Classification

Classification of terms

The obligations in a contract may vary in importance. Some clauses / terms are regarded as more fundamental or important than others. Contract law distinguishes between terms that are essential to the agreement and those that are less fundamental.

A distinction is sometimes made between warranties and conditions. Breach of a condition entitles the innocent party to terminate the contract as to his future obligations and allows him to recover damages for loss.  In contrast, breach of a so-called warranty entitles the innocent wrong party to damages only.

This distinction between terms which are less important and more important is grounded in common sense.  There will usually be terms of a contract, which are more fundamental and important than others. The failure to comply with certain terms may be less serious than other failures of compliance.

The law allows the parties to label the terms of their contract, according to whether they should be sufficiently important so that their breach should allow the other person to terminate the contract.


Classification of Contractual Terms

The expressions “condition” and “warranty” are used in different senses in the context of contract law. At common law, a condition is a term of the contract, breach of which entitles the innocent party to terminate the contract and sue for loss. It is intrinsically or is deemed to be a fundamental condition of the contract

The parties may choose to deem terms to be conditions in the above sense. In this case, any breach of which, no matter how trivial entitles the innocent party to terminate the contract. The provision should be in clear terms. If they do not do so, it is a matter for the court to interpret the true position.

In some sectors, strict compliance with particular obligations is critical to the successful operation of the particular trade and market. The stipulation of some terms as conditions may be indispensable. The courts will generally seek to uphold the expectations of the parties in such contexts.

In other contexts, the use of the expression “condition” lends considerable weight to the term being a “condition” in the above sense but is not conclusive. Where this would lead to apparently disproportionate consequences, the courts may interpret the apparent condition as a warranty. Whether a term is a condition or a warranty, may be a matter of substance, rather than of description


Conditions

The word “condition” is used in different contexts in contract law. In one technical sense, a condition is contract term, breach of which entitles the innocent party to terminate the contract. In contrast, a warranty is a term, the breach of which, entitles the innocent party to claim damages (compensation) only.

It may be a matter of interpretation as to whether a particular term, is or is not a condition. A written contract may label a condition or a warranty as such. The court will usually give effect to this choice. However, it is not conclusive and where the court finds that this was not the parties’ intention if will determine by reference to those intentions, as it finds them.


Sale of Goods Act

The Sale of Goods act uses the terms “conditions” and “warranties”. The Act provides that whether a stipulation in a contract for sale of goods is a condition, breach which of which gives a right to treat the contract as repudiated or a warranty, breach of which may give rise to a claim for damages and not a right to reject the goods, depends on the construction of the contract. The Act provides that a stipulation may be a condition although called a warranty in the contract document.

The Sale of Goods Act defines a warranty as an agreement with reference to goods which are the subject of the contract for sale, which is collateral to the main purpose of such contract, a breach of which gives rise to a claim for damages but not the right to reject the goods and treat the contract as terminated.

The key rights implied by the Sale of Goods Act in favour of the buyer are conditions. They include in particular the implied conditions as to title, compliance with their description, merchantability, fitness for purpose and conformity with the sample. Breach of any of these conditions entitles the buyer to reject the goods and reclaim the purchase price.


Intermediate / Innominate Terms

Traditionally, the question as to whether a particular term of the contract was a condition or warranty was determined when the contract was made.

The courts, have come to recognise so-called “innominate terms”. In the famous “Hong Kong Firs” case, the House of Lords recognised the principle of an “innominate” term. Whether breach of an innominate term gives rise to a right to terminate the contract, depends on its seriousness in the circumstances.

The House of Lords held that the description of terms as “conditions” or “warranties” was not exhaustive.  Innominate terms are neither conditions nor warranties. There is no designation of the consequences from the outset. Whether the breach of an innominate term gives rise to a right to terminate and damages or a right to damages only will turn on the seriousness of the particular breach that has occurred.


Fundamental Breach and Intermediate / Innominate Terms

More serious breaches of an innominate term, entitles the innocent party to terminate the contract. Other less serious breaches give rise to a claim for damages only.

If the breach is such as to substantially deprive the innocent party of the benefit which was intended to be conferred by the contract, it has the effect of a condition. Otherwise, it has the effect of a warranty, with a right to claim damages only.

The court considers whether the term on its true construction/ interpretation is a condition strictly so-called, any breach of which entitles the other party to treat his obligations as discharged or whether it is a warranty, any breach of which gives a right to damages only. If it falls into neither category, it is necessary to look at the extent of the actual breach that has taken place.

If the breach is such as to go to the “root of the contract”, i.e. that it is fundamental, the other party, is entitled to treat himself as discharged and sue for damages, upon a breach. The court will consider whether the breach is such, that it goes to the root of the contract, such as to deprive him substantially of what he has contracted.


Innominate Terms and the Sale of Goods Act

The Sale of Goods Act effectively divides all contract terms into conditions or warranties. The common law position as reflected in the Act, has developed since codification in 1893.  The court now recognise that there may be innominate terms in contracts for the sale of Goods.

The Sale of Goods Act itself provides that the rules of common law which are not inconsistent with the act continue to apply to contracts for the sale of goods. This position is further reinforced by amending legislation in Ireland which has not rigidly adapted the condition/ warranty dichotomy.

