Status of Terms Flashcards
Status of Terms
Different terms vary in their level of importance. The law classifies term into conditions, warranties and innominate terms, according to their importance. Implications of a breach vary according to the type of term breaches.
(Conditions )
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.
Bunge Corporation v Tradax 1981
A contract for the sale 5,000 tons of soya beans required the buyers to give the sellers 15 days notice of readiness of loading. This term was stated as a condition. The buyers gave a shorter notice period and the sellers treated this as terminating the contract and claimed damages. The price of soya beans had dropped by over $60 per ton. The initial hearing was decide by arbitration where it was held that the sellers were entitled to end the contract and awarded $317.500 representing the decrease in value of the soya beans. The buyers appealed to the High court who reversed this decision applying the innominate term approach from Hong Kong Fir. The Court of Appeal reversed the decision and the buyers appealed to the House of Lords. the term was stated as a condition and should be treated as such. The need for certainty in commercial contracts and the fact that the innominate term approach had caused much litigation meant that it should only be used where it was impossible to classify the term as a condition or warranty by reference to the term itself.
The Mihalis Angelos [1970]
Conditions
The owners of the ship, The Mihalis Angelos, chartered the ship to the defendant to use for the carriage of some cargo. A clause in the agreement stated the ship was expected ready to load on 1st July. In fact the owners had no grounds for believing the ship would be ready to load on that date as it was in Hong Kong at the time and would not be ready until at least the 14th of July and in fact it was not ready at that date. The defendant cancelled the contract on 17th of July. The cargo that they expected to be carrying had not arrived due to the bombing of a railway in Vietnam. The ship owners brought an action against the defendants for anticipatory breach. The defendants argued that the claimant was in breach of condition of the contract by not be ready to load on the specified date.The expected ready to load clause was a condition despite the fact it had caused no loss to the defendant. The classification as a condition was said to be because of the need for commercial certainty in shipping contracts
Warranties
The word warranty usually describes a contractual term which can be broken without highly important consequences – such as our example of the car ashtray, above. The Sale of Goods Act 1979, s. 61 defines a warranty as a term ‘collateral to the main purpose of [a contract of sale]’. If a warranty is breached the innocent party can sue for damages,
Bettini v Gye (1876
Bettini agreed by contract to perform as an opera singer for a three month period. He became ill and missed 6 days of rehearsals. The employer sacked him and replaced him with another opera singer. Bettini was in breach of warranty and therefore the employer was not entitled to end the contract. Missing the rehearsals did not go to the root of the contract.
Innominate terms
Innominate or intermediate terms are terms which can be broken with important or trivial consequences, depending on the nature of the breach. If serious, the term will act as a condition, if minor, a warranty. The doctrine of innominate terms came about in the case of Hong Kong Fir Shipping Co Ltd v Kawasaki Ltd.
Hong Kong Fir Shipping Co Ltd v Kawasaki Ltd, Innominate terms
The defendants had chartered a ship for 2 years. Elderly engines and incompetent staff caused 20 weeks of breakdowns. They decided to terminate the contract. The claimants claimed that the breach did not entitle the defendants to terminate, only to claim damages. Lord Diplock stated that this term is not soluble by debating whether the term is a ‘condition’ or a ‘warranty’. The correct approach was to look at what happened as a result of the breach and decide if the characters had been deprived of substantially the whole benefit which it was the intention of the parties they should obtain.
Schuler AG v Wickman Machine Tool Sales Ltd, Innominate terms
One party is to visit certain manufacturers at least once a week. This was written as a condition in the contract. It was held that it was important to consider whether imposing the strict legal meaning would create a very unreasonable result. This term is only an innominate term, as it could be breached in very minor ways. This strategy is logical where terms can be broken in a wide number of ways, as it would be unfair to allow termination for a very minor breach.
Reardon Smith Line v Hansen Tangen , Innominate terms
The tanker was named ‘Osaka No. 354’ which identified the shipyard which was to build the vessel. However, the name was changed to ‘Oshima 004’ and the charterers sought to rely on s.13 Sale of Goods Act 1979 to terminate the contract. But the court held that they were merely labels, and not a description. The term breached was not a condition.
Criticism of innominate terms.
Is it sensible to apply Diplock’s test to all contractual terms?
No: One problem with innominate terms is uncertainty. Until a breach has occurred, it may not be clear what kind of term is involved. This is a potential source of inconvenience, especially in business, where in order to plan their affairs, parties need to know exactly what obligations they are assuming, and what will be the result if they do not fulfill them. As seen in The Mihalis Angelos, the term regarding readiness for loading could have been broken with trivial consequences as well as with serious results, yet in the interests of certainty, it is a condition.
No: The Sale of Goods Act 1979 aims to establish the standards of quality of consumer contracts. It is better to impose a strict liability on the supplier, rather than depending on a case-by-case basis, eg. when there is a defect in a product.
Yes: Innominate terms allows the correct balance between the other two types. In The Hansa Nord, the citrus pellets were said to be ‘in good condition’, but some were damaged, although not seriously. The court held that the clause was an innominate term, and since the breach was not serious, the buyers were not entitled to repudiate the contract. Hence, there is no doubt that innominate terms has it its place.
