October 10, 2014
Eeek! This is an English legal term so forgive me for trying to answer this question anyway. Also, please forgive the length of this post. Exploring this answer might be helpful to understanding some aspects of contract law for students of US law, too.
Let's look at US contract law first:
Terms of a contract are divided into two categories:
2. Promises (sometimes called warranties). Sometimes a promise is also a condition.
Our general rules are:
If party A fails to comply with a condition of the contract, or a condition otherwise does not occur, party B can repudiate the whole contract.
If party A fails to comply with a promise, party B can usually just sue for damages.
What is a condition?
A condition is something that must occur before a party is obligated to do something. Insurance contracts are a good source if you want to find conditions. Let's say Beta Insurance Company insures Alan's house against damages from falling objects. His insurance contract will probably include terms similar to the following:
Beta will insure Alan against damages resulting from falling objects if, and only if:
- Alan pays a $1 premium on the first day of every month.
- The falling object must first penetrate the outside of Alan's house. By way of example, Alan is insured against a meteor falling through his roof, not a plate falling from his shelf.
- Alan alerts Beta as to the damage within 48 hours.
Let's say a meteor crashes through Alan's roof and Alan waits 72 hours to report the damage. At that point the damage to the house is $100,000. In many jurisdictions the insurance company will probably succeed in arguing that Alan gets nothing. Beta's duty to pay was a condition of Alan reporting the accident in a timely manner. The insurance company is not going to pay $100,000 and not even $75,000 - - the insurance company in many jurisdictions is not going to pay at all. See our general rule above: if a condition fails to occur or A fails to comply with a condition, B has no obligations.
What is a promise?
A promise is something that a party is obligated to perform. As we see above, sometimes a party does not have to keep its promise unless a condition occurs.
Let's say Grandma Betty hires Alan Construction company to build her a house. She agrees to pay $1,000,000. Betty has trouble walking so the house must not have stairs. In addition, Alan promises to make every room in the house wired for the internet. Alan finishes the house but one of the bathrooms does not have internet access. The house is otherwise just what Betty needs. Can Betty refuse to pay? No. But she might be able to sue for damages because Alan broke his promise to make every room in the house equipped for internet access. Maybe the cost of the house will be reduced by a few thousand dollars.
Let's turn to English Law for a moment:
As I understand it, English law adds a third type of classification - - innominate terms that cannot be classified as conditions or warranties/promises. As I understand it, we do not know whether a party can repudiate the contract or not until a court decides how serious was the term's breach. Depending on the seriousness of the breach, an English court will allow a party to repudiate or just sue for damages.
For example, let's say Alan Computers hires Beta Cleaners to clean up its offices. The contract provides that "Beta must not disclose secret information belonging to Alan." One of Beta's cleaners comes across a memorandum and tells his wife that Alan Computers is scheduled to have a wine and cheese party on Friday at 4:15. This information was not public. Not much harm is done. But let's say one of Beta's cleaners leaks information to the public that Alan Computers is running behind schedule on its new computer model. This disclosure destroys Alan Computers. Well, in both cases the same provision of the contract was breached. My understanding is that "Beta must not disclose secret information" would be viewed as an innominate term. In the first case, Alan could try to sue for damages, but in the second case, Alan could probably also repudiate the contract.
Back to US Law:
Look back at our story of Grandma Betty. Let's say the construction company built this poor woman's house with endless stairways similar to an Escher drawing. This was a material breach. Betty can probably repudiate because the construction company's breach defeated the entire purpose of the contract to build a house suitable for an elderly person who had trouble walking.
I'll try to get a video on my YouTube page soon regarding contracts and remedies.