their efficiency; they involve lengthy manual processes. This is why legal teams everywhere feel buried in low-value work. Contract review and analysis software like Summize offers an efficient approach to your manual processes and extracts contract terms and clauses from a contract with one click.

Summize uses artificial intelligence (AI) and machine learning to highlight key provisions of your contract, no matter how unique. By analysing each contract, the software will highlight the most important pieces for you in a simple summary and will red-flag any areas of concern.