Commercial & Technology Contracts Mythbuster: all terms are equal?

Commercial & Technology Contracts Mythbuster: all terms are equal?

Commercial & Technology Contracts Mythbuster: all terms are equal?

It doesn't matter if you call a contract term a warranty, undertaking, condition or representation. They're all the same aren't they?

If you enter into a contract, you may think that, regardless of the wording used, the legal effect of each obligation is the same. It's a reasonable assumption, but not in fact entirely the case. The courts have classified terms, and sometimes this affects what happens when they are not complied with. Use of one word to describe the obligation, rather than another is often an indicator of how the term will be classified, if challenged, but not always.

Warranties

In the strict legal sense, a warranty is the name given to an ordinary term of the contract and generally speaking, most terms will be legally classified as warranties unless there is a reason to classify them as something else. Breach of a term that is classified as a warranty does not generally give the non-defaulting party any “special” rights; breach will give the non-defaulting party the right to claim damages for loss suffered, in the usual way, but not an automatic right to terminate the contract.

“Don't people give warranties” - does that have a different meaning? Yes and no - in a contract, statements or assurances made about factual matters are often designated as “warranties”. By way of example, a contracting party may specifically “warrant” that it has obtained all of the necessary approvals required to enter into a contract.

Even so, calling a term a “warranty” has no special consequence unless it can be shown such a consequence was agreed, or the obligation is actually a condition or a representation, see below. It's all a question of context and interpretation.

"It is a condition that ..."

A condition is a more significant term of the contract, and so in contrast to the position for a breach of a term that is a warranty, breach of a condition gives the non-defaulting party the right to either:

  • Treat the breach as a repudiation and terminate the contract 
  • Affirm the contract (ie treating the contract as continuing) 

To the extent that a non-defaulting party suffers loss or damage, it can also claim damages.

Whether a term is a condition or not will depend at least partly on whether it is called a condition in the contract, as calling it a condition shows an intention for the term to have certain consequences. However this is not conclusive and the courts have found in some cases that the parties did not really intend that termination should result from a breach of something called a condition when the consequences of breach are trivial.

Sometimes legislation expressly says that warranties or conditions are implied into contracts e.g. the Sale of Goods Act 1979, implies a condition that the goods are of satisfactory quality in B2B contracts.

If the consequences of a breach could range from minor to serious it is more likely the obligation will be an “intermediate term”, judged on its effects.

"The vendor undertakes..."

Sometimes contracts rather grandly have the parties undertaking to carry out certain obligations, which can sound more impressive than just agreeing to do them. However, in the absence of any other factors, the word “undertakes” has no particular significance. Such a term will fall to be assessed as a warranty or condition as above and may well be viewed as an intermediate term, if its breach could be serious or minor.

In some legal areas, an undertaking does have a specific meanings, such as an undertaking given by a solicitor to another solicitor, but these are not normally relevant to contract interpretation issues. 

"The vendor represents..."

A representation in a contract is normally a statement of fact, for example that the accounts of a company are accurate. If such a statement is untrue then the other party may have a claim not only for breach of contract (as above), but also for “misrepresentation”. This is a complex area and not all statements “count” as representations, but where a claim can be brought, the rules on how damages are assessed are different as between breach of contract and misrepresentation. This means that in any given scenario, one route may give a more favorable outcome to the injured party than the other. It may also be possible to “rescind” the contract for misrepresentation. Rescission is not always available (the court will decide), because it is a remedy that not only ends the contract, but also restores parties, so far as possible, to the position that they were in before they entered into the contract. So this remedy will not be available if it is not possible to do this eg because the subject of the claim has been destroyed. If so, then the innocent party can still claim damages.

So ...

The take home lessons are:

  • How the parties designate a term is not always conclusive
  • The classification of terms within a contract can have a significant effect on the remedies available to the non-defaulting party.   

Always take advice.

 

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