Topic X Terms of

2 the Contract

LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Distinguish express terms from implied terms; and
2. Explain four categories of express and implied terms and the
effects of their breach on a contract.

X INTRODUCTION
Welcome to Topic 2. How do you find the previous lesson? I hope you are ready
to continue the next lesson, which is Topic 2. To begin with and for your
information, every contract contains essential matters which have been agreed to
by the parties to the contract. These essential matters are known as the terms of
the contract.

Every contract which is made, whether orally or in writing, contains certain

terms. These terms explain the rights and obligations of the parties.

Topic 2 will discuss the classification of terms of the contracts, whether express
or implied and the categories of these terms, namely conditions, warranties or
intermediate terms. These terms need to be distinguished because the effect of
breach of these terms differ. Refer to Figure 2.1 to help your understanding of
this topic.

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Figure 2.1: Two classification of terms of the contract and their categories

2.1 EXPRESS AND IMPLIED TERMS

Let us refer to Topic 1. The terms of the contract as in Illustration 1 of Section
1.1.1 in Topic 1 are express terms.

Express terms are terms which are explicitly expressed, whether orally or in
writing.

Sometimes, the terms of a contract are not expressed but may be implied from
the contract. In Illustration 1 of Section 1.1.1, A and B do not express that the
motorcycle must be in good condition, that is serviceable. But it is implied that a
person who purchases a motorcycle intends to ride it, not to display it.
Therefore, under the contract, it is implied that A should deliver a serviceable
motorcycle.

How is implied term in a contract determined?

(a) The court is of the opinion that if a matter is not in the contract, but if at the
suggestion of a reasonable man, the parties to the contract would reply,
„oh, of course!‰ the matter suggested is implied in the contract.

Suppose in Illustration 1 of Section 1.1.1, while A and B are negotiating, C,

their friend, who is of reasonable mind says, „B, the motorcycle you are
buying must be in good condition and is serviceable.‰ A and B answer,
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„Oh, of course!‰. In short, that the motorcycle is in good condition and is

serviceable are implied terms of the contract between A and B, though the
matter is not stated in their contract. Let us look at Yong Ung Kai v Enting.

Yong Ung Kai v Enting

The High Court held that a contract for the sale of timber
was subject to obtaining a timber licence because without
the licence, there would be no timber to be fell. Although
the matter was not stated in the contract, it must have been
in the minds of the parties that the contract required the
obtaining of a licence.

(b) Besides, the terms of a contract may be implied from the customs or usage
of trade. Let us look at Cheng Keng Hong v Government of the Federation
of Malaya.

Cheng Keng Hong v Government of the Federation of Malaya

The court had to consider whether the contractor of a

building who does any work according to the drawings,
which were not set out in the specifications, is entitled to
claim payment from the owner of the building.

The court held that although that was the practice, it was
contrary to the terms and tenor of the contract. Therefore, it
was not the custom of trade which may be implied but
merely a long established irregularity.

In short, a customs of trade may be an implied term in a contract.

(c) There are certain implied terms of contract which are specified by Acts of
Parliament. For example, in a contract of sale of goods based on the Sale of
Goods Act, 1957, it is implied that the seller must have title in the goods.
Note that this Act will be studied in greater detail in Topic 5 in relation to
the Law on Sale of Goods.

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SELF-CHECK 2.1
You have just learned two classifications of the terms of contract.
Compare the definitions of express term with implied term.

2.2 CONDITIONS, WARRANTIES,

INTERMEDIATE TERMS, AND
COLLATERAL CONTRACTS
Based on Figure 2.1, you are aware that express and implied terms are further
categorised. Both these terms are categorised into conditions, warranties and
intermediate terms.

2.2.1 Conditions

A condition refers to a term deemed fundamental by the parties to the

contract.

A condition explains the fundamental matter of the contract. If this basic matter
is non-existent, the contract is deemed non-existing. To understand better, let us
now look at the following illustration.

Illustration 1:
A enters into a contract to purchase a motorcycle. In the contract it is stated that
the motorcycle should be capable of attaining a speed of 100 k. p.h. Here, the
words „should be capable of attaining a speed of 100 k.p.h‰ are fundamental to
the contract. It is a condition to the existence of the contract for the purchase of
the motorcycle. If the motorcycle which is delivered cannot attain the speed of
100 k.p.h., the buyer has obtained some other goods not agreed to. For that
reason the contract is deemed non-existent.

Remedies for Breach of Conditions

(a) The party aggrieved by a breach of condition of a contract may rescind the
contract and claim damages, from the party in breach, for any loss caused
by the breach. The aggrieved party is also discharged of all his obligations
under the contract.

Referring to the above illustration, A may rescind the contract. A may also
claim damages, that is the price paid to the seller and other incidental

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losses. If there is any outstanding sum due on the purchase price, he need
not pay it. Let us look at the following case.

Behn v Burness

The court held that the term in a charterparty which stated

that the ship „now in port of Amsterdam‰ was a condition
because of the commercial importance which charterers
attach to such statements. Breach of the term discharged the
charterer from further performance of the charterparty.

(b) The aggrieved party may choose to perform the contract and claim
damages. By such action the aggrieved party is deemed to have accepted
the breach of the condition as a breach of warranty.

