Difference between Conditions and Warranties

A contract is referred to a legally binding relationship which is constructed between two or more parties who agree to its terms which are enforceable on them. The terms of a valid contract are enforced on each contracting party and they have to comply with them. Certain elements are necessary to be fulfilled by the parties in order to form a valid contract. These elements include offer, acceptance, intention, consideration, and capacity of parties. In case the contractual obligations are violated by a party, then the aggrieved party has the right to claim remedies under the contract. Along with remedies the innocent party also has the right to terminate the contract under the common law. This remedy is available for the parties in case a condition of the contract is violated.

The terms of the contract are divided into two categories which include condition and warranties. The conditions are essential terms of a contract based on which the contract is formed between parties. On the other hand, warranties are referred to non-essential terms in a contract. These terms are sub parts, and violation of these terms did not allow the parties to terminate their contract. In the case of Australian contract law, the conditions are treated as significant terms and violation of these terms allows the parties to terminate the contract. This report will argue that even in the case of a “minor” breach of the condition of a contract, the innocent party has the right to terminate the entire contract. Certain exceptions to this rule will be evaluated in the report as well which are present in Australian contract law such as the exclusion clause and waiver of rights in which the contract is not terminated even after violation of a condition.

Conditions and warranties are two classifications of contractual terms which are included by parties into a legal contract. It is important for parties to identify each of these terms since it assists parties in quickly determining their remedies in case of breach of the contract. A warranty is referred to non-essential term of the contract which is less significant than compared to a condition. Generally, the warranties in a contract are written as a promise or an assurance which is given by one contracting party to another, for instance, the service contract formed between two parties can have a term in which they agree to provide staff training at particular level. In case this term is violated by the contractual party, then it did not deprive the innocent party of the whole benefit of the contract. Furthermore, a term which is considered as a warranty in one contract can be considered as a condition in another. In case of violation of the warranty in a contract, the innocent party has the right to demand damages only. The aggrieved party cannot terminate the contract in case a warranty is breached by another party.

Rights of Innocent Party to Terminate the Contract

A condition is referred to a significant term of the contract which goes to its roots. In case of a sale of goods contract, a clause can be included by the parties that states the time of its essence, for instance, the goods must be delivered within a specified time. In case this term is not fulfilled by the parties, then the aggrieved party has two options. The first option is that the innocent party can terminate the contract to remove the contractual obligations. The second option is that the aggrieved party can treat the contract as continuing and continue to comply with the contractual terms. In either of these cases, the innocent party has the right to claim damages from the party who violated the terms of the contract. Moreover, in case of violation of a condition of the contract, the innocent party is entitled to terminate the contract regardless of the consequences or nature of the breach. If the aggrieved person has suffered no or little loss due to the breach, still he/she has the right to terminate the contractual liability. Therefore, the aggrieved party has the right to rescind a contract even if there is a “minor” breach in the condition of the contract.

In Australian contract law, the importance of the condition of a contract is recognised by the courts. In the case of Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd, the court provided three situations in which the contract can be terminated. These three situations include serious breach of non-essential term, breach of condition, and if one party ‘renounced’ the contract. The judgement of this case shows that the Australian courts accept the termination of a contract even if there is a minor breach in the condition of the contract. A similar view was given in the court in the judgement of Ankar Pty Ltd v National Westminster Finance (Australia) Ltd case. In this case, the court provided that the breach of a condition in a contract given automatic right to the aggrieved party to rescind the contract. This approach is adopted in the contract law in order to reduce the exploitation of essential terms of a contract by the parties.

Moreover, the court provided in the case of Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd a test of ‘essentiality’ which is used for identifying whether the term is a condition or warranty. In this case, it was held by Jordan CJ that the test of essentiality evaluates the general nature of the contract as a whole in order to determine whether the term is a condition or warranty. This test evaluates whether the promise which is made by a party is so important that the contract was formed on such promise otherwise the parties would not have entered into a contractual relationship. The court analysed in this test whether strict and complete compliance with the promise was assured by the parties before forming the contractual relationship. If this assurance were not given by the party, then the innocent party would not have entered into the legal contract. If these elements are fulfilled in the contract, then the term is considered as a condition in the contract based on which the aggrieved party has the right to terminate the contract. This statement was upheld by the High Court in this case.

