We often see the word “warranty” used in a contract. A seller of goods may “warrant” that the items sold comply with regulatory requirements; and in share sales there are usually extensive warranties. The word does however have a technical meaning which is easiest to explain by contrasting it with another term – “condition”. Conditions and warranties are treated differently and it can be important to know whether a provision in a contract amounts to: (i) a warranty, (ii) a condition, or (iii) something else – known as an intermediate term.
When a warranty is breached, although the non-defaulting party will have a claim for damages, it does not (in the absence of express words) have the right to treat the contract as repudiated and therefore to terminate the contract.
Breach of a condition on the other hand does give the non-defaulting party a right to terminate – conditions are therefore more important terms that go to the heart of the contract.
Breach of an intermediate term, as the name suggests, may or may not give the non-defaulting party a right to treat the contract as repudiated depending on the circumstances.
It can be difficult to assess whether a term in a contract is a warranty, condition or intermediate term. In certain cases, legislation or a previous judicial decision may specify the categorisation. For example, in the absence of express provision, in a sale of goods contract there is an implied condition that a seller of goods has the right to sell those goods. In contrast, that legislation says there is an implied warranty that goods must be of satisfactory quality. If a term has not been classified by legislation or case law, whether the term is a warranty or something else will depend on the intention of the parties as revealed by the construction of the contract.
If for example there is a challenge over whether a party has the right to terminate as a result of the breach of a term, the fact that the term is called a "warranty" or “condition” does not necessarily mean that this will be accepted by the courts. The court will assess its true nature by looking at the contract as a whole and in particular at the consequences of breaching that term. The term is much more likely to be viewed as a condition giving a right to terminate where the consequences of breach are serious for the non-defaulting party – are they deprived of substantially the whole of the benefit of the contract? Otherwise, on the face of it, the term will be treated as a warranty and the non-defaulting party will be limited to bringing a damages claim. This situation can be avoided by making the circumstances that give rise to a right of termination crystal clear.
For more information, please contact Charlie Maurice or another member of our commercial contracts team.
Charles Maurice