The consequences of a breach of a so called innominate term depends on the seriousness of the breach in the circumstances, in the normal way. If it is sufficiently fundamental, it will entitle the innocent party to terminate the contract, but not otherwise.


Modern Approach I

In a formal contract, particularly in a commercial context, the courts will usually uphold the designation of a term as a condition or warranty as the case may be. The designation will not necessarily use the expressions condition or warranty. It may simply list or define circumstances, which give one party or the other the right to terminate his obligations under the contract and to claim for damages for the breach.

The general principles of interpretation of contracts apply. The courts look at the words of the parties in the light of the circumstances. The relevant time is when the contract is made. Each term must be a warranty, a condition or an innominate tern from the outset.

In considering whether a term is a condition, warranty or innominate term, the courts look firstly at the express terms of the contract. If there is no express provision, the court will consider whether such a term is necessarily implied in accordance with ordinary contractual principles, if the matter is not dealt with expressly/

Parties are still free to label conditions or warranties in advance. However, the modern view is that some terms may fall into either category. These are so-called “innominate terms”.


Modern Approach II

The designation of a term as a condition is not conclusive even in an express contract. In determining the terms of a contract and its interpretation, the language is not necessarily conclusive. It may be more conclusive or near conclusive in a formally drafted document (e.g. by a lawyer. In a document made informally without regard to the technical meaning of words, the court will not give effect to a technical meaning which the parties do not intend.

The fact that a particular interpretation leads to an unreasonable result is a relevant consideration. If the parties so intend, they should make their intentions abundantly clear.

Where a particular term or condition used in a trade or industry has a well-established meaning, the courts are likely to apply it in interpreting the contract. This accords with the general principles of interpretation. The courts respect the need for commercial certainty in industry sectors and trades.

The courts will consider any applicable legislation, such as the Sale of Goods legislation, which expressly deems some terms to be conditions or warranties, regardless of what the contract provides. The courts will consider any custom and trade practice. The factual background and context will often determine the status of the term.


Test for Fundamental Breach

Parties to an agreement can expressly provide that if a particular thing happens, that the other party can terminate the contract. If, however, the matter is not expressly provided, the question is whether the breach is so fundamental that the other party has been deprived of, the substance of what he contracted for.

The key question as to  whether the breach of the particular term is serious enough to entitle the innocent party to terminate its further obligations, depends on its seriousness in the circumstances.  If the breach goes to the “root” of the contract and effectively denies the innocent party of the benefit of the contract, this will be deemed sufficiently fundamental to entitle the innocent party to terminate its obligations under the contract.


References and Sources

Irish Textbooks and Casebooks

Clark, R. Contract Law in Ireland 8th Ed. (2016) ch 9

Friel, R. The Law of Contract 2nd Ed, (2000)

McDermott, P.  Contract Law (2001) 2nd Ed (2017) ch 19

Enright, M. Principles of Irish Contract Law (2007)

Clark and Clarke Contract Cases and Materials 4th Ed (2008)

English Textbooks and Casebooks

Poole, J. Casebook on contract law. (2014) 12th edition

Stone and Devenney, The Modern Law of Contract 10th Ed (2015)

McKendrick, Contract Law 10th Ed (2013)

Chen-Wishart, Contract Law 5th Ed (2015)

Anson, Reynell, Beatson, J., Burrows, Cartwright, Anson’s law of contract. 29th Ed (2010)

Atiyah and Smith, Atiyah’s introduction to the law of contract. 6th Ed.

Chen-Wishart, M. (2015) Contract law. 5th Ed.

Cheshire, Fifoot and Furmstons, Furmstons and Fifoot Cheshire, Fifoot and Furmston’s law of contract. OUP.

Duxbury, Robert (2011) Contract law. 2nd Ed.

Halson, Roger (2012) Contract law. 2nd Ed.

Koffman & Macdonald’s Law of Contract. 8th Ed. (2014)

O’Sullivan, Hilliard, The law of contract. 6th Ed. (2014)

Peel, and Treitel, The law of contract. 13th Ed. (2011).

Poole, J.Casebook on contract law. 12th Ed. (2014).

Poole, J.  Textbook on contract law. 12th Ed. (2014)

Richards, P Law of contract. 10th Ed. (2011)

Stone, R.  The Modern law of Contract. 10th Ed. (2013)

Treitel, G. H.  An outline of the law of contract. 6th Ed (2014).

Turner, C Unlocking contract law. 4th Ed. (2014).

Upex, R. V., Bennett, G Chuah, J, Davies, F. R. Davies on contract. 10th Ed. (2008).

UK Casebooks

Stone,Devenney, Text, Cases and Materials on Contract Law 3rd Ed (2014)

McKendrick, Contract Law Text, Cases and Materials 6th Ed (2014)

Stone, R, Devenney, J Cunnington, R Text, cases and materials on contract law. 3rd Ed (2014)

Burrows, A. S.  A Casebook on Contract. 4th Ed.

Beale, H. G., Bishop, W. D. and Furmston, M. P. Contract: cases and materials. 5th ed. (2008)

Blackstone’s Statutes on Contract, Tort & Restitution 2017 (Blackstone’s Statute Series)

UK Practitioners Texts

Chitty on Contracts 32nd Edition, 2 Volumes & Supplement (2016)

The above are not necessarily the latest edition.