Exceptions to the Rule

In other words, if the parties wanted to terminate the contract in case of a minor breach of its terms, then it is necessary to establish that such term is a condition in the contract. It is important for the parties to identify the difference between conditions and warranties in a contract. Kirby J had agreed with the provision that the violation of condition given rise to the right to the party to terminate the contract. The objective of this provision is to ensure that the contractual parties take their obligations seriously. The contracts are binding relationships which should be seen in such way. Therefore, in case the objective of the contract is not fulfilled, or the innocent party did not receive the benefit of the contract, then the aggrieved party should have the right to terminate the contractual relationship because it serves no purpose. The innocent party has the right to terminate the contract irrespective of the fact that he/she has suffered any damages due to the violation of the condition of the contract. The aggrieved party has the right to claim damages as well along with terminating the contract. The compensation is demanded for the loss suffered by the party even if the innocent party decides to avoid the termination of the contract.

There are certain exceptions which can be used by parties to avoid terminate of the contact in case the condition is breach by another party. In these situations, the contract is not terminated in case there is only a minor breach of the contract. Firstly, the condition in a contract is considered as warranty in case the innocent party decided to waive the right to rescind the contract. If the aggrieved party did not want to terminate the entire contract in case of violation of an essential term, then such term is treated as warranty in the contract. Another exception is exclusion clause which is included by parties into the contract. The exclusion clause is referred to a contractual provision which is used by parties to excuse their liability which raises under a contract. As per this clause, the parties can eliminate their liabilities which raise under a contract by including an exclusion clause. The parties can provide that all the conditions warranties and other expressed or implied liabilities or guarantees are hereby excluded based on which the innocent party did not have the right to terminate the contract or demand damages for the injuries suffered. Darlington Futures Ltd v Delco Australia Pty Ltd is a relevant case in which the court defined the element of exclusion clause and provided policies regarding how parties should include it in the contract. Other than certain exceptions, it is clear that the breach of a condition gives the right to the innocent party to terminate the contract regardless the fact that the breach is significant or minor. This rule protects the contractual rights of innocent parties to ensure that parties did not exploit their contractual rights.

Conclusion

Conclusion

In conclusion, the terms of a contract are categorised into conditions and warranties which are referred as essential and non-essential terms respectively. The condition is an important term, and the violation of this term gives the right to the innocent party to terminate the entire contract. On the other hand, if a warranty in the contract is violated, then the aggrieved party did not acquire the right to end the contractual relationship. This principle is recognised by the Australian contract law as well. Examples of various cases are evaluated in the report in which Australian courts recognise the rights of parties to terminate the contract in case a condition of the contract is violated. There are certain exceptions under which the contract is not rescinded ever after violation of the condition in a contract. Firstly, if the aggrieved party did not want to terminate the entire contract on violation of a condition, then the condition is treated as warranty in the contract. Secondly, if an exclusion clause is included by a party in the contract to eliminate all the liabilities, then the innocent party cannot terminate the contract or demand compensation for violation of the condition. However, it can be concluded that the Australian contract law recognises that the condition in a contract is a significant term breach of which gives the right to the innocent party to terminate the contract. This element is recognised by the court in order to protect the contractual rights of parties to avoid exploitation of essential terms in a contract.

A Articles/Books/Reports

Allsop, James, ‘Values in law: How they influence and shape rules and the application of law’, (2017) 44 (2) Brief 49.

Andrews, Neil, Contract law (Cambridge University Press, 2015).

Carter, J W, ‘The implications of contractual terms: Problems with Belize Telecom,’ (2013) 27 (3) Commercial Law Quarterly: The Journal of the Commercial Law Association of Australia 4.

Carter, John W, ‘Intermediate Terms arrive in Australia and Singapore’ (2008) 24 Journal of Contract Law 226.

Carter, John W, G J Tolhurst and Elisabeth Peden, ‘Developing the Intermediate Term Concept’ (2006) 22 Journal of Contract Law 268.

Chen-Wishart, Mindy, Contract law (Oxford University Press, 2012).

Fisher, James, Uncertainty, ‘Opportunism and the Intermediate Term: The Hong Kong Fir Principle in English and Irish Contract Law,’ (2015) 14 Hibernian LJ 96.

Gamble, Roger, ‘Australia and the Intermediate Term – ‘No country for old rules’’ (2008) 34(2) Monash University Law Review 457.

Martino, David, ‘Contract law: Exclusion clauses: Consequential loss from Hadley v Baxendale to Environmental Systems and beyond,’ (2013) 51 (11) Law Society Journal: the official journal of the Law Society of New South Wales 78.

McDermott, Paul, Contract Law (Bloomsbury Publishing, 2017).

McKendrick, Ewan and Qiao Liu, Contract Law: Australian Edition (Macmillan International Higher Education, 2015).

Poole, Jill, Textbook on contract law (Oxford University Press, 2016).

Soyer, Baris, Warranties in marine insurance (Routledge, 2012).

Thampapillai, Dilan et al., Australian commercial law (Cambridge University Press, 2015).

B Cases

Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) HCA 15

Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500

Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) HCA 61

Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632