Classifiaction Of Contract Terms Flashcards
What are the three kinds of terms and what are the 2 possible consequences R6
We need to classify terms (give them a label) so we know what to do if a term in the contract has been broken.
What the options are depends on how we clarify the terms that have been broken.
There are three kind of terms in a contract: conditions, warranties and innominate terms and the consequences depend on the kind of term.
There are two possible consequences for the victim of a breach of contract - to claim damages or to end the contract.
What is repudiate and what is a wrongful repudiation R6
The word repudiate means to end the contract because of the other side’s breach.
It can be used as a verb - the act of ending a contract.
It can also be an adjective - repudiatory breach is one that allows the other side to end (or repudiate) the contract.
A wrongful repudiation is where one side terminates the contract but they didn’t have the right to do so.
Classification of terms - a problem of certainty or fairness R6
The problems for the court is whether to priorities certainty for the parties to a contract, so they know exactly what to expect in any circumstances, or to prioritise fairness and look at the consequences of the breach of contract.
You have a contract to deliver 5 tonnes of apples to me by the 1st of June, but you deliver 4.5 tonnes and they are 3 days late. In fact I now have enough apples and don’t really need to buy yours anymore.
A certain outcome would be to say that I automatically have the right to terminate the contract because you have broken an important term of the contract.
A fair outcome would be to see how much I have been affected by your breach. As the consequences are minimal, I didn’t really need them by the 1st of June, it would be ‘just’ to allow me to claim damages but not to end the contract.
What is the old approach to classification of terms R6
Before 1962 there were two kinds of contract terms - conditions and warranties.
This is called the ‘term based approach’ because when looking at the consequences of breach of contract, we are not interested in the consequences of the breach, just the kind of term that was broken.
With the old term-based approach which case showed conditions R6
Conditions were terms that went to the root of the contract. In Pouissard V Spiers (1876) a singer had to arrive on time for certain performances. They were late and missed several performances. The term that they had to attend the performances was a condition as it was the main point of the contract. Breaching this term gave the employer the right to repudiate the contract and claim damages.
With the old term-based approach which case showed warranties R6
Warranties are less important terms of the contract. In Bettini V gym (1876) a singer had to turn up for rehearsals and performances. When they were late for rehearsals this was only a breach of warranty, but to repudiate the contract.
Conditions were important terms of the contract and when broken means they cab repudiate the contract automatically regardless of the consequences/repudiatory.
Less important terms were called warranties, in Gye this was turning up to rehearsals, important but not the main part of the contract. So breach of a warranty allows the other side to claim damages, but not to end the contract.
This gave certainty because you knew that if you broke one of the main terms (condition) it could result in the contract being terminated, but if you break lesser terms these are warranties and can only get damages.
What is the problem with the old (term based) approach R6
This could lead to injustice.
In the case Arcos V Ronaasen (1933) there was a contract for wooden cement barrels, when the barrels were delivered the thickness of the wood was 2mm thinner than what was specified in the contract.
Held: the barrels could still be used but the breach of the term as to thickness of wood entitled the other party to end the contract as it was breach of a condition.
The injustice came that the barrels were perfectly usable still they may not have had a so long life span, may be 15 journeys rather than 20. This could have been compensated with damages because they were lightly less valuable in the long term. They may have wanted to end the contract because may be they weren’t convent anymore, may be they had found a cheaper source of barrels somewhere else so they were looking for a reason to repudiate and measuring the wood gave them this, there was certainty in the contract but arguably an unjust outcome, able to terminate for a technical breach.
Which case introduced innominate terms R6
Hong Kong Fir Shipping V Kawasaki Kisen Kaisha (1962).
The facts
2 year charter for the ship - this was a two year contract to charter (hire) a ship. One of the terms of the contract was the ship had to be seaworthy. Once the heiress took delivery of the ship they found it had engine problems and the crew were incompetent. It took a total of 20 weeks to get the ship into position where it was sea worthy and fit to use. By this time the charterers were fed up so they repudiated the contract, they sent the ship back to its owners and claimed damages for the costs they had suffered. The owners argued that the charterers didn’t have the right to repudiate the contract, so they counterclaimed for wrongful repudiation.
