“Warranty” and “Condition”: Revisiting Problematic English Terminology

[This is my redo of this 20 November 2018 post. I decided I could do much better.]

Let’s revisit this 2012 IPDraughts post, by Mark Anderson. It will allow us to consider some English contract-law terms of art.

I’ll let you read Mark’s post for the background. The gist of it was that in a dispute over an allegedly defective airplane, Bombardier sought to avoid application of sections 13 and 14 of the English Sale of Goods Act 1979 by invoking the contract provision that waived “ANY IMPLIED WARRANTY OF MERCHANTABILITY OR OF FITNESS FOR A PARTICULAR PURPOSE.” But perhaps because the contract used in the deal was based on a U.S. contract (the all capitals are something of a giveaway), the wording left something to be desired for purposes of English law.

Here’s Mark’s description of what happened:

Unfortunately for Bombardier, there is a long line of English case authority, discussed at length in Cooke J’s judgment, stating that in order to exclude section 14, it is necessary to state explicitly that one is excluding the “conditions” of merchantability (now satisfactory quality) and fitness for purpose. It is not enough to state that one is excluding “warranties”. This is because the Sale of Goods Act makes a clear distinction between promissory conditions (breach of which entitle the party suffering from a breach to terminate the contract) and warranties (breach of which only entitle that party to claim damages).

Let’s consider the distinction between conditions and warranties. Here’s how Practical Law Company defines condition:

A condition is a term of the contract that, if breached, gives the non-defaulting party the right to either:

• 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
• Affirm the contract.

And here’s how it defines warranty:

A warranty is a contract term the breach of which does not give the non-defaulting party the right to treat the contract as repudiated. A breach of warranty will only entitle the non-defaulting party to claim damages for any loss suffered.

Here’s how Wikipedia explains the distinction: “By way of illustration, an actress’ obligation to perform the opening night of a theatrical production is a condition, whereas a singers [sic] obligation to perform during the first three days of rehearsal is a warranty.”

This meaning of condition has nothing to do with the broader meaning of condition under US law, which Black’s Law Dictionary states as follows: “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.”

Friends, I suggest all this is profoundly bizarre, for three reasons.

The First Reason

The following obligation is the key obligation in a contract between Widgetco and Acme relating to the polishing of Widgetco’s 10,000 widgets: Acme shall polish the Widgets on the first day of each of the twelve months of the year.

Given the distinction between conditions and warranties, you’d think you’d be able to determine at signing whether this sentence is a condition or a warranty. But here are three scenarios.

• Scenario 1: On 1 February 2022, Acme polishes all 10,000 Widgets.
• Scenario 2: On 1 February 2022, Acme polishes 9,999 Widgets. They polish the remaining one by 12:10 a.m. on 2 February.
• Scenario 3: On 1 February 2022, Acme polishes no Widgets. They polish ten Widgets on each of the following ten days, then stop polishing Widgets.

Under scenario 1, Acme performs. Under scenario 2, Acme breaches, but trivially. In scenario 3, Acme breaches big time. That suggests under scenario 2, the sentence is a warranty, whereas under scenario 3, it’s a condition.

So determining pre-performance whether an obligation is a condition or a warranty requires that you assume binary outcomes, either absolute performance or absolute breach. But that’s not realistic—scenarios 2 and 3 show that there are degrees of breach.

Given that the obligation in question remains unchanged, it’s bizarre that the label applied to the sentence would vary depending on the extent of breach. It’s the breach that varies, not the sentence!

So how would this be considered under US law? The general rule under common law is that uncured failure by one party to perform can suspend or discharge the other party’s duty to perform only if the failure is material or substantial. Generally, nonperformance is considered material “only when it goes to the root, heart, or essence of the contract; or is of such a nature as to defeat the object of the parties in making the contract; or, as it has sometimes been said, when the covenant not performed is of such importance that the contract would not have been made without it.” 14 Williston on Contracts § 43:6 (4th ed.) (footnotes omitted).

So under US law, the question is whether the breach is material. That makes sense.

The Second Reason

The second problem with condition and warranty as terms of art is that in contracts governed by English law (as in US contracts), the verb warrants is used, either on its own or in the cursed doublet represents and warrants, to introduce statements of fact and, often enough, obligations and other random stuff. And the noun warranty is used in an analogous manner.

It seems a shockingly bad idea to use warranty as an artificially narrow term of art if that noun and the related verb are used in contracts in ways that bear no relation to the term of art.

The Third Reason

In addition to the term of art condition, there’s the term of art promissory condition. Ah, that must be a subset of condition. Uh, hold on, Chitty on Contracts at 2-158 says, “[The word condition] may refer to the performance by one party of his undertaking. Where, for example, A agrees to work for B at a weekly wage payable at the end of the week, the contract is immediately binding on both parties, but B is not liable to pay until A has performed his promise to work. Such performance is a condition of B’s liability, and, as A has promised to render it, the condition may be described as promissory.”

That’s broadly related to the Black’s Law Dictionary definition of condition quoted above. In other words, under English law the meaning of promissory condition appears to have nothing to do with the meaning of condition. That’s asking for confusion.

What It All Means

I wasn’t surprised to have Mark say this in his post:

There is a strong commercial argument that this technical distinction between conditions and warranties has outlived its usefulness, does not reflect modern commercial practice, and should no longer form part of English law. In one of the cited cases, Rix LJ (a very senior, current English judge specialising in commercial law) made comments to this effect, but felt bound by House of Lords (now Supreme Court) authority.

The technical distinction might have outlived its usefulness, but it doesn’t appear to be going anywhere. For one thing, it’s enshrined in the Sales of Goods Act, as Mark notes in his post.

The contrast on display here—bollixed English terminology, relatively sensible US approach—matches what I’ve seen in other contexts. For some background, see the end of my recent post on efforts (before the update). Here’s how I’d summarize things:

• In the US, people who work with contracts make stuff up, and many judges are bad at textual interpretation (for more on the latter point, see this 2020 blog post).
• In England, people who work with contracts make stuff up, and so do the courts.

Of the two, the English problem is the bigger problem.

Normally, drafters can opt out of legalistic notions just by saying stuff clearly. In this case, the problem is that the legalistic approach attributes occult meaning to bog-standard contracts terminology.

[Updated 1:00 pm, 6 February 2022: By the way, I’m not an English lawyer, so there’s a limit to how much context I can provide. You might find helpful this comment on LinkedIn.]