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Observed in the breach

David Sagar
How do you know whether a contractual term is a condition or a warranty, and what is the effect of a breach?

tudents preparing for the Business information can be found in the CIMA rescission and damages. Repudiation

S Law exam are required to study the

law of contract – a subject that
accounts for 30 per cent of the syllabus.
Business Law study pack, and many other
business law texts. Once the contents of the
contract have been ascertained, the next
means that Tom is no longer bound to
make any payments on the car. Rescission
enables him to recover his deposit of
Section 3b(iii) “Performing the contract” step is to determine the status of the terms. £5,000 and any instalment payments. In
has a syllabus weighting of 10 per cent. Terms may be classified as conditions or addition, he may recover damages to
Students are required to: warranties. If it is not known into which compensate him for any additional costs
A explain in detail how the contents of a category the clause falls, it is “inominate”. such as having the car towed to a garage,
contract are established; A condition is a fundamental term going the cost of hiring a car or arranging
B explain the status of contractual terms to the root of the contract. In other words, alternative transport.
and the possible consequences of non- conditions set down the primary obligations l He may accept the manufacturer’s
performance on these terms; of the parties. The difference between promise to repair the car – in other words,
C explain how the law controls the use of conditions and warranties can be illustrated he may affirm the contract and recover
unfair terms for both consumer and in two cases from the late 19th century. damages only – for example, compensa-
non-consumer business agreements; In Poussard v Spiers and Pond (1876), tion as under the first option. In this
D explain what the law regards as perfor- Madame Poussard was under contract to option Tom has, in effect, chosen to treat
mance of the contract, and valid and appear in an operetta for the season. In fact the breach as one of warranty rather than
invalid reasons for non-performance. she was unavailable because of illness until that of condition.
Question A is satisfied by explaining one week after the season had started. It was You might ask: so what about warranty?
which of the various statements made by held that the obligation to perform from the In this case, warranty is a relatively unim-
negotiating parties become terms of the first night was a condition and the producers portant term. The innocent party is not
contract. This in turn requires students to were entitled to terminate her contract. entitled to repudiate a contract simply for a
know how the law determines that the In Bettini v Gye (1876), Bettini was under breach of a warranty and is restricted to a
parties have reached agreement, through contract to appear in concert for a season. claim for damages. In fact, if the innocent
the rules of offer and acceptance, and how The term required him to be in London for party should proceed by repudiating the
terms are incorporated into the contract. rehearsals six days before the season started. contract following a breach of warranty,
The law on incorporation of express When Bettini arrived three days late, Gye they are no longer innocent, but have acted
terms can be summed up in a single refused to accept his services. It was held in breach of contract (see Bettini v Gye).
sentence: “Thus to be bound by a clause a that Bettini’s late arrival was simply a Imagine, for example, that Tom discov-
person must know of that clause, or have breach of a warranty so Gye was himself in ered the car radio was faulty and needed to
been given reasonable notice of it at or breach by terminating Bettini’s contract. be replaced. This is a relatively minor
before the time when the contract was A breach of a condition does not breach and entitles Tom to be compensated
entered into.” (Thornton v Shoe Lane automatically cause a contract to be termi- for the cost of a replacement radio. Tom
Parking Ltd (1971)). More specifically, nated, but it gives the innocent party a would not, however, be entitled to repudiate
express terms can be incorporated by the choice about how to proceed. They may the contract to purchase the car.
following means: choose to cancel (“repudiate”) the contract Unfortunately, contracting parties do not
l actual notice (knowledge) of the terms; and claim damages and rescission, or they always make it clear whether a particular
l signature; may choose to carry on with (“affirm”) the term is a condition or a warranty. This can
l provision of reasonable notice; contract and claim damages. create many problems but, in general, the
l a “course of dealings”. Let’s take another example. Tom, a self- law allows parties freedom of contract in
In addition, various statutes imply terms employed sales representative, bought a that they are free to classify terms as they
into contracts, irrespective of the express new car for £10,000. He paid a deposit of choose. What may appear to be a minor
wishes of the contracting parties. For exam- £5,000 and agreed to pay the balance in issue to one person may be of crucial
ple, the Sale of Goods Act 1979 contains a instalments. The first time Tom drove the importance to another. It is down to the
number of provisions that are implied into car the engine failed. The manufacturer was courts therefore to determine the intention
all contracts for the sale of goods. And the prepared to replace the engine, which was of the parties involved.
Unfair Contract Terms Act 1977 prohibits covered by its guarantee. The status of terms may be determined by
the exclusion of some of those provisions in It is an implied condition under Section asking the following questions:
certain types of contract, in particular those 14 of the Sale of Goods Act 1979, that goods l Does the contract state expressly that
involving the sale of retail goods by a sold must be of a “satisfactory quality”. This breach of a particular term gives the inno-
business to a consumer. leaves Tom with two possible options on cent party rights to terminate the contract?
There is no need to explain further the how he should legally proceed: If the answer is yes, then the term must be a
rules of incorporation for question B, as l He may repudiate the contract, and claim condition. This is so even if, when looked at

