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IAI Actuarial Core Principles · Business Management · Implied terms, exclusion of liability, contractual remedies and damages

A software supplier agrees to install an annuity administration system for a life insurer. The contract includes a term that 'the system will process 10,000 policies per hour'. The system processes 9,800 per hour, and the shortfall causes only minor inconvenience. A court treats the term as innominate (intermediate). How will the court decide whether the insurer can terminate?

The court looks at the consequences of the breach and asks whether it deprived the innocent party of substantially the whole benefit of the contract. A small shortfall with minor inconvenience would not, so the insurer would usually get damages only, not termination.

  1. ABy looking at the actual consequences of the breach to see whether it deprived the insurer of substantially the whole benefit of the contractCorrect
  2. BBy classifying the term as a condition at the date of contracting and applying automatic termination
  3. CBy treating the term as a warranty because it is numerical
  4. DBy ignoring the effects and asking only whether the supplier acted in good faith
  5. By granting termination whenever any breach occurs in a technology contract

Explanation

For an innominate term the remedy depends on the gravity of the breach's effects, not on a label fixed in advance. A 2% shortfall causing minor inconvenience would not deprive the insurer of the substantial benefit, so damages would normally be the remedy.

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