Week 5 - Contract Terms (Conditions, Warranties, and Innominate terms) PDF

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Summary

Lecture Objectives
• Provide an overview of this topic
• Discuss conditions and warranties
• Understand the role of innominate terms...

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Week 5

Lecture Objectives   

Provide an overview of this topic Discuss conditions and warranties Understand the role of innominate terms

Contract Terms Relationship with contract formation 

Contract formation looks at whether a contract has been validly constituted

Contract terms are essential for consideration of:    

The rights and obligations of the parties How a contract is to be interpreted by a court What constitutes as breach of a contract? How disagreements should be handled

Conditions and Warranties Contractual terms may have varying or relative importance

Some terms are of more importance than others.

Exercise: Find the contractual terms and order them on a hierarchy of importance. I will sell you my guitar for £200, which I guarantee is in good working order, no warping of the fretboard, and I will ensure that it is polished and the strings tuned before giving it to you. 1. Sale of a guitar, the price £200 2. Good working order, no warping of the fretboard 3. String tuned 4. Ensure to be polished

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This hierarchy is very important, because if certain of these terms are breached these will be considered serious and have significant impact on the contractual relationship. And if other terms are breached while it should not be, they will not be treated as equal to other important terms.

This distinction - conditions, warranties, and innominate terms. A condition – is a term that important enough that a breach would have very significant A warranty – is a term that can be broken without hugely significant consequences for the performance of the contract Innominate terms – is one where breach could be serious or trivial (insignificant) depending on the circumstances and the consequence of the breach

Condition The breach of a condition allows the other party to treat the contract as repudiated (In other words the other party decided to no longer be bound by its contractual terms) and sue for damages Rescission = the ability to terminate a contract in response to the breach by the other Key cases: Poussard v Spiers (1876); Bunge Corp v Tradax Export SA (1981); Mihailis Angelos (1970)

Warranties A warranty is a term of the contract that while it is part of that contract and failure to abide may have consequences it does not go the heart of the contract. In other words, the breach of term would not constitute in dramatically change the nature of that contract. In these situations it may be possible for a party to sue for breach and claim damages but do not rescind the contract all together. Key case: Bettini v Gye (1875)

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Innominate Terms Important in cases where it is not clear whether the breach can be seen as conditions or warranty To determine whether the breach can constitute as condition or warranty you need to examine the effect of that breach. Key case: Honk Kong Fir Shipping Co. Ltd & Kawasaki Ltd (1962) Facts: A ship was chartered (hired) for a period of 2 years. The agreement included a term that the ship would be seaworthy throughout the period of hire. The problem developed with the engine of the ship and the engine crew was incompetent. Consequently, the ship was out of service for a period of 20 week. The defendants treated this as a breach of condition and rescinded. The claimant brought an action for wrongful repudiation arguing the term relating to seaworthiness was not a condition of the contract. Outcome: The defendants were liable for wrongful repudiation. The court introduced the innominate term approach. 20 weeks out of 2 years contract period did not substantially deprive the defendant of whole benefit and therefore they were not entitled to repudiate the contract. Ratio Rather than seeking to classify the term itself as a condition or warranty, the court should look to the effect of the breach and ask whether the breach has substantially deprived the innocent party of the whole benefit of the contract. Reasoning Lord Diplock: ‘The problem in this case is, in my view, neither solved nor soluble by debating whether the shipowner’s express or implied undertaking to tender a seaworthy ship is a ‘condition’ or a ‘warranty’. The correct approach was to look at what happened as the result of the breach and then decide if the charterers had been deprived substantially the whole benefit which it was the intention of the parties they should obtain’ In other words, to determine whether it is a condition or a warranty you must look at the consequences.

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Other examples: Schuler AG v Wickman Machine Tool Sales Ltd (1973) Facts: In this case the contract had a term that was specifically called a condition, that requirement was ‘weekly visits’. Outcome: The court considered the term as innominate term, the fact that they called it a condition was indicative but the courts concluded that this was only one of the things they would look at. Just because you call something a condition it does not mean that it is. Use of term ‘condition’ may be an indication of importance, but ONLY an indication! Notes: If the results of the breach of this term regarding weekly visits would have very serious consequences for example, the weekly visits are rarely undertaken and there is significant problems as a result would have been considered as a condition. However, it could actually have been much less severe for example 51 weeks out of the year the visit is made the 52nd week of the year the visit is not made. The effect of this occurring might be much more trivial (insignificant) so it would be treated as a breach of warranty allowing for damages but not the termination of the entire contract.

Reardon Smith Line v Hansen Tangen (1976) Vessel name changed from Osaka No 354 to Oshima 004 Deemed not to be a condition and therefore could not allow for termination of contract

Cehave NV v Bremer Handelsgesellschaft GmbH (1975) – clause was considered innominate, and as breach not serious, no entitlement to repudiate contract (Facts 12,000 tons of lemon pellets were delivered but some damaged). The effect of the breach warranty as the claimant entitled for damages but nevertheless they cannot repudiate contract.

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What is the position on Innominate terms? Grand China Logistics Holding (Group) Co Ltd v Spar Shipping AS: ‘the modern English law approach to the classification of contractual terms is that a term is innominate unless it is clear that it is intended to be a condition or a warranty’ In other words, you must look at the contract terms. In the average contract if there is a dispute as to a term being breached and the impact of that breach it’s up to the courts to determine whether it is innominate and if so, what is the severity of the breach....