Meaning of Condition and Warranty in Banking

In banking, a condition is a fundamental term of a contract, the breach of which entitles the buyer to terminate the contract and sue for damages. A warranty is a minor term of the contract, the breach of which does not entitle the buyer to terminate the contract but only to sue for damages.

For example, a bank may agree to lend money to a borrower on the condition that the borrower has a good credit history. If the borrower does not have a good credit history, the bank may terminate the loan agreement and sue the borrower for damages.

Another example, a bank may sell a car to a buyer with the warranty that the car is in good condition. If the car is not in good condition, the buyer may sue the bank for damages but cannot terminate the contract.

Here are some MCQs on the meaning of condition and warranty in banking:

  1. Which of the following is a condition in a banking contract?
    • The borrower has a good credit history.
    • The car is in good condition.
    • The interest rate is 10%.
    • The monthly payment is $1,000.
    • The answer is (a). The borrower having a good credit history is a fundamental term of the contract. If the borrower does not have a good credit history, the bank can terminate the contract.
  2. Which of the following is a warranty in a banking contract?
    • The borrower has a good credit history.
    • The car is in good condition.
    • The interest rate is 10%.
    • The monthly payment is $1,000.
    • The answer is (b). The car being in good condition is a minor term of the contract. If the car is not in good condition, the buyer can sue the bank for damages but cannot terminate the contract.
  3. A bank lends money to a borrower on the condition that the borrower has a good credit history. The borrower does not have a good credit history. Can the bank terminate the loan agreement?
    • Yes, the bank can terminate the loan agreement.
    • No, the bank cannot terminate the loan agreement.
    • The answer is (a). The borrower’s lack of good credit history is a breach of a condition in the loan agreement. The bank can therefore terminate the loan agreement.