Conditions and Warranties in Australian Contract Law

This report discusses the significance of conditions and warranties in Australian contract law. It argues that even in the case of a “minor” breach of the condition of a contract, the innocent party has the right to terminate the entire contract. Certain exceptions to this rule will be evaluated in the report as well which are present in Australian contract law such as the exclusion clause and waiver of rights in which the contract is not terminated even after violation of a condition.

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Corporation and Contract Law

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I INTRODUCTION
A contract is referred to a legally binding relationship which is constructed between
two or more parties who agree to its terms which are enforceable on them.1 The terms of a
valid contract are enforced on each contracting party and they have to comply with them.
Certain elements are necessary to be fulfilled by the parties in order to form a valid contract.
These elements include offer, acceptance, intention, consideration, and capacity of parties. In
case the contractual obligations are violated by a party, then the aggrieved party has the right
to claim remedies under the contract. Along with remedies the innocent party also has the
right to terminate the contract under the common law. This remedy is available for the parties
in case a condition of the contract is violated.
The terms of the contract are divided into two categories which include condition and
warranties. The conditions are essential terms of a contract based on which the contract is
formed between parties.2 On the other hand, warranties are referred to non-essential terms in
a contract. These terms are sub parts, and violation of these terms did not allow the parties to
terminate their contract. In the case of Australian contract law, the conditions are treated as
significant terms and violation of these terms allows the parties to terminate the contract. This
report will argue that even in the case of a “minor” breach of the condition of a contract, the
innocent party has the right to terminate the entire contract. Certain exceptions to this rule
will be evaluated in the report as well which are present in Australian contract law such as the
exclusion clause and waiver of rights in which the contract is not terminated even after
violation of a condition.
1 Ewan McKendrick and Qiao Liu, Contract Law: Australian Edition (Macmillan International Higher
Education, 2015).
2 Baris Soyer, Warranties in marine insurance (Routledge, 2012).

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II CONDITIONS AND WARRANTIES
Conditions and warranties are two classifications of contractual terms which are
included by parties into a legal contract. It is important for parties to identify each of these
terms since it assists parties in quickly determining their remedies in case of breach of the
contract.3 A warranty is referred to non-essential term of the contract which is less significant
than compared to a condition. Generally, the warranties in a contract are written as a promise
or an assurance which is given by one contracting party to another, for instance, the service
contract formed between two parties can have a term in which they agree to provide staff
training at particular level. In case this term is violated by the contractual party, then it did
not deprive the innocent party of the whole benefit of the contract. Furthermore, a term which
is considered as a warranty in one contract can be considered as a condition in another. In
case of violation of the warranty in a contract, the innocent party has the right to demand
damages only.4 The aggrieved party cannot terminate the contract in case a warranty is
breached by another party.
A condition is referred to a significant term of the contract which goes to its roots. In
case of a sale of goods contract, a clause can be included by the parties that states the time of
its essence, for instance, the goods must be delivered within a specified time. In case this
term is not fulfilled by the parties, then the aggrieved party has two options. The first option
is that the innocent party can terminate the contract to remove the contractual obligations.
The second option is that the aggrieved party can treat the contract as continuing and
continue to comply with the contractual terms. In either of these cases, the innocent party has
the right to claim damages from the party who violated the terms of the contract.5 Moreover,
3 John W Carter, G J Tolhurst and Elisabeth Peden, ‘Developing the Intermediate Term Concept’ (2006) 22
Journal of Contract Law 268.
4 Paul McDermott, Contract Law (Bloomsbury Publishing, 2017).
5 Roger Gamble, ‘Australia and the Intermediate Term – ‘No country for old rules’’ (2008) 34(2) Monash
University Law Review 457.

