This article has been written by Sumit Kumar pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution course from LawSikho.
This article has been edited by Shashwat Kaushik.
Table of Contents
Introduction
In this article, various aspects revolving around conditions and warranties will be discussed, as well as the legal impacts and remedies available. It is important to state about the relevant statutes that govern conditions and warranties under the Indian Contract Act, 1872, and the Sales of Goods Act, 1930. The latest case laws will also be discussed briefly, along with relevant sections under the statues. The article will also analyse the elements of a contract and the significance of the same, which need to be considered while getting into a contract. After the details are analysed, it leads to the fulfilment of the contract as the relationship between the parties is specified clearly.
The basis for any transfer or transaction is the contract itself, as it ensures that parties adhere to the agreement and fulfil the promise as decided. The conditions and warranties play an important role as they define the terms and conditions of the contract. It is very easy to get confused between them as they sound similar to each other, but in reality, they have different legal meanings. It is important to understand the difference between the two terms. Once the difference is understood, the conditions will be clear to understand, and the performance of the contract will not be affected.
Conditions and warranties go hand in hand, and contracting parties may not understand the interplay between them. In conditions, if terms are breached, it may lead to the termination of the contract and damages, whereas in warranties there is only a claim for damages.
Conditions and warranties
Conditions
The term condition defines the rights and duties that are required to be fulfilled in a contract. If the stipulations or the provision are not performed, then it will hamper the performance of the contract. These are very critical, as they lay the foundation of any contract and its execution. Different types of conditions are discussed below:
Condition precedent
Condition precedents are those conditions that must be performed before the contract is due. If these conditions are not fulfilled, then the contract will not come into force.
Condition Subsequent
Condition subsequent are those conditions that, if they occur, will automatically terminate the contract once it has come into force.
Concurrent conditions
Concurrent conditions are those where mutual obligations must be performed concurrently.
Warranties
Warranties are secondary terms in a contract, meaning they are additional stipulations that complement the main agreement. In the event of a breach of warranty, the affected party has the right to claim damages for the losses incurred. However, a breach of warranty does not automatically lead to the termination of the contract. This distinction is crucial in understanding the nature of warranties and the expectations associated with them.
It is important to note that not all breaches of warranty are treated equally. The severity of the breach determines the consequences. In general, a minor breach does not give rise to the right to terminate the contract. This is because the primary objective of any contracting party is to ensure the stability and continuation of the transaction. Minor breaches, while they may cause inconvenience or disappointment, do not significantly undermine the fundamental purpose of the contract.
However, in cases where the breach of warranty is substantial or fundamental, the affected party may have the option to terminate the contract. A fundamental breach occurs when the breach goes to the heart of the contract and effectively deprives the innocent party of the benefits they were expecting to receive. In such cases, termination may be necessary to protect the interests of the non-breaching party and provide them with a remedy for the substantial loss suffered.
Understanding the nature of warranties, including the distinction between minor and fundamental breaches, is crucial for managing contractual relationships effectively. It allows parties to assess the potential risks and consequences of a breach and make informed decisions about their rights and remedies.
Role of Indian contract in conditions and warranties
Before understanding what role Indian contracts play in conditions and warranties, it is important to understand what a valid contract is?
One of the most important ingredients of a valid contract is to have an intention to create a legal relationship. Once that is done, then comes offer and acceptance; afterwards there should be a meeting of minds, which means the same things in the same sense. Once the basis of the contract is laid down, and then comes an important aspect of the consideration. Consideration means something that has value in the eyes of the law or things that one receives for performing his obligations.
After understanding the essentials of a valid contract, it becomes easy to structure the contractual relationship between the parties. Following are the propositions that help to give structure to the agreement.
Contract drafting
In the matter of contract drafting it is very important to understand the difference between the conditions and warranties so that later there is no confusion or dispute between the parties. If the obligations are clear to understand, it will lead to peaceful execution of the contract.
Risk management
In matters relating to risk management, it is important to group the conditions and warranties, as it will help to mitigate or manage the risks that are associated with the breach of the contract and also its impact on the overall performance of the contract.
Dispute resolution
In matters related to dispute resolution, it is important to understand the difference between the condition and warranties, as it will help to resolve the dispute through its various modes of mechanism with appropriate remedies for different types of breaches.
Commercial transaction
In matters related to commercial transactions, the condition and warranties play a crucial role as they help in smooth business operations, which ensure trust and reliability. Once the basis for the transaction is clarified, it becomes easy and convenient to address the breaches through the legal framework.
By understanding the difference between the condition and warranties, the Indian contract will help to manage the contractual obligations and also help to streamline the agreements.
Consequences of breach of condition
Right to terminate:
When a condition in a contract is breached, the aggrieved party (the party who has not breached the contract) generally has the right to terminate the contract. This means that the aggrieved party can choose to end the contract and be released from their obligations under the contract.
