Some Terms are More Important than Others

‘In the past the courts maintained that the distinction between conditions and warranties was to be made without considering the actual results of the breach, and was to be determined on the basis of the relative importance of the term in the context of the contract as a whole at the date when it was drafted.’ Jill Poole., Textbook on Contract Law (Oxford University Press 2010) p. 314. Explain the relevance of this statement, and discuss to what extent this is still the approach in the courts today.

Introduction

Some terms of a contract are more important than others. In particular, the breach of some terms will give rise to the injured party the right to terminate the contract. That is significant right for the injured party. This brief explains the relevance of the statement that “In the past the courts maintained that the distinction between conditions and warranties was to be made without considering the actual results of the breach, and was to be determined on the basis of the relative importance of the term in the context of the contract as a whole at the date when it was drafted.” The brief also examines to what extent this is still the approach in the courts today.

Condition and warranty defined

A condition may be defined as a statement of fact, or a promise, which forms an essential term of the contract. [1] It refers to a contractual term, the breach of which gives the injured party the right to terminate the contract. [2] Of course, the injured party may, instead of terminating the contract, affirm and can claim damages whether s/he affirms [3] or terminates. [4] It is important to distinguish conditions from non-promissory contingent conditions. If a condition is contingent it means that the obligation will not come into force until the happening of the event. [5] A warranty is a term which refers to the subject matter of the contract but not collateral to the main purpose of the contract. [6] Unlike a condition term, a breach of warranty term does not give rise to the right to terminate the contract but a claim for damages. [7] Thus, the injured party is not entitled to terminate the contract merely on account of such breach. [8] A warrant is less important term not going to the substance of the contract, the breach of which can be compensated for adequately by the payment of money. [9]

Courts’ evaluation of the distinction between conditions and warranties

For some considerable time, English law has recognised a distinction between two classes of contractual terms: conditions and warranties. The dominant approach of the courts in the early 20th century following the enactment of the Sales of Goods 1893 was to classify terms ab initio as conditions or warranties. The obvious advantage in this approach is that of certainty. [10] This certainty is particularly important if the contract is one of a string of contracts under which B buys goods from A and then sells them to C who in turn sell s them to D. Members of the string will have will have many ongoing contracts simultaneously and they must be able to do business wit confidence in the legal results of their actions. [11] However, the advantage of certainty has to be weighed against the need to reach a fair and just decision in individual cases. [12]

The distinction between conditions and warranties was originally based on the parties’ intention as expressed in the contract. [13] However, the intention of the parties was often not found from the words used. So the courts relied on the general requirements of substantial failure in performance. Thus, if the performance of the stipulation went to the very root of the contract, the stipulation was treated as a condition. [14] A warranty contained less important element of the contract and its breach did not entitle the injured party to repudiate the contract on the basis that it could adequately be remedied by the payment of money.

This approach could be seen in number of cases in which decision were based on the commercial importance of the term to the injured party. [15] Where there was no such evidence of intention, the court would base its decision on its own view the commercial importance of the term. In the older authorities, the warranty was sometimes used to refer what would now be called a condition. [16] However, the cases, do establish that there are certain terms that the breach of which prima facie gives rise to a right to repudiate the contract and which are therefore conditions in the terminology now current. [17] Thus, in Behn v Burness, [18] a ship was described in a charter-party as “now in the port of Amsterdam, whilst in fact it was elsewhere. The charter was entitled to terminate as the statement was a condition because of the commercial importance which charters attach to such descriptions. Similarly, a statement that a ship will sail on a certain day has been held to be a condition is a charterparty. [19] The same is true of a statement in a charterparty to the effect that the “ship is expected ready to load” on a certain day. [20]

The extent this is still the approach in the courts today

A new emphasis has been given to a more flexible test based on the gravity of the breach and its consequences in Hong Kong Fir Shipping v Kawasaki Kisen Kaisha, [21]

In Hong Kong Fir Shipping case, Dplock LJ made it clear that the division into conditions and warranties was not complete but had to be supplemented by the innominate term. In that case, the shipowner hired a ship to the charterer for 24 months. On the voyage to deliver goods, the ship spent five weeks being repaired. The engines were old and needed to be well maintained by efficient staff but the engine room staff were insufficient and inefficient. The engine room staff were replaced when the ship arrived at its destination and a further 15 weeks was required to make it ready for sea again. The charterer claimed to be able to terminate the contract for failure to deliver a seaworthy ship because of the state of the engines and staff inadequacy. The shipowner sued the charterer for wrongful termination of the contract.

Although the shipowner had been in breach for failing to provide a seaworthy ship, the Court of Appeal held that the breach had not entitled the charterer to terminate the contract but was entitled to substantial damage because the market had dropped considerably since the charter had been made. The importance of this decision lies in the Diplock LJ’s treatment of the charterer’s claim that seaworthiness was a condition and that, as a consequence, any breach of it entitled the charterer to terminate the contract. Diplock LJ made it clear that whether the termination was possible, for the breach of the term as to seaworthiness, did not depend upon the classification of the term as a warranty or condition but upon the factual consequences of the breach. The factual consequences of the breach determined the legal consequences. If the legal consequences were sufficiently serious, termination was possible, but not otherwise. Accordingly, the court held that the undertaking as to seaworthiness was not a condition, but innominate term of which its breach would not give rise to treat the contract repudiated unless the conduct of the other party, and the actual or anticipated consequences of the breach, were so serious as to frustrate the commercial purpose of the contract.