Tham Cheow Toh v Associated Metal Smelters

The appellant agreed to sell a metal melting furnace to the

respondents and undertook that the melting furnace shall
have a temperature of not lower than 2,600 ÀF. When this
specification was not satisfied, the respondents brought an
action alleging breach of condition of the contract. The court
held that the appellantÊs failure to supply a furnace
according to the specifications was a breach of condition of
the contract.

ACTIVITY 2.1

What is your opinion on the ideas analysed in each of the above

cases? Discuss your answer with your course mates.

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EXERCISE 2.1
What is the principle derived from the case of Tham Cheow Toh v.
Associated Metal Smelters?

A. The aggrieved party may choose to perform the contract and claim
damages.
B. The aggrieved party may discharge the contract for breach of
condition.
C. The aggrieved party may claim for specific performance of the
contract.
D. The aggrieved party may discharge all his obligations under the
contract.

2.2.2 Warranty

SELF-CHECK 2.2
What do you understand by a warranty? Is it the same as the
warranty on electrical goods that you purchase? Does a warranty
expire with time?

A warranty refers to a term in a contract which is not fundamental to the

existence of the contract.

A warranty is only a collateral term. Without these collateral terms, the contract
could still be performed as was originally intended. Let us look at the illustration
below.

Illustration 2:
The owner of a laundry (Figure 2.2) enters into a contract to purchase three
laundry machines, each of 12 kg capacity. The machines are of European make,
white in colour and with front loading. Suppose that the machines come in
various colours and the purchaser has to repaint them white, the seller has only
breach a warranty of the contract because the machines could still function. The
basis of the contract is still achievable.

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Figure 2.2: A laundry

Source: http://www.carlsbadrvpark.com/photogallery/laundry/MVC-633S.JPG

Remedy for Breach of Warranty

In the above illustration, the seller has breached a warranty of the contract. The
purchaser may claim damages for repainting the machines.

2.2.3 Intermediate Terms

This term was introduced by the court in Hong Kong Fir Shipping Co. Ltd. v
Kawasaki Kishen Kaisha Ltd. Let us look at what happened in the case.

Hong Kong Fir Shipping Co. Ltd. v Kawasaki Kishen Kaisha Ltd.
The court stated that there were however terms which could not
be categorised as being either conditions or warranties. But what
was certain was that a breach of these terms substantially
deprived the party not in default of the whole benefit intended
from the contract. Such terms are called intermediate terms.

Cehave NV v Bremer Handelsgesellschaft is another illustration of intermediate

terms.

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Cehave NV v Bremer Handelsgesellschaft

The contract for sale of pith of citrus fruits for animal feed
specified that the goods were shipped in good condition. On
reaching its destination, some of the goods were damaged. The
purchaser sought to discharge the contract on the grounds of
breach of condition. The court held that the breach was a breach
of intermediate terms.

Remedy for Breach of Intermediate Terms

Whether or not the contract may be set aside depends on the effect of the breach.
If the party not in default is substantially deprived of the benefit intended from
the contract, it may be terminated. On the contrary, if the breach merely causes
some losses, the party not in default may only claim damages.

SELF-CHECK 2.3
To facilitate your future reference, attempt, in schedule a comparison,
of conditions, warranties and intermediate terms, in respect of their
definitions and remedies.

Terms Definitions Remedies

Conditions
Warranties
Intermediate

2.2.4 Collateral Contracts

Sometimes, parties to an agreement in writing attempt to introduce oral
statements into the written contract. The effect is to add, vary, or contradict the
existing terms of the written agreement. Are these additional terms enforceable
as terms of the original contract? Let us look at the following case.

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Tan Swee Hoe Co. Ltd. v. Ali Hussain Bros.

The appellants in this case, orally agreed to allow the respondents

to occupy the premises for the purpose of carrying on a restaurant
(Diagram 2.3) business for as long as they wished on payment of
RM14, 000 as Âtea moneyÊ.

Diagram 2.3: A restaurant

Source: http://www.tourism.gov.my/news/docs/Kopitiam.doc

Later, two written tenancy agreements were executed but the

agreements did not refer to the appellantsÊ promise. When the
appellants increased the rent, a dispute arose between the parties and
the appellants gave notice to the respondents to leave the premises.

The respondents contended in their defence that the oral promise of

the appellants entitled them to stay in the premises as long as they
wished and so long as they paid the rent regularly. The court held
that the appellantsÊ oral promise was intended to induce the
respondents to rent the premises and it actually induced the
respondents to enter into the written contracts. This promise varied
the terms of the written contracts. There was a collateral contract,
which the appellants had breached by giving the notice to the
respondents to quit the premises.

EXERCISE 2.2
Which of the following is a remedy for breach of warranty of a contract?

A. Fine.
B. Damages.
C. Recession of a contract.
D. Community services.

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• Topic 2 deals with the contents of a contract, known as terms of the contract.
Each category of terms of a contract has its specific purposes and its breach
results in different consequences to the contract. For example, the conditions
of a contract are fundamental to the existence of the contract. Therefore if
there is a breach of conditions of the contract, the contract is void for non-
existence of the fundamental matters.

Conditions
Intermediate terms
Terms of contract
Warranty

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