INNOMINATE TERMS IN CONTRACT LAW

What will be discussed in this post is the classification of contract terms, implied or express, is either a warranty or a condition, reliant upon its significance in relation to the contract purpose. The question if a term is a warranty or a condition becomes important on the impact of breach of contract cases.

The difference between a warranty and a condition is that a condition is a significant term “going to the root of the contract”. Contrarily, as defined under s.61 of the Sale of Goods Act 1979, a warranty is:

“an agreement with reference to goods which are the subject of a contract of sale, but collateral to the main purpose of such contract, the breach of which gives rise to a claim for damages, but not a right to reject the goods and treat the contract as repudiated”.

As an overall principle, if a condition is broken by a promisor, however small, the opposing party is able to elect to consider himself as cleared from obligations in the future under the contract and will be able to sue immediately for damages. If the opposing party does not use the right to choose to treat the contract as finished but instead affirms the contract this means he is still contract bound, but is allowed to sue for damages in relation to the breach of the other party. If, contrarily a warranty is broken by a promisor, the only potential remedy is that the opposing party can sue for damages; they cannot exercise the right to treat the contract as finished.

As there is a greater remedy for breach of condition than that of breach of warranty, it is usual for parties to dispute as to if a term is a warranty or a condition. The distinction is clarified by the following cases.

As seen in Poussard v Spiers and Pond[1] an actress was under a contractual obligation to play the leading part in an opera in London from the beginning show. Due to illness the actress was unable to attend the final rehearsal along with the first four shows and upon offering to return for the fifth show she was refused by the producers. The said actress brought a claim for wrongful dismissal, when in court it was decided that the actresses involvement in the first four performances was a condition which was essential to the contract, therefore the breach allowed the producers to consider the contract as finished.

As seen in Bettini v Gye[2] a singer was under a contractual obligation to sing in an array of concerts and to participate in six days of rehearsals prior to the initial performance. The singer arrived three days late, therefore only having three days of rehearsals left. It was decided by the judge that this was not a significant condition. The duty to participate in rehearsals for the six days was not a condition but a warranty. This breach allowed the other party to sue for damages but not to terminate the contract.

The parties to the contract are permitted to organise the relative significance of the terms of their contract. Nevertheless, even in the circumstances where parties describe a term as a condition it is open to the court to presume that the parties could not have envisioned the term to have that effect.

An example of this is viewed in Schuler v Wickman Machine Tool Sales[3] Wickman was given solitary distribution rights in the UK of Schuler's panel presses for a four and a half year. Clause 7(b) of the agreement specified that:

“It shall be condition of this agreement that (i) (Wickman) shall send its representatives to visit (the six large UK motor manufacturers) at least once in every week for the purpose of soliciting orders for panel presses...”

Representatives of Wickman’s failed to carry out numerous visits and it was claimed by Schuler that this was a breach of condition under clause 7(b) and as it was a material breach as stated under clause 11(a) of the agreement which permitted Schuler to regulate the agreement. The House of Lords held that clause 7(b) was not a condition. It was held by the House of Lords that clause 7(b) was not a condition as the parties could not have envisioned that a single breach, how insignificant, would allow the innocent party to end the contract.

In this case the House of Lords overlooked the precise wording of the contract, supposedly on the grounds that to understand the specific clause as a condition was so unreasonable that it could not have been envisioned by the parties. Nevertheless, in a differing judgement, Lord Wilberforce, was of the view that the precise use of the word “condition” should have been conclusive of the matter. Indisputably, if the use of the word “condition” is not decisive of the matter then this will produce problems of uncertainty; not least that the innocent party will be uncertain as to if he has the right to end the contract for breach of that term.

INNOMINATE TERMS IN CONTRACT LAW

The distinction between warranties and conditions is no longer regarded as comprehensive. In Hong Kong Fir Shipping Co v Kawasaki Kisen Kaishi Ltd.[4] the Court of Appeal held that there are numerous terms which at the beginning are neither warranties nor conditions but are of an intermediate or innominate nature. These are called innominate terms in contract law. A slight breach of such a term will only quantify to a breach of warranty but a major breach thereof will permit the innocent party to end the contract and claim damages. This signifies an approach which is more flexible approach and allows the court a good deal of flexibility when dealing with cases where the supposed innocent party is endeavouring to use a minor breach in order to remove themselves from a contractual agreement which is no longer commercially beneficial.

The Court of Appeal in the Hong Kong Fir case took the view that the legal penalties of a breach of contract be contingent on the consequences of the breach or as Diplock LJ says “the nature of the event to which the breach gives rise.” This is rather different from the traditional method based on the difference between important terms (conditions) and minor terms (warranties); the difference resting on the parties’ intentions at the time when the contract was made. Undeniably, justice may be promoted by this analysis but is attained at the cost of certainty, in particular certainty as to whether the innocent party as a result of the breach has the right to end the contract. Read more.

[1] (1876) 1 QBD 410 [2] (1876) 1 QBD 183 [3] [1974] AC 235 [4] [1961] 2 Lloyd’s Rep 478