October 2001 CIMA Insider 21


How to tackle the

objectively, the term appears to be of
relatively minor importance. If the answer
is no, it is necessary to ask additional ques-
tions, such as:
l Does the contract describe a particular
term as a condition or a warranty?
Even where the parties use the word “con-
case study
dition” or “warranty” to describe a particular John Williams
term, the courts have stated that this will
The lessons you can learn from the May 2001 final level case exam
not in itself be conclusive. In Schuler AG v
Wickman Machine Tools Sales Ltd (1974) a
term described as a “condition” required
Wickman to make weekly visits over a four-
and-a-half year period to six named firms, a
total of 1,400 visits.
Wickman failed to make some of the
weekly visits so Schuler terminated the con-
tract. It was held that Schuler acted in he purpose of this article is to provide There are two issues involved in exam
breach by repudiating the contract. Even
though the word “condition” had been used
to describe the term, the House of Lords did
T guidance to candidates for future sit-
tings of the case exam. It does not
address common errors and problems with
practice. The simple part is the need to
develop planning and writing skills for an
exam which gives little guidance in the way
not believe that it was the parties’ intention the May 2001 exam, as this would detract of breakdown of the marks available, or the
that a failure to make a single visit would from the general standard achieved. time you should allow for the different parts
give Schuler the right to terminate. This was the first exam under the new of the requirement.
l Does the law state that the term in syllabus and, inevitably, it was quite differ- The first case did give an indication that
question is a condition? ent from previous exams since it was equal time should be spent on both parts of
For example, suppose a dispute arose designed to test a wide range of skills in a the requirement; but a subsequent case may
because goods delivered to the buyer dif- new way. The pilot paper and marking have only one requirement. You must plan
fered from their description in the seller’s matrix offered some guidance on what to your answer and allow time for the various
catalogue. Is this a breach of a condition or a expect, but the findings from a “live” case parts. There will always be some time pres-
warranty? The answer lies in Section 13 of should prove far more useful. sure, because cases are open-ended – you
the Sale of Goods Act 1979, which states: “In Inevitably, candidates in May will have will always think you could write more, but
contracts for the sale of goods by description experienced uncertainty about the balance good candidates will prioritise issues and
there is an implied condition that the goods between the pre-seen and unseen elements concentrate on the important ones.
shall correspond with their description.” of the scenario, and they will have faced dif- The other important point is to practise
The law clearly states that the term is ficult choices about how to prepare for the doing case exams. Practice cases do not need
a condition. So in this case there is no room exam. You need to recognise that every case to be CIMA cases, or even in the same pre-
for argument and, consequently, the is different and, therefore, an approach seen/unseen format, but you should practise
innocent party is entitled to claim for which works for one case may not be rapidly analysing case material, since you
breach of a condition. entirely appropriate for future cases. will need to exercise this skill when dealing
l Has the innocent party been deprived There are two basic ways you can embark with the unseen material in the exam.
substantially of what it was intended they on general preparation for the exam, before You should also practise developing out-
should receive under the contract? the pre-seen scenario is sent out: line answer plans from this analysis, and
This test has been criticised on the basis l you can revise the skills and techniques make sure you can get down to writing the
that the courts should be attempting to needed for final level examinations and answer without delay. Aim to complete your
determine the intention of the parties at the earlier papers. This is a relatively minor analysis and planning in not much more
time the contract was entered into, rather problem for those sitting the case at the than half an hour. It may be possible to save
than looking at the effect of the breach. As a same time as other final level papers, but time by using a table of contents for a report
result, it should be seen as a last resort. is significant for those sitting it later; function as an answer plan.
Where the other questions have not pro- l you can undertake exam practice. Case exam requirements are quite likely
duced a conclusive answer, and evidence of The revision problem is likely to be more to involve writing a report, although this
intention is unclear, a pragmatic way of serious if a significant amount of time has could vary. You should practise basic report
resolving the dispute is to look at the sever- passed since you sat the other final level layouts, but don’t waste too much time pro-
ity of the breach. If the effect of breaking a papers – the expected knowledge of tech- viding excessive presentations at the
term is to deprive the innocent party of the niques and skills can change fast, notably in expense of detailed content.
main benefit of the contract, then that term information strategy. Similar change also The format expected in an exam is, of
must have been a condition. If not, it follows affects financial strategy and business strat- course, going to be simpler than the kind you
that the term must have been a warranty. n egy – for example, the boom and subsequent would expect in a large organisation – this
bust in dotcom companies has produced a recognises the constraints of time and the
David Sagar is the examiner for range of new problems and new techniques, lack of a computer. Apart from the normal
Business Law and adaptations of old techniques. headings, the key requirement is that it