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in case of violation of a condition of the contract, the innocent party is entitled to terminate
the contract regardless of the consequences or nature of the breach. If the aggrieved person
has suffered no or little loss due to the breach, still he/she has the right to terminate the
contractual liability.6 Therefore, the aggrieved party has the right to rescind a contract even if
there is a “minor” breach in the condition of the contract.
III IMPORTANCE OF CONDITION IN AUSTRALIAN CONTRACT LAW
In Australian contract law, the importance of the condition of a contract is recognised
by the courts. In the case of Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd7,
the court provided three situations in which the contract can be terminated. These three
situations include serious breach of non-essential term, breach of condition, and if one party
‘renounced’ the contract.8 The judgement of this case shows that the Australian courts accept
the termination of a contract even if there is a minor breach in the condition of the contract. A
similar view was given in the court in the judgement of Ankar Pty Ltd v National Westminster
Finance (Australia) Ltd9 case. In this case, the court provided that the breach of a condition in
a contract given automatic right to the aggrieved party to rescind the contract.10 This approach
is adopted in the contract law in order to reduce the exploitation of essential terms of a
contract by the parties.
Moreover, the court provided in the case of Tramways Advertising Pty Ltd v Luna
Park (NSW) Ltd11 a test of ‘essentiality’ which is used for identifying whether the term is a
condition or warranty. In this case, it was held by Jordan CJ that the test of essentiality
evaluates the general nature of the contract as a whole in order to determine whether the term
6 Mindy Chen-Wishart, Contract law (Oxford University Press, 2012).
7 (2007) HCA 61
8 James Fisher, Uncertainty, ‘Opportunism and the Intermediate Term: The Hong Kong Fir Principle in English
and Irish Contract Law,’ (2015) 14 Hibernian LJ 96.
9 (1987) HCA 15
10 Dilan Thampapillai et al., Australian commercial law (Cambridge University Press, 2015).
11 (1938) 38 SR (NSW) 632

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is a condition or warranty.12 This test evaluates whether the promise which is made by a party
is so important that the contract was formed on such promise otherwise the parties would not
have entered into a contractual relationship. The court analysed in this test whether strict and
complete compliance with the promise was assured by the parties before forming the
contractual relationship. If this assurance were not given by the party, then the innocent party
would not have entered into the legal contract. If these elements are fulfilled in the contract,
then the term is considered as a condition in the contract based on which the aggrieved party
has the right to terminate the contract.13 This statement was upheld by the High Court in this
case.
In other words, if the parties wanted to terminate the contract in case of a minor
breach of its terms, then it is necessary to establish that such term is a condition in the
contract. It is important for the parties to identify the difference between conditions and
warranties in a contract. Kirby J had agreed with the provision that the violation of condition
given rise to the right to the party to terminate the contract.14 The objective of this provision
is to ensure that the contractual parties take their obligations seriously. The contracts are
binding relationships which should be seen in such way. Therefore, in case the objective of
the contract is not fulfilled, or the innocent party did not receive the benefit of the contract,
then the aggrieved party should have the right to terminate the contractual relationship
because it serves no purpose. The innocent party has the right to terminate the contract
irrespective of the fact that he/she has suffered any damages due to the violation of the
condition of the contract.15 The aggrieved party has the right to claim damages as well along
12 James Allsop, ‘Values in law: How they influence and shape rules and the application of law’, (2017) 44 (2)
Brief 49.
13 J W Carter, ‘The implications of contractual terms: Problems with Belize Telecom,’ (2013) 27 (3)
Commercial Law Quarterly: The Journal of the Commercial Law Association of Australia 4.
14 Jill Poole, Textbook on contract law (Oxford University Press, 2016).
15 John W Carter, ‘Intermediate Terms arrive in Australia and Singapore’ (2008) 24 Journal of Contract Law
226.

