Terms are the essence of contracts. They establish the conditions on which the contracts was formed; two parties agree upon an exchange under certain conditions that are mutually acceptable, and formulate a contract to enforce the initial terms so they cannot become muddled later by different interpretations and different remembrances. This is especially important in contracts between strangers who could later unscrupulously choose to forget the terms that are inconvenient or not of benefit to them.
There are three types of terms in these contracts: warranty, innominate, and condition. A warranty term is a promise that is made involving support for the main argument; condition terms are fundamental promises made to define the terms of the agreement; and innominate terms are not explicitly expressed because they are a temporary medium between condition and warranty terms. The judiciary has divided these terms into subcategories because each breach has its own severity and corresponding penalty.
Warranty terms support the main agreement in the contract. Therefore, a breach of the warranty will not affect the main goals set by the contract. If a breach occurs, it does not terminate the contract entirely; instead, the main goals of the contract will still be maintained, and damages will be assigned to the offending party.
Condition terms explicitly express the main issues of the contract. A breach of these terms makes the entire transaction between the two parties impossible, which is the worst possible situation for a contract. Since breach of condition terms virtually nullifies the entire contract, repudiation and damages both result. For example, if one client realizes the other party is in breach of condition terms, he can discontinue his own responsibilities. Some unscrupulous individuals use the repudiation breach to escape from the deal when they find they are not benefiting as much as they expected.
Innominate terms are used temporarily when the judiciary tries to define the terms as either warranty or condition. They exhibit some aspects of warranty and condition terms. In some cases, however, it is impossible to determine a specific category for the terms because the parties did not explicitly place warranty and condition terms in specified sections. Therefore, the court must review the entire contract and the sole purpose of creating the contract in the first place. Also, these terms are so vague that attempts to classify them pre-breach is very difficult. Therefore these terms cannot reflect the complexities of the parties’ intentions.
As the trial of Lombard North Central v Butterworth in 1987 established the precedent of parties setting their own terms, the judicial system upholds the parties expressed classification as their ‘intent’. The case of L Schuler AG v Wickmen Machine Tool Sales Ltd found that these terms much be set with a legal interpretation, and cannot just be randomly assigned.