22 CIMA Insider October 2001


should have a clear and logical table of tangible assets and without an established from any previous data and it will be rele-
contents, and that each part of the report record of earnings. There might have been vant to the answer. Senior management
should be clearly headed. other possible issues that could have been would always expect a chartered manage-
The pre-seen scenario is distributed well identified, including some which were not ment accountant to make sensible calcu-
before the exam so that all candidates have taken up in the unseen and the requirement. lations and to provide clear comment
plenty of time to analyse it and no one is dis- Some tutors developed predicted unseens explaining the significance of any figures.
advantaged because of problems such as and questions based on the published pre- l It is sensible to make all preliminary
postal delays or work pressure. This does not seens. While this was enterprising and calculations legible and to ensure that
imply that nearly three months’ work on the potentially beneficial for candidates, in prac- they are well explained. They can then be
scenario is either necessary or sensible. tice it was no more than a qualified success. labelled as a report appendix.
The pre-seen material provides some It helped to develop awareness of the type of l Ensure that all parts of the requirement
general background material, enabling industry and some potential problems, but are answered in some way, even if you
candidates to undertake general research some candidates clearly mixed up the CIMA cannot write all that you may want to
into the industry, the type of firm and its pre-seen information and CIMA unseen write on another part. There is always
potential problems. Identifying the firm information with hypothetical information. scope to write more on some aspects of
which may have been used as a partial model The closer a predicted unseen is to the cases, but you must prioritise.
for the development of the case is not CIMA unseen, the more this will be a prob- l Ensure that your answer is easy to navi-
necessarily helpful as significant changes lem. However, there will often be new finan- gate – that all sections are clearly headed,
will have been made and the exam is dealing cial data in the CIMA unseen, and tutors are and that these headings link up with the
with a hypothetical firm in the scenario, not unlikely to forecast this successfully. concise table of contents.
a real firm. When it comes to the actual exam, the first The case exam also has some distinctive
While the internet provides wonderful thing to remember is that this is still a formal features which should be reflected in all
scope for research, it should not be regarded exam and all the old rules still apply: your answers:
as the only possible route. For the May 2001 l Read, re-read, analyse the requirement, l Marks for knowledge are limited, so a
exam, candidates would have been well pre- and plan an answer to the question asked, detailed description of particular tech-
pared if their background reading included not the answer to the question you would niques, although valid and important, will
the Financial Times, the Economist and have preferred. not earn any more marks than a brief, but
Investors Chronicle in the months before the l Plan the way you use the available time. relevant, comment.
examination. It was noticeable that the Balance the time spent reading the new l Numerical skills are important, but being
candidates who had undertaken good information and the time spent mentally able to comment on the significance of
background reading right up to the exam merging it with the information you figures is even more vital.
were able to quote relevant analyses from already have. Allow time for planning an l Recommendations will always be needed
these publications and scored highly on answer as well as for writing it. and reasons must be stated clearly. In any
business awareness. l Do not assume that the question(s) will be case study, the information provided is
It may be possible to predict techniques largely based on the pre-seen material; limited and may also be ambiguous.
that may be needed in the exam. This this is unlikely. The unseen material, given Nevertheless, recommendations are still
certainly applied in the May 2001 exam. out together with the question, has to be required. They must be developed and
Candidates should have identified the substantial enough to change the overall justified using all the available informa-
obvious problems of extremely high and balance of the situation, so that candi- tion – stating the need for more informa-
possibly unrealistic initial expectations and dates have to answer a question on a situ- tion or commenting on the need for fur-
forecasts, and the problems of cash burn and ation assessed on the day, rather than ther investigation will not suffice. n
difficult refinancing. using answers they planned in advance.
They could also have identified the prob- l Analyse and use any new financial data. John Williams is the facilitator for the
lems of valuing firms without significant This will probably show some change case study at final level

October 2001 CIMA Insider 23