Terms & Commentaries KenIshia paScal

Terms

A Term - What is it?

The specific rights and obligations under a contract. These are legally binding obligations within the contract and can be either express or simplified, oral or written.

There are three forms of terms: Conditions; Warranties and Innominate Terms.

Terms are determined according to their degree of significance to each respective party.

Traditionally conditions (major terms) and warranties (subsidiary terms) are types of terms recognised by law. Distinction between the both terms are important as each results in a different remedy.

Conditions - The "what" & the "result"

Often described as the major terms of a contract, these terms go to the heart of a contract.

The remedies available to conditions are broad, ranging from the termination of contracts to the claimant of damages.

Such remedies may be remembered through the anagram CAT :

An easy anagram.
  1. Claiming  damages
  2. Affirming a contract possibly because it's a cost effective option
  3. Terminating contracts irrespective of whether they are partially performed.

Cases

Poussourd v Spiers [1876] 1 QBD 410

Pills and Music

Key facts

  • Actress employed to play leading role in opera
  • Becomes ill 5 days before opening night
  • Unable to perform for 4 days
  • Producers replace her
  • Producers try to terminate the contract
  • Actress unsuccssfully sues for a breach of contracy

Legal Question: is the absence a term worthy of such remedies?

Decision

  • Courts held: the opening night was really important due to factors including the presence of press. The actress's absence on that night amounts to a breach not contract in itself allowing the producers to terminate the show as a result.

Parties labelling a term as a condition may not always be upheld by the courts. This is a precaution to avoid contract holders making every term eligible for the termination of a contract.

eg. Schuler v Wickman [1974] C 235

Unreasonable Terms

Key facts

  • Wickman, an English company, gave selling rights for German press company for 5 years
  • Terms stated: they shall send a rpresentative to visit one of the 6 UK manufacturers at least a once a week to get orders
  • WWritten contract desribes this term as a condition
  • Serious consequences should be expected (termination) if the condition was breached.
  • W failed to make a number of visits
  • Company terminaed the contract on the grounds of a breach on the condition
  • W claimed damages for wrongful termination

Legal question: Did the term, despite being described as a condition, amounted to a condition?

Decison

  • H.o.L held: the word condition does not mean condition. it is only an indication that the parties intended that the innocent party should be able to terminate the contract.

Why?

Because the contract has to be looked at on a whole through the eyes of a 'reasonable man'. The more unreasonable the result the less likely it is that the party intended it.

Hmm..

Food for thought

The inability to confirm that a term labelled as a condition in a contract actually is a contract may lead to uncertainty. Why can't parties determine what is and is not a condition? Perhaps due to the protection of vulnerable parties...?

Consider and contrast...

Lombard v Butterworth [1987] QB 527

Parties labelling terms

Key facts

  • Lease of a computer to a defendent
  • Clause in agreement specifies need for punctual payments
  • Not doing so resulted in the termination of the agreement.
  • Defendant was late in paying the 3rd, 4th and 5th payments
  • the 6th was overdue by 6 weeks.
  • Plantiffs sought to terminate the contract on the grounds of that terms

Legal Question: Did the term, labelled as a condition, amount to a condition?

Decision

  • Courts held that parties were free to stress the significance of terms. The plaintiff was within rights to take action as they had made it clear from the the outset.

Note also that the plaintiff had waited for a few of the other payments.

Warranties - the "what" & the "result"

Warranties are minor terms of a contract which are ancillary to the main purpose. Unlike its counterpart, conditions, the breach of such terms do not lead to serious consequences.

The only remedy available for a breach of a warranty is a right to sue for damages. The contract CANNOT be terminated.

With insurance contracts however, the labelling of a warranty is more akin to condition according to the nature of a contract.

CASES

Betini v gye [1876] 1 qbd 183

Which is more important?

Key Facts

  • Bettini agreed by contract to perform as an opera singer for 3 months
  • Contract requires singer to arrive 6 days before hand
  • Singer arrived 3 days before the start of the season
  • Producers wanted to treat this as a breach of contract and sacks singer
  • Singer successfully sues

Legal Question: Were rehearsals a warranty or a condition?

Decison

  • Court determined that the terms regarding the rehearsal were minor and were ancillary to the main purpose of the contract: singing. The producer as a result could only sue for damages rather than terminate the contract.

bENEFIT of Traditional distinguishes

The main benefit to both the courts and the parties is the provision of certainty.

Whether or not this certainty is always appropriate is debatable. For example consider the positions of unequal bargaining. By labelling a term as a condition or warranty it is apparent how serious the consequences are.

