Contract drafting. What is a "warranty"? Part 1

What is a “warranty”? 

I was recently asked, “what is meant by a warranty?”  The answer, as is the case with many legal questions, is, "it depends".

The term ‘warranty’ has several different meanings. And sometimes lawyers will use the term with different meanings in the same contract. The questioner wanted to know how a warranty differs from a guarantee. He was not, therefore, asking how a warranty differs from a ‘representation’ or from a ‘condition’ or from an ‘undertaking’.  He might however have been referring to a warranty in the sense of a 'collateral warranty'.  

When interpreting a contract, the court will seek to ascertain the intentions of the parties  (assessed objectively) from the specific words used at the specific time and place, taking into account the factual background. Those drafting and negotiating contracts, and who use terms such as 'warrants' or 'warranty', should identify what they want from the contract and then ensure that the contract is clear in expressly providing for what they want.

This Post considers a warranty in the context of whether a term is a warranty or a ‘condition’.   The other meanings of ‘warranty’ will be the subject of subsequent Posts.  Throughout, the Posts deal with the position in the law of England and Wales.  

Warranty v Condition v Innominate Term

Contract terms can be divided into:

• conditions;
• warranties; and,

• innominate (or intermediate) terms.

Condition

In this context, a 'condition' means that the term is a fundamental term of the contract. This is a crucial distinction as a breach of a condition entitles the innocent party to treat the contract as discharged and to sue for damages. The contract will, therefore, be at an end at the option of the innocent party.

A key issue when drafting and negotiating contracts is to identify whether or not you want a particular term to be a condition.  If you do not want the other side to be able to terminate the contract for a breach, however minor, then you must ensure that the term is not a condition.

For example, a manufacturer agrees to manufacture a machine and to deliver it on a certain day. The manufacturer is one day later in delivering the machine. If time of delivery is a condition, the buyer can refuse to take delivery and can also sue for damages.  There is no margin for error. It may therefore be very important for the manufacturer to ensure that the term is not a condition but a ‘warranty’.

Warranty

In this sense, a warranty is a less important term, breach of which will not allow the innocent party to treat the contract as at an end. In the example of the delayed delivery of the machine, the buyer will be able to seek damages for delay but will have to accept late delivery.  Note that the delay cannot continue indefinitely and remain a breach only of a warranty. The buyer may be able to serve reasonable notice on the manufacturer stating a date for delivery and making time of the essence. Or a court may decide that the delay in delivery is so long that the buyer has a right to terminate.

Interpreting the contract

Whether a term is a condition or a warranty will depend on the contract between the parties. The contract may contain express provisions that will settle the matter. The term may, for example, be stated to be “of the essence”.  These words have the effect of making the clause a condition. Alternatively, there may be an express statement that time of delivery is “not of the essence”. 

Note that merely calling a term a “condition” in the contract may not be sufficient to render the term a condition in the sense that we are referring to here. The word ‘condition’ is used by lawyers in several different ways, such as when referring to all the terms of a contract as ‘terms and conditions’.

Many contracts do not expressly make it clear whether a term is a condition or a warranty. In such cases, in the event of a dispute, it will be left for the court to interpret the contract and ascertain objectively the status of the term, taking into account the words used and the factual background at the time of the contract. For example, time for delivery is likely to be a condition if the goods to be delivered are a consignment of bananas.

Innominate term

An innominate or intermediate term is one that, at the time of the contract, could be a condition or a warranty. All will depend on the effect of a breach.

For example, a term may provide that goods are to be shipped in a ‘good condition’. The effect of a breach may be substantial if the condition of the goods is particularly bad, or trivial if there are only minor defects in the state of the goods.  If the former, the buyer can argue that there has been a breach of a condition and, if so, can treat the contract as discharged. If the latter, the buyer can sue for damages.

Practical points

If a term is important, you can make it a condition by using clear words. The phrase “of the essence” is useful shorthand that will achieve this. Alternatively, or additionally, you can state that a breach of the term will entitle you to treat the contract as discharged and to sue for damages. You may not succeed in making a term a condition simply by calling it a ‘condition’. 

If you do not want a term to be of the essence, ensure that it is not.