IAI Actuarial Core Principles · Business Management

Implied terms, exclusion of liability, contractual remedies and damages: formula sheet

Full chapter guide

Key formulas

Express term: Express term = promise stated in words or writing by the parties; Read in its ordinary meaning in context. It takes priority over any conflicting implied term.
Sources of implied terms: Implied term = fact OR law OR custom OR statute; Name the source in your answer. Different sources have different tests.
Business efficacy test: Term implied if necessary to make the contract work as intended; The test is necessity, not just reasonableness or convenience.
Officious bystander test: Term implied if both parties would answer "Of course" to a bystander's suggestion; The term must be obvious to both parties. If they would argue about it, it fails.
Conditions for implying a term in fact: Reasonable + necessary + obvious + clearly expressible + no conflict with express terms; Use as a checklist. Failing any one condition usually means no implication.
Custom as an implied term: Custom implied if certain, reasonable, well known, and not excluded by the contract; A custom that contradicts the express words of the contract will not be implied.
Breach of a condition: Breach of condition → right to repudiate + damages (or affirm + damages); The innocent party chooses. If they affirm the contract, they lose the right to end it for that breach.
Breach of a warranty: Breach of warranty → damages only; The contract continues. The innocent party cannot repudiate for the breach.
Breach of an innominate term: Substantial loss of the whole benefit → repudiate + damages; otherwise → damages only; The remedy depends on the effect of the breach, not on the label.
Sale of Goods Act, 1930 definitions: Condition = essential to the main purpose; Warranty = collateral to the main purpose; Whether a stipulation is a condition or a warranty depends on the contract's construction, whatever it is called.
Order of analysis: Incorporation → Interpretation → Statutory/judicial limits → Conclusion; Use this order for any problem. A clause that fails at an early stage needs no further analysis.
Signature rule: Signed document → bound by its terms (unless misrepresentation, fraud, or similar); Failure to read the document does not normally release the signer.
Notice rule: Reasonable notice must be given before or at the time of contracting; Notice after the contract is made is ineffective. Unusual terms need more prominent notice.
Contra proferentem: Genuine ambiguity → construed against the party relying on the clause; It applies only where the wording is truly ambiguous. It does not rewrite clear words.
Negligence rule: Exclusion of negligence liability needs clear words; General words may not be enough to cover negligence.
Statutory limit (English law): Death or personal injury caused by negligence → cannot be excluded (UCTA 1977); Many other exclusions must satisfy the reasonableness test.
Actual breach: Failure to perform when due, or defective or partial performance, without lawful excuse; Check the due date has arrived or performance has started.
Anticipatory breach: Express or implied refusal to perform, made before the due date; The refusal must be clear and absolute, not a mere doubt or request to renegotiate.
Test for discharge by breach: Repudiatory breach (breach of condition, or substantial loss of benefit) + acceptance by innocent party = discharge for future performance; Both parts are needed. Without acceptance the contract continues.
Minor breach: Breach of warranty or minor term = damages only; The innocent party must still perform its own side.
Innocent party's options: Accept and end the contract, or affirm and continue; damages available in both cases; Affirming can lose the right to end for that breach.
Compensatory principle: Damages = value of performance promised − value actually received (plus other proven, recoverable loss); Puts the innocent party in the position as if the contract had been performed. Not a punishment for the breach.
Hadley v Baxendale, first limb: Recoverable if loss arises naturally, in the usual course of things, from the breach; Applies to everyone, whatever they knew. Ordinary, expected consequences.
Hadley v Baxendale, second limb: Recoverable if loss was in the reasonable contemplation of both parties at contracting as a probable result of breach; Needs knowledge of special circumstances at the time the contract was made. Later notice does not count.
Section 73 (Indian Contract Act): Compensation for loss naturally caused or known to be likely; none for remote and indirect loss; Compensation is for loss caused by the breach. Include mitigation in your answer.
Mitigation: Recoverable loss = total loss − loss that reasonable steps would have avoided; The party in breach usually has to show that the claimant failed to take reasonable steps. Reasonable costs of mitigation are recoverable.
Section 74 (Indian Contract Act): Award = reasonable compensation ≤ sum named in the contract; Applies to a named sum or a penalty clause. The named sum is a ceiling. The claimant must show legal injury, unless loss is impossible to prove.
Specific performance: Ordered when damages are inadequate AND the court can supervise the order; Typical for unique goods or land. Usually refused for personal service or contracts needing continuous supervision.
Injunction: Prohibitory = stop an act; Mandatory = do or undo an act; Can be interim (temporary) or permanent. Often used to enforce negative covenants.
Rescission: Contract cancelled; parties restored to their original positions where possible; Innocent party is freed from obligations. Benefits received are generally returned.
Quantum meruit: Payment = reasonable value of work done or benefit given; Used where part performance occurred and no fixed price can be enforced. Related Indian provision: section 70, Indian Contract Act, 1872.
Key test for all equitable remedies: Remedy granted only if damages inadequate and the court exercises discretion; Conduct, delay and hardship are weighed.