However, sometimes this is not the case. How serious a breach is may not be apparent. This leads to the existence of innominate terms.

Innominate terms - the "what" & the "result"

An innnominate term exits in situation where it is not possible to state at the outset the consequences of a particular breach of a term.

Such terms normally relates to qualitative, not quantitative, terms, eg. The classification of a roadworthy car.

Innnominate terms once breached can result in either trivial or serious consequences. The effect of the former consequence is of the term acting like a warranty, whilst the latter consequence has the term acting like a condition in that situation.

This form of a term was introduced due to the oddity of terms. An obvious benefit of this term is that it gives the courts flexibility. By applying a "wait and see" approach, the existence of a breach is determined by time, with the decision of the treatment of the term being held AFTER events occur. Hence the remedy does not depend on the status of the breach but the weight of said.

There is no automatic entitlement to such terms unlike with warranties and conditions. Having greater remedial flexibility, as mentioned above, the courts focus solely on the consequences of that breach.

A commentary on Hong Kong Fir Shipping v Kaswaki Kisen Kaisha Ltd

Commentaries

Hong Kong Fir Shipping v Kawasaki Kisen Kaisha Ltd [11962]n 1 All ER 474 CA

This case is famous for introducing the modern classification of terms, innominate terms.

Facts

Defendants had a ship chartered by the claimants for a 2 year period. The agreement included a term that the ship would be seaworthy throughout the period of hire. The ship was delivered in February and on the same day sailed to the USA picking up cargo then moved onto Japan. The ship was old, with the necessary maintenance of the machinery by experienced staff being needed. There was insufficient staff and the chief engineer was a drunk.As a result problems developed with the engine of the ship. Consequently the ship was out of service for a 5 week period and then a further 15 week period due to malfunctions.

Within the agreement, there was clause stating that the ship must be seaworthy. As the ship was not the defendants could have bought forth action and claimed damages. However the defendants treated this as a breach of condition and ended the contract based on the term seaworthiness. The claimants brought an action for wrongful repudiation arguing the term relating to seaworthiness was not a condition of the contract.

Legal Question

The legal issue here was whether the consequences of breaching this clause amounted to that of a warranty or condition.

Decision

The defendants were liable for wrongful repudiation. The court introduced the innominate term approach. Rather than seeking to classify the term itself as a condition or warranty, the court sought to look as the effect of the breach and question if the breach had substantially deprived the innocent party of the whole benefit of the contract. Only where this is answered affirmatively would a breach to a condition exist.

20 weeks out of a 2 year contract period did not substantially deprive the defendants of whole benefit and therefore they were not entitled to repudiate the contract. It was held by the Court of Appeal that clause was not a condition as it was not great enough to frustrate the commercial purpose if the charter. The defendants were still able to sail the ship. Termination would've been possible only if the benefit of the charter was completely lost. For instance, had they not been able to set sail at all due to the the malfunctioning machinery.

Comment

This case opens up the debate of whether innominate terms ought to be a classification of terms.

It can be argued that only terms should only be able to fall between the classifications of conditions, warranties and innominate terms. In favour of innominate terms being a classification, one may argue that by looking at the consequences of the clause, the courts could reasonably come up with a variety of appropriate remedies for the situation. Inturn, unnecessary remedies which may be deemed too much or too little, retrospectively, are avoided initially.

On the other hand, the traditional classifications are seen by some to be the only necessary forms of terms; raising the question of whether the courts should even bother looking at innominate terms. The presence of such a classification arguably makes the understanding and clarity of clauses in a contract much more blurred than they ought to be. Transactional certainty can be lost between both parties as a result. This may lead to nullity with both parties walking away without an agreement between them. incompleteness may also present itself as either or both parties fail to include essential terms.

With regards to the case, the term seaworthiness itself is open to suggestion. The degree of what makes a ship sea worthy is debatable. Where to party A for examples, a missing railing would deem a ship completely unavailable and out of service, to party B the term may apply only to malfunctioning machinery and engines of such. So, perhaps, the degree to which the term would have been valid, should have been mentioned in the contract to avoid any miscommunication and inturn misunderstandings about remedies available should there be a breach. The certainty and clarity of the clause would also improve significantly.

All in all, the presence of innominate terms provides a grey area in which some cases may fall into. without this area, as mentioned previously, the remedy provided may prove to be too strong or too week. Innominate terms allows each case to be given the remedy they deserve according to the consequences that the clauses bring forth.

Credits:

Created with images by AnaCorpus - "cat pet feline" • succo - "hammer court judge" • markusspiske - "office home office creative" • Adlerauge - "ferry ship bug"

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