There are three recognised classes of contract terms:-
The classification is significant for the effect on the availability of different remedies to the innocent party for breach of contract. In each case, damages will be an available remedy if loss has been suffered.
Conditions are generally more important than warranties as they go to the root of the contract. Breach of a condition allows the innocent party to terminate the contract (repudiatory breach).
Factors that indicate a term is a condition (rather than a warranty) are:-
- The contract designates it as such and upon examination of the contract the term was intended to take effect as a condition.
- The parties explicitly agree that a term should take effect as a condition.
- The nature of the contract, the conduct of parties or the surrounding circumstances indicate that the parties intended the term to take effect as a condition.
- Case law establishes it as such; or
- An Act of Parliament or secondary legislation designates it as such.
Warranties are defined negatively as a term of a contract that is neither a condition nor an innominate term. The key feature of warranties is that a breach of warranty only entitles the innocent party to a remedy in damages. It does not entitle the innocent party to terminate the contract.
An innominate term exists halfway between a condition and a warranty. An innocent party may terminate the contract on a breach of an innominate term if that breach is sufficiently serious. There are several tests for whether a breach of contract is sufficiently serious, including:-
- Whether the innocent party is deprived of substantially the whole benefit of the contract;
- Whether the breach goes to the root of the contract.
Factors relevant under these two tests include:-
- The degree of detriment caused to the innocent party;
- The delay caused to the innocent party;
- The value of performance to the innocent party;
- The cost to the innocent party of making good defective performance;
- Any offer by the original party to remedy the breach;
- Whether there have been previous breaches;
- Whether future breaches are likely; and
- Whether damages will be adequate compensation.
There is a certain degree of circularity to the test for whether a term should be classified as an innominate term:-
- An innocent party can terminate a contract for a serious breach because the clause is an innominate term; and
- A term is an innominate term if the contract can be terminated for serious breaches.
Therefore, the right to terminate a contract for a breach of an innominate terms springs not from any inherent qualities attributable to innominate terms generally, but rather to the assessment that the party ought to be able to terminate in the circumstances. Innominate term is simply the label given to such terms in these cases.