Understanding Anglo-American contract models (part 6)

Previous posts about Anglo-American contract models reveal that a full understanding of contract language is of paramount importance to avoid (costly) mistakes. This is particularly true when a template is used for contracts that are not governed by the law on which the template is based. The following discussion about the technical distinction between condition and warranty is very useful to illustrate this point.

Conditions and warranties

Contracting parties are frequently exposed to significant liability issues due to the usage of Anglo-American contract templates for commercial sales contracts that are not governed by English or US law. A major factor in this regard is a misunderstanding of the distinction between conditions and warranties. The first thing to note is that the word condition in an Anglo-American contract model should not be confused with its traditional meaning. That is, a situation that must exist before something else is possible (Oxford University Press). In a similar vein, Black’s Law Dictionary entails the following meaning: “A future and uncertain event on which the existence or extent of an obligation or liability depends; an uncertain act or event that triggers or negates a duty to render a promised performance.”

However, it is not possible to rely on the above-mentioned definitions when dealing with an Anglo-American contract template. This is because conditions (under English law) are considered as a term of the contract that, if breached, gives the aggrieved party the right to either: (i) treat the breach as a repudiation and terminate the contract (technically, to treat the contract as discharged, so that future contractual obligations come to an end); or (ii) affirm the contract. A warranty is a contract term the breach of which does not give the aggrieved party the right to treat the contract as repudiated. A breach of a warranty will only entitle the aggrieved party to claim damages for any loss suffered. When looking at the difference from a purely technical point of view, it can be said that conditions are terms which go the very root of a contract and that a warranty is not so imperative that the contract will subsist after a breach.

While this may seem like an uncomplicated distinction, the English case Air Transworld Limited v Bombardier Inc [2012] EWHC 243 (Comm)As illustrates the importance of understanding the law in this regard. This case concerned the sale of a private jet aircraft subject to English law. Nonetheless, the lawyers of Bombardier used a US contract template without taking into account the English Sale of Goods Act. Consequently, the contractual provision that waived “ANY IMPLIED WARRANTY OF MERCHANTABILITY OR OF FITNESS FOR A PARTICULAR PURPOSE.” did not exclude the implied terms about quality or fitness under Section 14 of the Sale of Goods Act. This is because Section 14(6) stipulates that the implied terms concerning quality and fitness are conditions. For waiving the legal consequences it is not enough to state that one is excluding “warranties”.  The underlying reason is that the English Sale of Goods Act makes a clear distinction between the consequences of breach of a condition (the aggrieved party is entitled to terminate the contract) and a breach of a warranty (the aggrieved party is entitled to claim damages).