Contract can only be ceased by plaintiff

The fundamental idea is that the contract can only be ceased by plaintiff where the term breached is a significant one (a ‘repudiatory breach’). In Decro-Wall International SA v Practitioners in Marketing Ltd [1] Buckley LJ said:

“To constitute repudiation, the threatened breach ought to be such as to withdraw the injured party of a important part of the benefit to which he is permitted under the contract….breach ought to be of an important term, or of primary term of the contract, or that it must go to the root of the contract….[ the question is whether] the effects of breach [is] such that it would be unreasonable to the injured party to grasp him to the contract and leave him to his remedy in damages as and when a breach or breaches may occur? If this would be subsequently, then repudiation has taken place."

At the time of the formation of the contract, classification of term establishes whether its breach yields the right to terminate irrespective of the importance of the actual results of breach. Contract can be terminated for breach even of its real effects is unimportant, but not for breach of warranty however its effects are serious.

However, if a term is not classified by the parties, statute, or binding precedent, it may be hard to say at the time of formation how significant a term is, because the results of its breach may fluctuate extensively seriousness, depending on the exact circumstances of breach [Bentsen v Taylor, Sons & Co [2] ]. The judicial clarification was to identify a new category of ‘wait and see’ terms, called innominate or intermediate terms. Whether termination is presented for breach of such terms depends on ‘waiting and seeing’ whether, once breach occurs, its effects are adequately severe to justify excusing the claimant from additional performance

On the other hand, if the parties, statute, or binding precedent do not classify a term then it can be hard to say on the time of the formation how significant a term is, because the results of the breach of the term can be serious, depend upon the correct circumstances of breach [Bentsen v Taylor, Sons & Co [3] ]. The court explanation was to classify a fresh kind of ‘wait and see’ terms, called innominate or intermediate terms. Whether termination is presented for breach of such terms depends on ‘waiting and seeing’ whether, once breach occurs, its effects are adequately severe to justify excusing the claimant from additional performance [4] .

As in Hongkong Fir Shipping Co. Ltd v Kawasaki Kisen Kaisha Ltd [5] Diplock LJ said:

“The lawful consequences of the violate of innominate terms ‘do not go behind automatically from a prior classification of the undertaking, as a ‘condition’ or ‘warranty’. It depends upon whether the breach has dispossessed or will dispossess the claimant ‘of substantially the whole benefit which it was intended he should obtain from the contract".

In this case, the defendant chartered a ship from the plaintiff on a 24 month time charter. The charterparty stated that the ship was ‘in every way fitted for ordinary cargo service’ and clause 3 provided that the owners should ‘maintain her in a thoroughly efficient state in hull and machinery during service’. The ship was delivered to the defendant on 13 February 1957, and on that date set sail from the Liverpool to Newport News, Virginia, to load a cargo of a coal for carriage to Osaka. At the date of delivery, the ship was unseaworthy because she had old engines. As a result, repairs had to be carried out on the way to Osaka. In June 1957, following a freight rates since the date of the charter, the defendant terminated the charterparty. The plaintiff brought a claim for damages for wrongful repudiation. The Court of Appeal dismissed the appeal, holding that the breach of contract was not sufficiently serious to entitle the defendants to terminate the contract.

Extent of the class of intermediate terms:

In the Hong Kong Fir case the intermediate terms granted that the threefold classification of terms does exist, the question then takes place into which category particular terms ought to be placed? [6] The significant issue is that, whether a formerly unclassified term is to be classified as a condition or as an intermediate term. This issue is tough one for the reason that it gives rise to a conflict between two policies.

First, The right to terminate is to be restricted by these policies in which the breach causes serious prejudice to the injured party, and so a party is prevented from terminating for ulterior motives such as his wish “of escaping from an unwelcome bargain" as mentioned in The Gregos [7] . This policy favours the classification of terms as intermediate. This is illustrated by the Honkong Fir case and The Hansa Nord [8] and by a number of later decisions. In Tradax International SA v Gold-Schmidt SA [9] the words “four percent foreign matters" in a contract for the sale of barley were held to be an intermediate term, so that the buyer was not permitted to reject purely because the goods were certified to contain 4:1 percent foreign matters. Slynn J. said that:

“In the nonappearance of any clear agreement or previous decision that this was to be condition, the court should bend in support of interpreting this provision as to impurities as an intermediate term, only a severe and significant breach of which entitled rejection".

