Classification of Terms- condition, warranty, innominate term Eliis Mets, seminar group: International Law 1

1) CONDITION:

  • A condition is regarded as a major term of the contract, i.e. one which goes to the very root of the contract.
  • If a party to a contract breaks a condition the consequence is serious since it entitles the other party not only to sue for damages but also to terminate the contract. The injured party, however, does have the option of affirming the contract and simply claiming for damages if they wish (to be mentioned, parties may want to continue the contract because the conditions have been improved).
  • The right to terminate a contract for breach of condition is modified in relation to non-consumer contracts for the sale of goods by the Sale and Supply of Goods Act 1994 and Sale of Goods Act 1979.
  • If the parties label a term as a condition, then the court may uphold this, although not always because calling a term a "condition" does not necessarily render it so as illustrated in the Schuler v Wickman [1974] AC 235 case.
  • One of the key cases illustrating the conditions would be the Poussard v Spiers [1876] 1 QBD 410 case where court decided that the absence of the actress was breach of the condition and therefore, the producers had the right to terminate the existing contract.

2) WARRANTY

  • A warranty is regarded as a minor term of the contract, i.e. one which imposes a term that is merely ancillary to the main thrust of the contract.
  • Ordinarily, a breach of warranty merely gives the injured party the right to sue for damages only (and it does not lead to serious consequences).
  • One of the key cases illustrating the warranty would be the Bettini v Gye [1876] 1 QBD 183 case where the court said that there existed minor terms and therefore, the contract cannot be terminated. Case in general was dealing with singers employed to perform in theatres.
  • HOWEVER, some terms implied by statute are classified as either conditions or warranties and SOMETIMES, the statutes are exactly saying what sections exactly are the warranties and which one are conditions. FOR EXAMPLE, ss-12-15 Sale of Goods Act 1979 are all conditions.

3) INNOMINATE TERMS

  • In recent years, where no expression of the status of a particular term has arisen out of the agreement from whatever source, the courts have taken to classifying the term as an "INNOMINATE TERM" (referred to by some authorities as an "INTERMEDIATE TERM"). The effects of a breach of an innominate term do not depend on the status of the term in the contract when it is entered into but on the effects of a breach of the term in the contract.
  • Where a term is found by the court to be an innominate term the rights of an innocent party in the event of a breach are found by applying the test as to whether they have been substantially deprived of the whole of the benefit which it was intended they should obtain form the contract. If they have been so deprived then they will be entitled to terminate the contract and sue for damages; if not, they can claim damages only.
  • Clearly breach of a condition will amount to a repudiatory breach of contract; however, where a term is not a condition then the Hong Kong Fir test will apply (case illustrating where no condition was found and therefore, termination of the contract was refused).
  • An innominate term only becomes repudiatory if a breach substantially deprives the injured party of the whole of the benefit of the contract.
  • Case illustrating the innominate terms would be the Mihalis Angelos [1970] 3 All ER 125 case where court decided that condition can be found and therefore, the termination of the contract is possible and otherwise, it would be effectively unfair. Courts in this case had no hesitation in finding the condition and they rejected to apply the case with the Hong Kong Fir test.
  • The innominate term concept in general usually achieves a greater level of fairness.
  • It gives the courts the flexibility as they can decide what are the consequences.
  • Key points illustrating the innominate terms would be as follows: 1) flexibility; 2) traditional classification can be used and decided; 3) operates as a "WAIT AND SEE" approach.
  • One of the key cases illustrating the illuminate term would be the Hong Kong Fir Shipping v Kawasaki Kisen Kaisha Ltd [1962] 1 All ER 474 CA case where court decided that seaworthiness cannot be regarded as a condition and therefore, the termination of the contract was not possible (however, this case will be discussed in the later paragraph!)

CASE COMMENTARY ON HING KONG FIR SHIPPING V KAWASAKI KISEN KAISHA LTD [1962] 1 ALL ER 474 CA:

  • Defendants chartered a ship from the plaintiffs for 2 years. The ship was supposed to be in a condition suitable for ordinary cargo service.
  • However, the crew was incompetent and also, the condition of the ship was very poor. So poor, that it was said to be UNSEAWORTHY.
  • After 20 weeks using the ship it was lost and the claiments therefore, wanted to terminate the contract. Plaintiffs therefore said, that they can claim only the damages.
  • The case itself do not automatically follow the classification of "condition" or either the "warranty" (it was really complicated case).
  • Lord Upjohn stated: "The traditional classification of terms as conditions or warranties "may not provide a complete answer"".
  • However, the decision of the court said that the SEAWORTHINESS cannot be considered as a condition and therefore, the termination of the contract was not possible.
  • In this case the consequences of the breach were not so serious as to allow the buyer to reject the whole cargo.
  • The decision in the Hong Kong Fir case does create a certain level of uncertainty since the parties will not know what their rights are in relation to a breach of contract until an auction is brought before the court. Of course the parties can expressly state within the contract itself what the consequences of breaking a particular term would be and, indeed, it would be in their own interests to do so. The absence of such express intentions nevertheless creates substantial problems, so much so that there have been attempts to limit the scope of the concept of the innominate term by the courts themselves.
  • IN CONCLUSION: Where the status of a term is not ascribed from the operation of some rule of law then one must ask the Hong Kong Fir question, namely: "Has the innocent party been deprived substantially of what it was intended that he should receive under the contract?" If the answer to this question is in the affirmative he can terminate the contract; if not, he may only claim damages and has no right to terminate.
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