The judgement
The court said that the term, that the ship had to be seaworthy, was not a condition or a warranty, it was an innominate term.
A breach of an innominate term is repudiatory if the innocent party is deprived of substantially the whole benefit of the contract. In this case they lost 20 weeks of the 104 week charter. It could not be said that the charterers were deprived of substantially the whole benefit of the contract.
Tim video notes on the previous case R6
Conditions and warranties sometimes led to unjust outcomes because parties were able to wriggle out of inconvenient contracts on the basis of technical breaches when the goods were still usable.
One term was that the ship was sea worthy.
The charters argued that it’s a breach of a condition because it must be a condition that the ship is sea worthy because it’s important for the whole contract so that allows us to repudiate.
Held: No, being sea worthy is a unusual kind of term which can be broken in all sorts of ways it could be a serious breach (about to sink because of a whole on the side) or may be a trivial breach it’s got 80 instead of 90 fire extinguishers on board.
So a term that can be broken in all sorts of ways doesn’t really fit conditions and warranties, so they invented innominate terms (no name term, not yet been fully labelled. Innominate terms are those that can broken in a number of different ways.
Whether it’s repudiatory depends on the consequences of breach, so how much have you lost the main purpose of the contract term they used is ‘are they deprived of substantially’ seen above. If they are the other side can repudiate if not they are only entitled to damages. This was non-rediatory because they didn’t lose most of the benefit. They had wrongfully repudiated and the people who owned the ship could sue themselves for wrongful termination of contract.
Some terms are classified by statute R6
The Sale of Goods Act 1979 implies some terms into contracts for the sale of goods (eg the goods must be satisfactory quality). These terms are stated in the act to be a condition.
Note - The Sale of Goods Act was replaced in 2015 by the Consumer Rights Act in relation to consumer contracts, and the 2015 Act takes a different approach to contract terms. But the 1979 Act still applies to non consumer contracts, eg business to business.
Descriptions of goods are a condition unless they are not R6
Reardon Smith Line V Hansen Tangen (1979) - here there was a contract for a ship of a certain specification, the ship was labelled as ‘Osaka 354.’ In fact the ship was built by the sister company of the original builders and was called ‘Oshima 004.’ The buyers sought to repudiate for breach.
Held - there are conditions that describe the qualities of the goods, these are to be seen as conditions. The description here was only one of identification through and as such could not be seen as a condition and the breach did not entitle the buyers to reject.
Classification by the courts R6
The courts will have regard to the views and practices of the business community.
In other words - where a term is always seen in one particular business as a condition, the courts will interpret it as one.
We still use conditions because they give certainty in the law, this was demonstrated in the case The Mihalis Angelos (1971) where it was held ‘This kind of term will always be seen as a condition of the contract as that was the established custom in the shipping industry. This gives certainty to the parties in the contract.
Classified by the parties R6
If the parties have clearly stated in the contract that a term will be a condition, the courts are likely to interpret it that way. This is important as it allows the parties to remain in control of their obligations and so promotes certainty in the law.
This was shown in the case Lombard V Butterworth (1987).
Lombard V Butterworth (1987) R6
There was a contract to hire machinery, the hirers had to pay a monthly fee. A contract stated that it was of the essence that hirers should pay each instalment promptly on the 1st of each month. This was held to be a condition and one late payment allowed the other party to terminate the contract and claim damages. The COA said that although prompt payment s not normally of the essence, parties are at liberty to make it so.
Sometimes the courts have a different approach R6
Schuler V Wickman (1974)
S made machinery for car manufacturing. W made a contract to sell that machinery to the car industry.
The contract said that it was a condition that W sent its salesmen to the 6 largest motor manufacturers in Britain once every week for 2 years.
It was held that the parties’ own classification of the term as a condition was not conclusive. The parties had not intended to use the word condition in its technical sense. It was so likely that at least one visit would be missed that the parties can’t have meant to allow 1 missed visit as grounds to terminate the contract.
NB. This was a 3;2 majority decision of the HOL - it was not followed in Lombard above. This shows uncertainty in the law in this area.
