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Scope and content: Classification of terms

Overview

ClassificationThere are a number of ways terms may be classified which may impact upon remedies available for breach. For example:

  • terms classified as conditions will, if breached, allow the innocent party to terminate the contract;
  • terms classified as warranties (less important terms) will generally only permit the innocent party to claim damages for breach.

In some cases it will not be easy to classify terms as either conditions or warranties and they may instead by classified as intermediate terms. When intermediate terms are breached the remedy will depend on the seriousness of the breach itself.

Given the impact on remedies, it is important to understand how courts will classify the terms of a contract.

 

Conditions

The Court in Associated Newspapers Ltd v Bancks [1951] HCA 24, when considering whether a term in the contract was a condition, cited (with approval) the Jordan CJ in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 (also cited with approval by the majority of the High Court in Koompahtoo Local Aboriginal Land Council v Sanpine Pty Limited (2007) 233 CLR 115):

The question whether a term in a contract is a condition or a warranty, ie, an essential or a non-essential promise, depends upon the intention of the parties as appearing in or from the contract. The test of essentiality is whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or a substantial performance of the promise, as the case may be, and that this ought to have been apparent to the promisor. If the innocent party would not have entered into the contract unless assured of a strict and literal performance of the promise, he may in general treat himself as discharged upon any breach of the promise, however slight.

See Associated Newspapers Ltd v Bancks [1951] HCA 24 for further discussion

 

Warranties

A warranty, in the context of classification of terms, refers to a term that is less important than a condition. Breach does not allow the innocent party to rescind.

The distinction between warranties and conditions has been utilised in legislation. For example, the Goods Act 1958(Vic) defintes warranties in the following way:

Goods Act 1958 (Vic) s 3
"warranty" means 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 to a right to reject the goods and treat the contract as repudiated.

That same Act also implies certain terms into contracts for the sale of goods. Some are referred to as conditions and others as warranties. For example, it is an 'implied condition' that the seller has the right to sell goods, but an 'implied warranty' that the buyer shall have and enjoy quiet possession of those goods.

In addition, the Goods Act (s 16) makes clear that whether or not the parties refer to terms as conditions or warranties is not decisive:

Goods Act 1958 (Vic) s 16(2)
Whether a stipulation in a contract of sale is a condition the breach of which may give rise to a right to treat the contract as repudiated, or a warranty the breach of which may give rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated, depends in each case on the construction of the contract. A stipulation may be a condition though called a warranty in the contract.

 

Intermediate terms

An intermediate term is one that has not or could not be classified as a condition or warranty at the time of contracting. Whether or not a party can end a contract for breach will depend on the significance of the breach itself. This is generally determined by assessing whether the breach goes to the 'root of the contract' (a concept Justice Kirby in a dissenting opinion described as 'a very imprecise and apparently self-justifying notion').

In Koompahtoo Local Aboriginal Land Council v Sanpine Pty Limited (2007) 233 CLR 115 the High Court, by majority (Kirby J adopting a different approach to classification) formally adopted the concept of intermediate terms, assessing whether they give rise to a right to terminate by reference to whether the actual breach that has taken place goes to the 'root of the contract'.

The majority observed that there were two circumstances in which a party can terminate a contract for breach:

  1. When the term breached is a condition (essential term)
  2. Where there has been a 'sufficiently serious breach of a non-essential term'. This type of term falls between the 'essential' conditions and 'non-essential' warranties and may be referred to as 'intermediate' terms.

Breaches of intermediate terms will be 'sufficiently serious' to allow breach where the breach goes 'to the root of the contract'; that is, they are 'such as to deprive the injured party of a substantial part of the benefit to which he is entitled under the contract'.