Contract Basics #4 The differences between conditions and warranties

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Contract Basics #4: The differences between conditions and warranties

Published On: 20 August 2015

Welcome to the fourth in our series of simple briefings aiming to highlight some of the more common issues relating to contracting. In this briefing we are looking at the difference between "conditions" and "warranties" and why that matters when assessing the consequences of a breach of contract.

Classification of contract terms

Contractual terms are classified as conditions, warranties or intermediate (or innominate) terms. Ideally, parties will identify how each contract term will be classified at the outset of the contract. This is so that if there is a breach of contract, the parties can quickly determine the available remedies.

Conditions

A condition is a term of a contract that goes to the root of the contract. In a sale of goods contract this might include a clause that states that time is of the essence i.e. it is a condition of the contract that the goods must be delivered by a specific time.

If a condition is breached, the aggrieved party has the right to treat the breach as "repudiatory" which means that the aggrieved party can either:

  • Terminate the contract; or
  • Treat the contract as continuing (i.e. affirm the contract).

In either case the aggrieved party can claim damages.

It is important to note that a breach of a condition entitles the aggrieved party to terminate regardless of the nature or consequences of the breach, even if the aggrieved party has suffered little loss as a result of the breach.

Warranties

A warranty is a term of the contract which is less significant than a condition and which is usually written as an assurance or a promise. For example, in a services contract there might be a requirement to have staff trained at a specific level.

If breached, it would not deprive the aggrieved party of the whole of the benefit of the contract. A term that is a warranty in one contract might be a condition in another depending on how important that term is to the parties.

Statements about factual matters are commonly expressed as "warranties" in a contract. For example, a party might warrant that it has obtained all required consents at the start of a contract. Such a statement is likely to be accepted as a warranty (subject to the below).

Intermediate terms

An intermediate term is neither a condition nor a warranty and the parties need to consider the significance of the breach to determine the right remedy. The remedy available to the aggrieved party will depend on the nature and effect of the breach at the time it occurs.

The general test is whether:

  • The aggrieved party is deprived of substantially the whole benefit of the contract; and
  • Whether it was the intention of the parties (as expressed in the contract) that it should obtain that benefit.

If the breach deprives the aggrieved party of the whole of the benefit of the contract then this will be a condition and will allow the aggrieved party to terminate. If not, then the term will be a warranty and the aggrieved party may be entitled to claim damages.

This approach is usually criticised for lack of certainty. An aggrieved party should act cautiously as it could be liable for wrongful termination if it is found that the breach did not actually deprive it of substantially the whole benefit of the contract.

Classifying terms

Terms classified by statute

Many terms implied by statute are classified as conditions or warranties by the relevant statute. For example:

  • The Sale of Goods Act 1979 (SGA) implies terms into contracts for the sale of goods regarding the goods' compliance with their description, quality and fitness for purpose. These terms are classed as conditions;
  • The SGA also implies terms regarding the purchaser's enjoyment of possession of the goods and that the goods' should be supplied free from undisclosed encumbrances. These terms are classed as warranties; and
  • The SGA applies different interpretations for contract terms depending on whether the term is found in a consumer contract or in a commercial contract.

Terms classified in the contract

If the contract is silent and does not stipulate if a term is condition or a warranty:

  • A court will usually rule that the term is a condition if:
    • Statute or case law has determined that the term is a condition;
    • The contract clearly entitles the aggrieved party to terminate the contract if the term is breached; or
    • It would be just to infer that the parties meant for a breach of that term to allow the aggrieved party to terminate the contract.
  • A court will usually rule that the term is a warranty if:
    • Statute or case law has determined that the term is a warranty;
    • The contract expressly provides that the aggrieved party will only be entitled to damages if the term is breached; or
    • It would be just to infer that the parties did not mean for a breach to allow the aggrieved party to terminate the contract.

If the contract states that a term is a condition or warranty, the courts will generally follow this classification unless:

  • The contract stipulates that a term is a warranty but statute or case law has determined that term is a condition (and vice versa);
  • The contract sets out consequences for the breach of a term which are contrary to the classification of that term (i.e. the term is classified as a condition but does not allow for termination of the contract if that term is breached); or
  • It would be just to classify the term contrary to that set out in the contract. For example, where a contract states that the breach of a term requiring attendance at appointments across numerous sites will entitle the aggrieved party to terminate the contract, a court may determine that failure to miss one out of potentially hundreds of appointments is not sufficient to terminate the whole contract.

If you need any help in drafting contractual terms and conditions, please do not hesitate to get in touch.

Helen Simpson, Partner
T: +44(0)117 918 2338
E: hsimpson@dacbeachcroft.com

Carole Poletti, Solicitor
T: +44(0)117 918 2324
E: cpoletti@dacbeachcroft.com

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