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with terminating the contract. The compensation is demanded for the loss suffered by the
party even if the innocent party decides to avoid the termination of the contract.
IV EXCEPTIONS
There are certain exceptions which can be used by parties to avoid terminate of the
contact in case the condition is breach by another party. In these situations, the contract is not
terminated in case there is only a minor breach of the contract. Firstly, the condition in a
contract is considered as warranty in case the innocent party decided to waive the right to
rescind the contract.16 If the aggrieved party did not want to terminate the entire contract in
case of violation of an essential term, then such term is treated as warranty in the contract.
Another exception is exclusion clause which is included by parties into the contract. The
exclusion clause is referred to a contractual provision which is used by parties to excuse their
liability which raises under a contract. As per this clause, the parties can eliminate their
liabilities which raise under a contract by including an exclusion clause. The parties can
provide that all the conditions warranties and other expressed or implied liabilities or
guarantees are hereby excluded based on which the innocent party did not have the right to
terminate the contract or demand damages for the injuries suffered. Darlington Futures Ltd v
Delco Australia Pty Ltd17 is a relevant case in which the court defined the element of
exclusion clause and provided policies regarding how parties should include it in the
contract.18 Other than certain exceptions, it is clear that the breach of a condition gives the
right to the innocent party to terminate the contract regardless the fact that the breach is
significant or minor. This rule protects the contractual rights of innocent parties to ensure that
parties did not exploit their contractual rights.
16 Neil Andrews, Contract law (Cambridge University Press, 2015).
17 (1986) 161 CLR 500
18 David Martino, ‘Contract law: Exclusion clauses: Consequential loss from Hadley v Baxendale to
Environmental Systems and beyond,’ (2013) 51 (11) Law Society Journal: the official journal of the Law
Society of New South Wales 78.

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V CONCLUSION
In conclusion, the terms of a contract are categorised into conditions and warranties
which are referred as essential and non-essential terms respectively. The condition is an
important term, and the violation of this term gives the right to the innocent party to terminate
the entire contract. On the other hand, if a warranty in the contract is violated, then the
aggrieved party did not acquire the right to end the contractual relationship. This principle is
recognised by the Australian contract law as well. Examples of various cases are evaluated in
the report in which Australian courts recognise the rights of parties to terminate the contract
in case a condition of the contract is violated. There are certain exceptions under which the
contract is not rescinded ever after violation of the condition in a contract. Firstly, if the
aggrieved party did not want to terminate the entire contract on violation of a condition, then
the condition is treated as warranty in the contract. Secondly, if an exclusion clause is
included by a party in the contract to eliminate all the liabilities, then the innocent party
cannot terminate the contract or demand compensation for violation of the condition.
However, it can be concluded that the Australian contract law recognises that the condition in
a contract is a significant term breach of which gives the right to the innocent party to
terminate the contract. This element is recognised by the court in order to protect the
contractual rights of parties to avoid exploitation of essential terms in a contract.

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VI BIBLIOGRAPHY
A Articles/Books/Reports
Allsop, James, ‘Values in law: How they influence and shape rules and the application of
law’, (2017) 44 (2) Brief 49.
Andrews, Neil, Contract law (Cambridge University Press, 2015).
Carter, J W, ‘The implications of contractual terms: Problems with Belize Telecom,’ (2013)
27 (3) Commercial Law Quarterly: The Journal of the Commercial Law Association of
Australia 4.
Carter, John W, ‘Intermediate Terms arrive in Australia and Singapore’ (2008) 24 Journal of
Contract Law 226.
Carter, John W, G J Tolhurst and Elisabeth Peden, ‘Developing the Intermediate Term
Concept’ (2006) 22 Journal of Contract Law 268.
Chen-Wishart, Mindy, Contract law (Oxford University Press, 2012).
Fisher, James, Uncertainty, ‘Opportunism and the Intermediate Term: The Hong Kong Fir
Principle in English and Irish Contract Law,’ (2015) 14 Hibernian LJ 96.
Gamble, Roger, ‘Australia and the Intermediate Term – ‘No country for old rules’’ (2008)
34(2) Monash University Law Review 457.
Martino, David, ‘Contract law: Exclusion clauses: Consequential loss from Hadley v
Baxendale to Environmental Systems and beyond,’ (2013) 51 (11) Law Society Journal: the
official journal of the Law Society of New South Wales 78.
McDermott, Paul, Contract Law (Bloomsbury Publishing, 2017).

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McKendrick, Ewan and Qiao Liu, Contract Law: Australian Edition (Macmillan
International Higher Education, 2015).
Poole, Jill, Textbook on contract law (Oxford University Press, 2016).
Soyer, Baris, Warranties in marine insurance (Routledge, 2012).
Thampapillai, Dilan et al., Australian commercial law (Cambridge University Press, 2015).
B Cases
Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) HCA 15
Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500
Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) HCA 61
Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632