Classification of Terms of Contract

Note on Classification of Terms of Contract by Legum

Classification of the Terms of Contract:

Whilst terms of contract are defined as representations that are integral to a contract, some terms are more integral or important to the contract than others. The breach of these more important terms entitles the injured party to not only sue for damages, but to terminate the contract. These highly important terms are referred to as conditions, whilst those terms that are not as essential are referred to as warranties.

Conditions Defined:

A condition is a fundamental or highly essential term of the contract which goes to the heart of the contract. When conditions are breached, the contract is robbed of essence and the injured party can terminate the contract and is free from obligation. It is usually not possible to assert that the contract is fulfilled till the conditions are fulfilled.

In Social Security Bank Ltd v CBAM Services Inc, the supreme court determined that a condition:

i. Goes to the whole root of the contract and not just a part of it.

ii. A breach of a condition makes further performance of the contract impossible.

iii. A condition affects the very substance of the contract.

Warranty Defined:

These are minor terms whose breach only entitles the injured party to seek damages. In the case of Neoplan Ltd v Harmony Construction Co Ltd, warranty was defined as "a term of a contract which was collateral to the main purpose of the contract, that is, which is not so vital as to effect a discharge of the contract, if the circumstances are, or become inconsistent with it."

Understanding the Distinction Between Conditions and Warranties with Case Law:

In the case of Poussard v Spiers, the court held that the failure of an opera singer to show up for the first three days of a performance amounted to a breach of condition, since turning up especially for the first few days was at the heart of the contract between the parties.

In contrast, in the case of Bettini v Gye, the failure of the opera singer, Bettini, to show up for the rehearsals prior to the performance was seen as a breach of warranty which only entitled the injured party to damages and not to termination of the contract.

How the Courts Determine d Conditions and Warranties?

Initially, the courts looked at the significance of the term at the time of contracting. Significance could be determined by examining the language of the parties at time of contracting, inter alia.

When a particular term is considered a condition, its breach would entitle the injured party to terminate the contract irrespective of the effects or harms accruing from the breach. It was possible for a breach of condition to result in very little losses to the injured party, but they would still be entitled to terminate the contract. Also, serious consequences arising from a breach of a warranty only entitled the injured party to sue for damages and not to terminate the contract.

The Genesis of Innominate/intermediate Terms:

Whether a term constituted a condition or warranty was determined by the parties at the time the contract was made, not after the breach of the term.

However, there was a realization that not all terms of the contract can be pre-classified as conditions or warranties. Consequently, the courts developed the concept of innominate or intermediate terms where a particular term is considered a condition or warranty based on the consequences that accrue after a breach of such term. Sometimes, the parties may themselves classify a term as a condition only for the courts to assert that the term is a warranty based on the minor consequences that accrue from the breach of such terms.

An innominate term will become a condition if its breach results in serious consequences, and will become a warranty if its breach only results in minor consequences. The classification of an innominate term into a condition or warranty is thus only possible after a breach occurs.

For instance, in Hong Kong Fir Shipping Co. Ltd v. Kawasaki Kisen Kaisha Ltd , the failure of the plaintiff to ensure that the ship they let to the defendant was fit, would have ordinarily been considered a breach of a condition. However, in this case, the court used the concept of innominate terms to hold that since the consequences of the plaintiff’s breach were not so grave, the term was not a condition.

In the case of Cehave NV versus Bremer Handelsgesellschaft , there was an agreement for the sale of citrus pulp pellets which were to be in good condition. On arrival of the shipment, some pellets were damaged due to overheating. The buyer rejected the whole cargo. The court held that the “damaged” pellets were still usable for the purpose it was intended, and breach of the term to supply pellets that were in good condition was not sufficient enough to require termination of the contract.