Contract | Formation
Terms: Classification
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Introduction
Terms which impose contractual duties, whether express or implied, will be conditions, warranties or innominate terms. Generally, a breach of any term gives the other party the right to sue for damages. However, the classification of the term may affect other possible available remedies such as termination of the contract and future obligations.
Traditional approach: conditions and warranties
The courts have traditionally classified a term as either a condition or a warranty. A condition is a major term and a warranty is a minor term. The courts determine whether a term is a condition or a warranty by applying an objective test: would a reasonable person think that the parties intended the term to be a condition or a warranty? The courts will consider all the circumstances at the time the contract was made and whether the parties have expressly stated how a term should be classified.
If the term is found to be a condition and the contract has not been fully performed, the innocent party will usually be able to terminate the future performance of the contract. In addition, a claim for damages may also be made. These remedies are available even if the loss or damage suffered is only minor. However, if the term is found to be a warranty, the innocent party is limited to suing for damages for loss suffered and cannot terminate the contract. The seriousness of the damage or loss is irrelevant.
There is a rebuttable presumption that the word condition in a contract is being used in a legal sense.
Schuler v Wickman Machine Tool Sales Ltd [1974] AC 235 HL
Facts:
A clause labelled a 'condition' stated that, over the 4-year contract, one of two named representatives from the defendants would visit six other firms every week. There was no provision for alterations necessary due to logistical issues such as sickness. If the term was a condition failure to make one visit would enable the plaintiff's to terminate the contract.
Issue:
Was the term condition used in a strict legal sense?
Held:
House of Lords found that the parties had not intended the word to be used in its strict legal sense because the outcome would be unreasonable if the term were a condition.
Recent development: innominate terms
Innominate terms are neither a condition nor a warranty and are also referred to as an intermediate term.
Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha [1962] 2 QB 26
Facts:
The defendants chartered a ship from the plaintiff for 2 years. The agreement included a term that the ship would be seaworthy during the hire. There were problems with the engine and the engine crew were incompetent, leading to the ship being out of service 15 weeks in total. The defendants terminated the contract on the grounds that the plaintiff had breached a condition of the contract. The plaintiff brought an action for wrongful repudiation arguing that the seaworthiness term was not a condition, so there was no right to terminate.
Issue:
Was a condition breached and the defendant entitled to terminate the contract?
Held:
The defendant was not entitled to terminate the contract. The terms were too complex to be either a condition or a warranty. Instead the test applied was: whether the breach had deprived the innocent party of substantially the whole benefit of the contract. The time lost repairing the ship was not sufficient to deprive the defendant of substantially the whole benefit of the contract. Therefore, the effect of the breach determines the available remedy.
Diplock LJ suggested: the approach should not be used in all cases. Parties should be able to expressly agree circumstances when the innocent party could terminate or that statute should impose the remedy. He emphasised that the traditional classification is not redundant, as there would be circumstances when a breach of a certain term would always deprive the innocent party of substantially the whole benefit of the contract (a condition) or that the breach would never have this effect (a warranty).
Analysis of approaches
The traditional use of conditions and warranties promotes certainty. It is well established that if a condition is breached and the contract has not been fully performed then it may be terminated and that if a warranty is breached there will be no right to terminate. However, the traditional approach is inflexible and can lead to unfair results as it does not consider the consequences of a breach. A minor breach of a condition gives the right to terminate the contract (unless s15A of the Sale of Goods Act 1979 Act or S5A of the Supply of Goods and Services Act 1982 apply) but if an innocent party suffers a major breach of a warranty no termination is possible.
The innominate approach is less certain. It can be difficult to decide if the effect of the breach is sufficiency serious to justify termination. This is clearly important in relation to remedies available and may mean that if a party purports to terminate when he is not entitled to do so, he will be in breach of the contract. However, by considering the effect of the breach the approach is more flexible and arguably a fairer result may be produced.
Recently, the traditional approach was backed by Megaw LJ.
The Mihalis Angelos [1971] 1 QB 164
Megaw LJ: .. in the old sense of the word 'condition': that is, that when it has been broken, the other party can, if he wishes, by intimation to the party in breach, elect to be released from performance of his further obligations under the contract; and he can validly do so without having to establish that on the facts of the particular case the breach has produced serious consequences which can be treated as 'going to the root of the contract' or as being 'fundamental', or whatever other metaphor may be thought appropriate for a frustration case...
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He continued to argue that the traditional approach promotes certainty, uniformity and predictability in the law. He argued that it is desirable to have a definite rule for contractual terms which were in common use, especially in a commercial context.
Summarising his preference for the traditional approach: .. Where justice does not require greater flexibility, there is everything to be said for, and nothing against, a degree of rigidity in legal principle...
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Both the traditional and innominate approaches exist and therefore it is for the courts to decide which to adopt. However, courts are limited by three important factors.
Statute
Sale of Goods Act 1979 implies terms which are defined as conditions, that goods must: correspond to description (S13), be of satisfactory quality (S14(2)) and fit for purpose (S14(3)). Section 3 and S4 of the Supply of Goods and Services Act 1982 contain similar provisions which are also conditions.
However, sections 13 - 15 of Supply of Goods and Services Act 1982 Act, which imply terms about the service to be provided are described merely as
terms
, so are innominate terms. Therefore if one of these implied terms is breached the remedy is dependent on the effect of the breach.Trade usage and commercial expectation
The benefit of certainty in commercial transactions is well recognised and means that previous dealings and trade usage will be considered. Therefore, the traditional approach can be favoured in commercial context (The Mihalis Angelos [1971]).
Express provision by the parties
The parties may expressly create conditions and warranties in an agreement. However, the courts must be satisfied that the terminology has been used in a strict legal sense (Schuler v Wickman Machine Tool Sales Ltd [1974]).