Breach of condition is repudiatory breach regardless of how trivial the effect of the breach is. Repudiation can be followed by an action for damages. The Sales of Goods Act 1979 makes an exception which states that in sales of goods contracts, where the buyer deal as a non-consumer and the breach in question is one of the conditions implied under sections 13 to 15 of the Act, the term shall be treated as it were a warranty. [22] The Supply of Goods (Implied Terms) Act 1973 and the Supply of Goods and Services Act 1982 make similar provisions in relation to hire purchase contracts. [23] Breach of an innominate term whose effect satisfies the test in Hong Kong Fir Shipping depends on the effect of the breach itself. The test is whether the effect of the breach deprives the innocent party to the contract a substantial benefit to which the parties intended. If this is answered in the affirmative, then there will be a repudiatory breach if an innominate term is broken.

The benefit of the innominate term classification is its flexibility which contrasts with the fixed nature of the other classifications, where the consequences of the breach are simply determined by the classification. [24] The innominate term classification allows the law to be flexible in its approach to the legal consequences of a breach. Cehave NV v Bremer Handelgesellschaft (mbH), The Hausa Nord [25] provides a good example of the benefits of the flexibility of the innominte term. A German company (A) sold citrus to a Dutch company (B). The delivery was to be made in Rotterdam. Included in the contract was a term that shipment was to be made “in good condition”. Some of the pallets arrived damaged. B rejected the whole consignment, thereby terminating the contract on the ground that the goods had not been shipped “in good condition”. The goods were thereafter sold by the order of a Dutch court to a third person. Subsequently, the goods were re-sold at one-third of the original contract price to B who then used the whole consignment for the purpose similar to that for which B had originally bought.

The Court of Appeal held in the light of the fact that the goods had ultimately been re-sold to B there was no breach of the condition implied by section 14(2) of the Sales of Good Act. The court found that although the term of shipping the goods “in good condition” was broken, the term was not a condition because it could not have been intended by the parties that any breach of it should entitle B to terminate the contract. The term of shipping the goods “in good condition” was an innominate term. B was not entitled to terminate the contract for breach of the term because the effect of the breach was insufficiently serious to justify termination. This was evident from the fact that the goods had been used in almost exactly the same way as they would have been, had they not damaged. Accordingly, B was only entitled to damages and had not been discharged from its obligations to accept the goods on initial delivery and pay the contract price. The advantages of the innominate term classification are obvious in this case because had the term been a condition, the breach would have allowed the purchaser to terminate. This would have been his right despite the fact that the grounds for his decision to terminate were purely pecuniary, rather than based on the actual breach. [26] The damage to the goods barely affected the purchaser to use them.

The approach of the Court of Appeal in Hong Kong Fir Shipping and Cehave received support from the House of Lords in Bunge Corporation v Tradax Ltd [27] and Reardon Smith Line v Hansen-Tangen, [28] where Lord Wilberforce referring to Hong Kong Fir Shipping said that the law of contract has developed along much more rational lines, in attending the nature and gravity of a breach or departure than in accepting rigid categories which do or do not give a right to terminate. Therefore, today a distinction is made between terms which are conditions, warranties and innominate terms. The three types of term are differentiated by the legal consequences that flow from the breach of each of them. [29] When a condition is breached the injured party has the right to repudiate the contract and also sue for damages. [30] A breach of warranty gives rise only to the right to sue for damages. [31] A breach for an innominate term, the legal consequences of the breach depend upon the factual consequences. [32]

Therefore, it could be argued that the modern approach is that the other party is entitled to terminate the contract if the contract expressly provides that in the event of any breach of the term s/he can do so. If the contact does not expressly provide so, s/he can terminate if the contract provides so when correctly construed. The relevant, for example, may be described as a condition. The question then arises whether this word is used as a code word for shall be entitled to terminate if broken. If this does not solve the issue, s/he can repudiate the contract if the term broken is a condition in the technical sense by the statute or judicial precedent. If none of the above solve the issue, whether s/he is entitled to terminate the contract will depend on whether the events produced by the breach are such that it is reasonable to describe the breach as going to the root of the contract, and so justifying termination of the contract.

Conclusion

In the past, the distinction between conditions and warranties placed considerable emphasis on ab initio classification of the quality of the term broken. A new emphasis has been given to a more flexible test which bases the right of termination on the gravity of the breach and of its consequences. However, although in the past the courts made the distinction between conditions and warranties without considering the actual results of the breach, it is still the case today where the parties to the contract have expressly indicated a term to be a warranty or where the statute classes a term as a warranty. But if there is no express classification of the term in the contract or by a statute, the court would only class a term as a warranty after considering the result of the breach under the doctrine of innominate term.