Quick revision

Express terms are stated by the parties; implied terms come from law, custom, or the need to make the contract work.
A condition is a term so important that its breach lets the innocent party end the contract and claim damages.
A warranty is a minor term; its breach gives damages only, not the right to end the contract.
An innominate term is classified by the seriousness of the actual breach and its effect on the innocent party.
An exclusion clause removes liability; a limitation clause caps it. Both are tested for fair incorporation and legal validity.
Not every breach ends a contract; only a sufficiently serious breach discharges the innocent party from further performance.
Damages aim to put the innocent party in the position it would have been in had the contract been performed.
Remoteness limits damages to losses that were reasonably foreseeable or within the parties' contemplation.
Mitigation requires the innocent party to take reasonable steps to reduce its loss; avoidable loss is not recovered.
Specific performance and injunction are equitable remedies, granted at the court's discretion, usually when damages are inadequate.
Always apply the rule to the facts and end with a clear conclusion.

Common mistakes

Implying a term because it would be fair or reasonable. Fix: Remember that reasonableness alone is not enough. For terms implied in fact the term must be necessary or obvious to both parties. Courts do not improve a contract.
Allowing an implied term to override an express term. Fix: Always check the express wording first. An implied term only fills silence and cannot contradict clear words.
Saying a breach of warranty lets the party cancel the contract. Fix: Write: warranty breach gives damages only. Ending the contract needs a condition, or a serious breach of an innominate term.
Deciding the class from the label used in the contract. Fix: Treat the label as evidence only. Look at the importance of the term to the contract and the parties' intention.
Saying exclusion clauses are always void or always valid. Fix: State that validity depends on incorporation, wording and legal limits. Show each test.
Accepting notice given after the contract was made. Fix: Always check timing. Terms must be brought to the other party's attention before or at the time of contracting.
Saying every breach discharges the contract. Fix: Only a repudiatory breach, accepted by the innocent party, discharges the contract. A minor breach gives damages only.
Treating anticipatory breach as a breach only on the due date. Fix: A clear refusal or an act making performance impossible before the due date is already a breach. The innocent party may act at once.
Treating damages as punishment for the breach. Fix: Write that damages compensate loss. Punitive awards are not the aim of contract damages.
Claiming a special loss because the defaulter learned of it after the contract was made. Fix: For the second limb, check knowledge at the time the contract was made. Later notice does not extend liability.

Exam tips

Always start with the express terms. Examiners reward students who check what is stated before implying anything.
Name the source of the implied term (fact, law, custom or statute) before applying a test. This earns method marks.
In multiple-choice questions, watch for options that imply a term just because it is fair. These are usually wrong.
In written answers, apply both the business efficacy and officious bystander tests to the facts, not just define them.
End with a clear conclusion on whether the term is part of the contract and what follows if it is breached.
Begin every scenario answer by classifying the term. Marks usually follow the classification and the matching remedy.
Give reasons for the classification, using words like 'essential to the main purpose' or 'collateral'.
Name the Indian Contract Act, 1872 and the Sale of Goods Act, 1930 correctly, but only cite section numbers you are sure of.