- Immediate termination: In some cases, the breach of a condition may be so serious that it gives the aggrieved party the right to terminate the contract immediately. For example, if a seller delivers goods that are significantly different from what was agreed upon, the buyer may have the right to terminate the contract immediately.
- Notice of termination: In other cases, the aggrieved party may need to provide notice of termination to the breaching party before terminating the contract. The notice period may be specified in the contract or determined by law.
Right to damages:
In addition to the right to terminate, the aggrieved party can also claim damages for the losses incurred due to the breach of condition. Damages are intended to compensate the aggrieved party for the financial losses they have suffered as a result of the breach.
- Types of damages: There are various types of damages that may be available to the aggrieved party, including:
- Compensatory damages: These damages aim to restore the aggrieved party to the position they would have been in if the contract had been performed as agreed.
- Consequential damages: These damages cover losses that are a direct and foreseeable result of the breach of contract.
- Nominal damages: These damages are awarded when the aggrieved party has suffered a legal wrong but has not suffered any actual financial losses.
Other remedies:
In addition to the right to terminate and claim damages, there may be other remedies available to the aggrieved party in the event of a breach of condition. These remedies may include:
- Specific performance: In certain circumstances, the aggrieved party may be able to seek a court order requiring the breaching party to fulfill their obligations under the contract.
- Injunction: An injunction is a court order that prevents the breaching party from continuing to breach the contract or from taking further actions that would worsen the situation.
- Rescission: Rescission is a court order that cancels the contract and restores the parties to the positions they were in before the contract was entered into.
The consequences of a breach of condition can be significant, and it is important for both parties to a contract to be aware of their rights and obligations in the event of a breach.
Case laws
In the case of Ashok Kumar vs. New India Assurance Co. Ltd. (2023), it has been held that violations of the conditions should be in the nature of fundamental breach to deny the claim. In this case the issue was regarding theft of vehicle but the insurance company has denied the claim, stating delay in informing the insurance company. The Hon’ble Supreme Court has held that even if there was some carelessness, it was not a fundamental breach of condition for totally denying the insurance claim altogether. Therefore, a claim up to 75% must be awarded on a nonstandard basis.
Apart from the above case, there is a long line of judgements of the Hon’ble Supreme Court that any violation of the condition should be in the nature of a fundamental breach so as to deny the claimant any amount. [See Manjeet Singh vs. National Insurance Company Limited and Another (2018); B.V. Nagaraju vs. Oriental Insurance Co. Ltd., Divisional Officer, Hassan, [(1996) 4 SCC 647], National Insurance Co. Ltd. vs. Swaran Singh and 9 Others (2004) and Lakhmi Chand vs. Reliance General Insurance, (2016)
Suggestion (sale of goods act)
In the suggestion part of this article, it is important to mention the Sale of Goods Act, 1930. The sections related to Conditions and Warranties are stated from Section 11 to Section 17 of Sale of Goods Act, 1930, for Conditions and Warranties.
Apart from the above sections, there is also the concept of the Rule of Caveat Emptor, which basically means buyer beware or the buyer must take care of goods. It is also worth noting that there are few exceptions to the above rule, which are stated below:
- Fitness of Product for Purchase Under Section 16(1)
- Goods Sold by Description
- Merchantable Quality of Goods Under Section 16(2)
- Trade Name
- Trade Usage Under Section 16(3)
- Sample Inspection
- Fraud
One of the latest case laws on the Rule of Caveat Emptor is P. Kishore Kumar vs. Vittal K Patkar Civil Appeal No. (2011), where the Hon’ble Supreme Court has held that “The doctrine of caveat emptor tasks a vendee with the duty to diligently investigate the title he is purchasing, but the plaintiff in the present case has evidently shirked such duty for which the law cannot come to his rescue.”
In the case of Commnr. Of Customs (Preventive) vs. M/S. Aafloat Textiles (I) P.Ltd. & Ors., the penalty has been imposed on the buyer for buying gold under a forged Special Import Licence. The buyer has stated that he has no knowledge about the forgery, whereas the Revenue Department has relied upon the Rule of Caveat Emptor and stated that the buyer should have been more careful while purchasing the goods, as he bears the responsibility for the risks associated.
The Hon’ble Supreme Court, in its judgement, has stated that “whether the buyer had made any enquiry as to the genuineness of the license within his special knowledge. He has to establish that he did make an inquiry and took precautions to find out about the genuineness of the SIL while he was purchasing. If he has not done that, consequences have to follow.”
It is worth noting that, due to development and changes in business methods, it is not possible for a buyer to check upon each and every product before purchasing. Markets today are filled with new products that have distinctive qualities and customers can’t be expected to examine each and every product. Due to paradigm shift, the Rule of Caveat Emptor has lost much of its relevance in today’s scenario.
Conclusion
In conclusion, it can be stated that the role of the Indian contract with regards to conditions and warranties is very important as it defines the terms and conditions, execution, and dispute resolution mechanism. Once all the issues are streamlined, it will lead to smooth business operations and legal protection.
References
- Conditions and warranties – iPleaders
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