To contrast, the requirement of commercial certainty is emphasised in the second policy classification of terms as conditions is favoured by it. This classification makes conditions useless to go into the difficult questions of fact and degree which occurs in determining whether the breach is “serious and substantial". These considerations prevailed in Bunge Corp v Tradax Export SA [10] holds that a notice of readiness for loading specified by a buyer is a condition of the contract, in spite of how dangerously the seller is influenced by its breach. The same binding consequence of classifications of terms by the Court of Appeal or House of Lords is to be observed in many other types of contract; and in all cases the binding nature of the decision influences the way in which the contracting parties must approach their obligations. [11] 

Critical evaluation of intermediate term:

The judgment in the Hong Kong case led some to believe that classification of terms was no longer required except this would obviously have been to go away too far from the history. That a dissimilarity must be prepared between major and minor terms, relatively than between the more and less serious effect of a breach. To illustrate this difference, some law lords state that they must themselves at the date of the contract and not wait for the likelihood of the future

In the case of Hong Kong Fir case ,an additional point to note from this case is that Diplock LJ appeared to suggest that:

“A term would only be classified as a condition if every breach of it would deprive the party not in default of considerably the whole benefit which it was proposed that he should obtain from the contract".

This suggestion was based on a rather questionable analogy with the law of frustration, and the House of Lord rejected it in Bunge Corporation v Tradax Export SA [12] , where Lord Roskill said that there were

“many cases……where terms the breaches of which do not deprive the innocent arty of largely the whole benefit which he was proposed to obtain from the contract were nevertheless held to be conditions any breach of which permitted the innocent party to rescind".

Another case in which, the approach in Hong Kong case has been criticised by Mr Weir complaining that it ‘rewards incompetence’ in Cehave NV v Bremer Handelgesellschaft mbH (The Hansa Nord) [13] Mocatta J held in the favour of buyer. Terms under the Sale of Goods Act ought to either conditions or warranties and since breach of the ‘shipped in good condition’ term may have serious consequences, it had to be condition. The Court of Appeal alleged that the term was an intermediate term and the breach did not go away to the root of the contract, buyer was only entitled to damages.

Weir criticised this decision, complaining that it ‘rewards incompetence’ [14] . By disallowing the buyer to let the buyer terminate the contract, the Court of Appeal efficiently forced the buyer to pay not only the accurate value, but the seller’s yield as well. He criticised and stated that: ‘The guilty party is to get all that he bargained for except the innocent party gets no part of what he bargained for [15] ’. Regrettably, it also left us with an unacceptable degree of uncertainty in the law.

Moreover, in relation to common clauses in commercial contracts a different approach has implemented in Maredelanto Compania Naveria SA v Bergbau-Handel GmbH (The Mihalis Angelos) [16] In this case the Court of Appeal held that the “readiness to load" clause was a condition, breach of which entitled the charterers to terminate the contract. The members of the Court of Appeal were not unusually pressed with the argument adopted in the Hong Kong Fir case. But they were of the view that the difference between ‘condition’ and ‘warranties’, though not of worldwide application, was still priceless, separately from the statute, in many classes of contract and particularly in charterparties. In reaching the conclusion, the court had to select between the aims of certainty and elasticity.

Megaw LJ stated that:

“One of the significant elements of the Law is predictability. At any price in commercial law, there are clear and considerable advantages in having, where possible, a firm and definite regulation for particular class of legal relationship….it is certainly much better both for ship-owners and charterers when a contractual obligation of this nature is under consideration- and still more when they are faced with the requirement of an vital decision as to the effects of a suspected breach of it- to be able to categorically: “If a breach is confirmed, then the charterer can put an end to the contract", rather than that they should be left to consider whether or not the courts would be expected, in the particular case, when the evidence has been heard, to decide that in particular conditions the breach was not such as “ to go to the root of the contract"…."

Moreover, there are lots of situations in which it may be cleared by the court that a term is a condition even though it is possible to envisage breaches of it which would not be serious.

It is illustrated in Bunge Corpn v Tradax Export SA [17] . It is held that to presume time clause as an intermediate term in mercantile contracts would be “commercially most undesirable". The House of Lords alleged that as the sellers’ obligation to ship during June was certainty a condition, the obligation to give timely notice by the buyer of readiness must commonly be treated as condition, without enquiry in particular cases as to whether any serious consequences have been caused due to delay [18] .

Lord Wilberforce he stated that [19] :

“The judgment of Diplock LJ does not give any support and ought not to grant any encouragement to any such proposition; for away from doubt it makes out that it is open to the parties to agree that, as regards a particular obligation, any breach shall allow the party not in default to treat the contract as repudiated….."

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