Essay-Terms - Innominate Terms PDF

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Essay on Innominate Terms...

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Essay – Terms – Innominate Terms The introduction of the category of innominate terms was unnecessary and has introduced undesirable uncertainty into the law of contract. Discuss The laws concerning contractual terms are satisfactory because they achieve the purpose of providing certainty which is important when entering into a contract. An offer, which is the foundation of an agreement, and by extension contract, is an indication of a willingness to engage on certain terms. The important phrase here is, “certain terms”, this is important in all relationships, but is even more important in a business context where there may be a considerable amount of money at stake. In Shogun Finance v Hudson, Lord Hobhouse said it best, while commenting on the parol evidence rule, “the rule in one of the great strengths of English commercial law and is one of the main reasons for international success of English Law in preference to laxer systems which do not provide the same certainty.” The introduction of the category of innominate terms appears to have been unnecessary and has introduced undesirable uncertainty into the law of contract, it introduced flexibility. This essay will first address this idea by stating the working definitions of terms, how innominate terms were introduced and the principle derived; three ways in which innominate terms introduced uncertainty and a counter argument. Terms in contract law comes from two sources, they can be expressed or implied. Express terms are agreed on by the contractual parties; implied terms which are those not specified by the parties, but are implied by statute and the courts. Terms are classified into conditions and warranties, following the case of Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd (Hong Kong Fir), a third classification was introduced, innominate terms. Conditions are held to be so by statute (The Sale of Goods Act 1979, s.13-s.15) the courts ( Couchman v Hill) or the parties to the contract (Lombard North Central v Butterworth). Innominate terms were first introduced in 1962 by Lord Diplock in the case of Hong Kong Fir. In this case, the plaintiff chartered a ship to the defendant for 24 months, P undertook to supply a seaworthy ship. However, the engine room staff were inefficient and the engines were old. During the first 4 months, the ship was delayed for 5 weeks by repairs. Further repair which took 15 weeks were then found to be necessary. The D repudiated the

contract and P sued for wrongful repudiation. It was held that the seaworthiness of the ship was neither a condition nor a warranty, but an innominate term and D was not entitled to repudiate the contract because the breach did not deprive the D of the whole benefit of the contract. The principle derived from this case was that - where the occurrence of a breach does not deprive the innocent party of the whole benefit of the contract, in other words, it does not ‘go to the root’ of the contract, the party is not entitled to repudiate the contract. This represented a departure from the traditionally accepted approach that is the innocent party’s right to elect to terminate for breach of contract. Firstly, innominate terms created the problem of failure to provide protection for innocent parties who traditionally were protected. Adams and Brownsword rightly criticized the decision asking how innocent parties can ever be confident that the courts will treat the consequences of a breach as being serious enough. Oliver Williams, further argued, it is not fair or ideal to place innocent parties in such a position as it exposed them to additional risk which may be construed as affirmation of the contract. This is also undesirable because innocent party’s right to sue is stifled and overshadowed by time consuming judicial scrutiny. It is often said that time is money, and in the case of Hong Kong Fir, a 20-week delay in the business context is a considerable amount of time. Secondly, innominate terms created the problem of confusion among the courts regarding the idea of ‘going to the root’ of the contract. A solution was offered in the “substantial deprivation of the whole benefit’ test introduced by Lord Diplock. Legal scholars however argued that this places a high threshold burden on the innocent party. Tritel commented that the ‘substantial deprivation’ and the metaphor of ‘going to the root of the contract’ was not particularly helpful in analyzing the law or predicting the course of future decision. Again, it can be seen that certainty was desired. Thirdly, innominate terms may facilitate sloppiness in performance of contracts because the under-performer knows termination is unlikely to result unless the under performance leads to a serious enough breach. This view was advanced by Neil Andrews in his book, Contractual Duties, Breach, Termination and Remedies and shared by Tony Weir. In what appears to be a possible solution to this issue, Solne Rowan suggested that parties should be permitted to agree on remedies upon entering into the contract, this would serve the purpose of reducing litigation time and would

not, according to Rowan, necessitate any fundamental overhaul of the English Law remedies for breach of contract. However, despite the attractiveness of this idea, it was settled in Quadrant Visual Communications Ltd and other v Hutchinson Telephone (UK) Ltd, this was not up for consideration. In this case it was determined that a contract was not able to conclude on the right of a court to consider the action of a party when considering the grant of specific performance. Despite the problems that innominate terms seem to have created under the theme of uncertainty, there are some benefits. Business is not black and white, terms are not always conditions or warranties, room must be made for the grey areas, this is arguably what innominate terms did. Lord Hobhouse’s comment, in the introduction spoke about the rigid application of conditions and warranties would no doubt produce injustice, which is why the Hong Kong Fir doctrine, with all it’s faults, have some value. Firstly, it discourages, if not prevents, the injustice of parties from escaping a contract for a minor breach, change in market conditions or just a bad bargain. This was apparent in Reardon Smith Line v Hansan Tangen where the tanker market collapsed and the appellant sought to reject the vessel for not complying with the description in accordance with the sale by description. The COA held that this was a breach of a technical nature and did not entitle the appellant to reject the vessel. Further, innominate terms are not a free for all for underperforming parties as suggested by Adams and Brownsword in their concern for innocent parties not being able to repudiate contract which aren’t being performed to their liking. The courts as Carter (2012) highlighted, rely on several factors, which include: any detriment caused; delay caused; value of performance; cost of insisting on performance; opportunities for remedy by the party in breach; consequence of prior breach and prospects of future breach; and ability to adequately compensate the innocent party. These factors are broad and evaluated on a case by case basis. So uncertainty still persists, but if the party repudiating the contract gets it wrong even after they have considered these factors, there is a price to pay. This was seen in the case of Ampurius Nu Homes Holdings Ltd. V Telford Homes (Creekside) where the COA acknowledged that the bar was set very high deciding whether or not the breach was sufficiently serious to entitle the innocent party to terminate; the claimant had failed to clear the bar on the facts of the case. The benefit which it was intended that the claimant would obtain from performance of

the contract was the grant of a 999 year lease. The delay was not considered to have deprived the claimant of the whole benefit of the contract. Despite the problems that have arisen from the introduction of innominate terms into contract law which include: failure to protect the innocent party from underperformance stifling their right to repudiate while exposing them to risk; the initial confusion about what the idea of the breach “going to the root” of the contract mean and the apparent facilitation of sloppiness of performance; the classification does have some benefits as the bar is set quite high and the factors relied upon by the court are quite wide. This augers well for fairness in relation to both parties, business in not black and white, the law must make room for the grey areas and this is arguably what innominate terms have sought to facilities....