The commercial standing of the parties and their equality of bargaining power should be taken into account in considering whether the new, less rigid approach should be taken, and the following factors may affect the decision of the court.
• If the term is one which is covered by statute then there it is not open to the courts to discuss its status.
• If a breach of term would ‘go to the root’ of the contract, then the traditional approach to differentiating between types of terms may be satisfactory.
• If there is a ‘course of dealing’ it may be clear what type of term has been breached.
• If the parties clearly stated their intentions regarding the status of the terms in the agreement, and understood the significance of their statements, then this may be decisive (but see Schuler v Wickman, p. 111).
• If the parties are of equal commercial standing, it may well be justified, in the interests of certainty and consistency, to interpret terms more strictly, to ensure certainty between the parties. This principle will apply particularly in the case of charterparties. The following cases are relevant here.
Reardon Smith Line v Hansen Tangen (1976)
Here the breach was technical and was being used as an excuse to escape from a subsequently unwanted contract. A tanker being built to order was labelled Osaka 354. A subcontractor did some work on it and relabelled it Oskima 004. The buyers tried to reject the vessel, claiming that it did not conform to its original description, a term which could have been breached in a major or minor way. In fact, they really wanted to avoid the contract because the market had slumped.
The following is an interesting case which came well before Hong Kong Fir but which used a similar approach, showing that the idea behind examining the consequences was not as ‘new’ as perhaps thought, but merely waiting to be formally introduced via case law.
Awilko v Fulvia SpA di Navigazione (1981) (The Chikuma)
A vessel was hired out under a charterparty and a dispute arose over the regularity of payments. The owners claimed that because of this they were entitled to withdraw the ship. The House of Lords held that they were entitled to do so. Although this was harsh, it was felt that in such commercial agreements ‘conditions’ should be strictly interpreted so that parties know where they stand. In this way, long and expensive litigation would be avoided. So this was really a matter of erring on the side of certainty because of the nature of the transaction.
Bunge Corporation v Tradax (1981)
In a shipping contract, a term requiring notice of readiness to load was breached by a few days. This was held by the House of Lords to be a condition, even though the extent of the breach was small, as a stipulation over time in a shipping contract is of great importance and the outcome needs to be certain.
Lombard North Central v Butterworth (1987)
This case is a recent example of a party stressing the importance of a term being of a specific type. The plaintiff leased a computer to the defendant, with a clause making punctual payment of hire instalments
‘of the essence’ of the agreement. The defendant was late paying the third, fourth and fifth instalments. When the sixth payment was six weeks overdue the plaintiff terminated the agreement and sought damages for breach. It was held by Court of Appeal that they were entitled to do so, having made their intentions concerning the term quite clear at the outset.
Aerial Advertising Co v Batchelors Peas (1938)
Where should I fly today?
Eat Batchelors’ Peas
Condition or warranty?
Figure 7.1
Summary
The main types of terms
Conditions and warranties – Poussard v Spiers and Pond, Bettini v Gye.
The effect of a breach of either of these:
• Breach of a warranty: damages.
• Breach of a condition: repudiation or damages – Vitol SA v Norelf Ltd;
but if affirming, the innocent party must also carry out obligations still due – Fercometal Sarl v Mediterranean Shipping Co SA.
Approaches taken by the courts in distinguishing between types of terms
• Traditional approach: examine whether the breach ‘goes to the root of the matter’ (Blackburn J in Poussard v Spiers and Pond).
• The parties may have labelled the terms – Schuler v Wickman Machine Tool Sales Ltd.
• Statute may specify the nature of the term (usually within a consumer contract).
• The court may consider the consequence of the breach, for example, the ship in The Mihalis Angelos was in the middle of the ocean, so repudiation was needed.
• A ‘course of dealing’ may exist – British Crane Hire Corporation Ltd v Ipswich Plant Hire Ltd.
• The Hong Kong Fir approach may be used, where the court examines the effect of the breach and treats the term like a condition or a warranty.
The parties agreed that the plaintiff would advertise the defendant company’s products by flying over various towns displaying a trailing banner which read ‘Eat Batchelors’ Peas’. Before starting each day the pilot was to telephone for approval of the location. He did not do this on 11 November 1937, and flew over the main square in Salford during the two minutes’ silence which was part of the remembrance day service. Many complaints were received by the defendant company, including threats to avoid buying their products.
The defendant company claimed that it was no longer bound by the contract, and the court upheld this claim. The decision was based not on the original importance of the term, but on the seriousness of the breach.
Innominate terms
• Examine the approach taken in Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd. See also Cehave v Bremer Handelsgesellschaft (known as The Hansa Nord), Reardon Smith Line v Hansen Tangen.
• Consider the need for certainty between parties of equal commercial standing – Awilko v Fulvia SpA di Navigazione (known as The Chikuma), Bunge Corporation v Tradax, Lombard North Central v Butterworth. See also Aerial Advertising Co v Batchelors Peas.
Questions
1 Discuss whether the increased use of the innominate term means that it is no longer important to differentiate between conditions and warranties.
OCR 4-module specimen paper
2 ‘The different approaches taken to classifying terms lead to uncertainty.’ Discuss the accuracy of this statement.
3 ‘The intentions of the contracting parties are the main factors in deciding on the relative importance of contractual terms.’ Discuss whether this is, in fact, the approach currently taken by the courts.
4 ‘The different categories of terms found in an agreement are set by the parties and reflect a general freedom to contract.’ Is this a reflection of the state of the law regarding the types of terms within a contract?
5 Explain the way in which the courts establish how a particular term should be classified and discuss the importance of this distinction.
OCR 2003