Innominate Terms: Legal Perspectives for Small Business Owners

As a small business owner, you rely on contracts to define your relationships with suppliers, customers, and employees. Within these legal agreements, you will find different types of terms. Two common types are conditions (essential terms) and warranties (promises). However, a third category is less well-known but equally important: innominate terms. This article explores the meaning and purpose of innominate terms.

What are Innominate Terms?

Innominate terms, also called intermediate terms, are contract clauses that do not neatly fit into the categories of conditions or warranties. Unlike conditions and warranties, which have predetermined levels of importance, the significance of an innominate term is only determined if and when it is breached.

The importance of an innominate term depends on the consequences of its breach in that specific situation.

How Do They Work?

When a dispute arises over contractual obligations, the concept of innominate terms can provide flexibility in resolving the issue. Instead of immediately resorting to terminating the written contract or accepting minimal compensation, you have room to negotiate based on the actual impact of the breach.

For example, let us say you have a contract with a marketing agency to provide services for your business. The agreement states they will deliver monthly reports on the 1st of each month. If this term is considered innominate:

1. Minor Breach: If the agency delivers the report on the 3rd of the month and it does not significantly impact your business operations, you might only be entitled to a small discount or compensation; and
2. Serious Breach: If the agency consistently delivers reports weeks late, hampering your ability to make timely business decisions, you might have grounds to terminate the contract and seek substantial damages.

This flexibility allows you to tailor your response to the specific circumstances, potentially preserving valuable business relationships while still protecting your interests.

Why are Innominate Terms Important?

Innominate terms provide flexibility. They allow the law to respond proportionately to breaches, based on their actual impact rather than a rigid, predetermined classification.

For you, as a small business owner, this means:

1. Fair Outcomes: If someone breaches a term in your contract, the remedy will fit the actual harm caused;
2. Protection Against Minor Breaches: You are less likely to have a contract terminated over a minor issue; and
3. Recourse for Serious Breaches: You have options if a seemingly minor term turns out to be crucial in practice.

Let us take a practical perspective on approaching innominate terms when drafting and negotiating contracts.

Embrace Ambiguity

While it might seem counterintuitive, sometimes leaving a term’s classification ambiguous can be beneficial. By not explicitly labelling a term as a condition or warranty, you allow flexibility if a dispute arises later.

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For example, in a supply contract, instead of rigidly defining delivery times as a condition, you could:

• provide a reasonable timeframe for delivery;
• include clauses that allow for some flexibility in unforeseen circumstances; and
• specify what constitutes a material delay.

It is crucial to remember that if terms are too vague or ambiguous, the contract may be deemed an “agreement to agree,” which is not legally enforceable.

Court Influence

The classification of a term as innominate and the remedies available for its breach are determined by the courts based on the contract’s wording, the parties’ intentions, and the overall context. Courts will consider the severity and consequences of the breach when deciding appropriate remedies, which could range from damages to the right to terminate the contract.

Focus on Consequences

When drafting or negotiating terms, consider potential scenarios where the term might be breached. Think about the range of possible consequences and how they might affect your business. This approach can help you decide whether to push for a term to be a condition or whether the flexibility of an innominate term might be more beneficial.

Use Clear Language

While you might not explicitly label a term as innominate, you can draft it in a way that allows for flexible interpretation. Use clear, specific language to describe the obligations, but avoid absolute statements about the consequences of a breach.

Key Takeaways

Some key takeaways from this article include:

1. innominate terms are contract clauses whose importance is determined by the consequences of their breach;
2. they provide flexibility in contract interpretation and dispute resolution; 
3. the remedy for breaching an innominate term depends on the actual impact of the breach; and
4. understanding innominate terms can help you manage risks in your business contracts.

If you need help with contract term drafting, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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