Conditions And Warranties Flashcards
The terms of a contract (whether express or implied) can be classified as…
…conditions, warranties or innominate terms.
What is the significance of the distinction between conditions and warranties?
The question of whether a term is a condition or a warranty becomes significant in the event of breach of contract.
As a general principle, if a party breaches a condition, the innocent party has a right to treat the contract as repudiated ie they can terminate the contract, put an end to it with the effect that both parties are released from all future obligations under the contract.
The innocent party may also sue for damages immediately. If it does not exercise the right to elect to treat the contract as at an end, and instead chooses to affirm the contract, the contract remains in full force and effect, meaning that all parties will remain bound to perform their obligations under the contract, but the innocent party can still sue for damages with respect to the other party’s breach. In such instance, the innocent party waives the right to repudiate.
In contrast, if a party is in breach of a warranty, the only remedy available to the innocent party is to sue for damages ie there is no right to treat the contract as repudiated.
How can you distinguish conditions and warranties?
According to the traditional approach, the distinction between a condition and a warranty is that a condition is an important term ‘going to the root of the contract’ (Poussard v Spiers (1876) 1 QBD 410). A warranty is a less important term not going to the root of the contract.
The crucial question is, therefore, whether the parties intended, at the time of contracting, that any breach of the relevant term could result in the innocent party terminating (see Poussard v Spiers again). Only if the answer to this question is clearly ‘yes’ should the term be categorized as a condition from the outset.
What are innominate terms?
The traditional distinction between conditions and warranties is no longer regarded as exhaustive.In Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26, the Court of Appeal held that there are many terms which, at the outset, are neither conditions nor warranties but are of an ‘innominate’ or intermediate nature.
The term in question in Hong Kong Fir was that the ship being hired was, ‘in every way fitted for ordinary cargo service’. This is a clause that could be breached in a variety of ways, ranging from the minor to significant. Rather than classify such terms at the outset the court advocated looking at the consequences of breach and asking:
Does the breach deprive the party not in default of substantially the whole benefit which it was intended that he should obtain from the contract?
If the answer to this question is ‘yes’ then the term will be treated as a condition and the innocent party is entitled to treat the contract as repudiated and claim damages. If the answer is ‘no’ the innocent party is entitled to claim damages only.
This is quite different from the traditional approach based on the intention of the parties at the time they made their contract which distinguishes between minor terms (warranties) and important terms (conditions).
Admittedly, this analysis may promote justice as between the parties, but such justice is achieved at the cost of certainty, in particular certainty as to whether the innocent party has the right to terminate the contract as a result of the breach
Taking all this into account, when considering the classification of terms, the starting position should be to consider whether the term in question has been classified as a condition or a warranty by: i) statute; ii) the parties or iii) previous judicial decision(s). If that does not provide an answer, then the court will need to look at the contract, the subject matter and the surrounding facts to determine whether the parties intended for any breach of the term to entitle the innocent party to terminate the contract (this is where the “root of the contract” test may be relevant).
If the court cannot determine the parties’ intention, or determines that their intention was that not every breach would lead to the right to terminate, then the court is likely to decide that the term is innominate, and apply the test from Hong Kong Fir.
What are the pathways concerning a breached contract?
· Warranty – Damages only
· Condition - Right of election: Affirm & damages OR terminate & damages
· Innominate term - Do the consequences of the breach deprive the party not in default of substantially the whole benefit from the contract?
o Yes – Right of election: Affirm & damages OR terminate & damages
o No – Damages only
Turning to the issue of classification of statutory implied terms, key terms implied by statute are classified as follows:
· Conditions (breach gives rise to right to reject and claim refund) - SGA 1979 ss12-15
· Innominate terms – SGSA 1982 s13
Importantly, however, the remedy for breach of the terms implied by ss 13-15 SGA has been altered as a result of s 15A. Section 15A does not apply to s 12(1) SGA, the implied condition as to title. Section 15A provides that if the breach is so slight that it is unreasonable for the buyer to repudiate the contract and reject the goods, the breach should only be treated as a breach of warranty.
In such instance, the buyer will only be entitled to claim damages. The effect is that breach of these implied terms is not to be treated automatically as a breach of condition but may, at the court’s discretion, be treated as a breach of warranty and accordingly the only remedy available will be to claim damages.
In relation to the Consumer Rights Act 2015, a different approach is taken. When it comes to the terms implied in contracts for the supply of goods by s 9 (satisfactory quality) s 10 (reasonably fit for their particular purpose) or s 11 (correspondence with description) the Consumer Rights Act 2015 specifically provides rights to reject goods, but only in certain circumstances: in this way, the classification of these terms is not really of central importance. The detail of this is not addressed in this element.
Define repudiatory breach
A party that has committed a breach of a condition is said to have committed a repudiatory breach.
Generally, the innocent party has a right to treat the contract as repudiated ie they can terminate the contract.
How does time for performance or completion affect contracts?
One area where the law on conditions and warranties has developed in a particular way is in relation to contractual terms setting out the time performance or completion of the contract.
Time is of greater or lesser importance to the parties in most kinds of contract. It is quite usual for the contracting parties to stipulate for a date for delivery for the sale of goods. Failure to comply with such a stipulation is, obviously, a breach of contract, but whether it is a breach of a condition or a warranty will depend on the intention of the parties.
This intention will be assessed by reference to the express terms of the contract and, where appropriate, by implication, depending on the nature and circumstances of the contract.
Where a requirement as to timing is essential to the contract, for instance in mercantile contracts, the expression used is that ‘time is of the essence’. If time is of the essence, lateness will amount to a repudiatory breach entitling the other party to terminate the contract.
Where time is not of the essence, it can usually become so, by the innocent party serving a notice on the defaulting party which states time is of the essence. Such a notice must state completion date, which must be reasonable.
If a party breaches a condition…
…the innocent party has a right to treat the contract as repudiated ie they can terminate the contract
If a party is in breach of a warrant…
the only remedy available to the innocent party is to sue for damages
the distinction between a condition and a warranty is that…
…a condition is an important term ‘going to the root of the contract’.
Some terms, at the outset, are neither conditions nor warranties but are of an ‘innominate’ nature. A breach of such a term…
…if it has a minor effect, will allow the innocent party to claim damages only.
A breach with more serious consequences will allow the innocent party to treat the contract as repudiated and claim damages.
Where terms are implied by statute…
…the statute will normally specify whether they are conditions or warranties (in some cases the statute will also state or modify the remedy available upon breach of such a term).
