The Sale of Goods Act 1979

The law related to the international contracts of selling of goods is contained in the Sale of Goods Act 1979.The Act replaced 1893 Act of the same name and included all the amendments which took place during this period of time (see Appendix A). The amendments were mainly focused on the protection of consumer rights, thus they did not bring any significant changes to the above legislation. [1] A contract of sale is defined as: “a contract by which the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price”. [2]

Sources of contractual terms

There are two principal sources of contractual terms: express terms and implied terms. The purpose of the contract is to represent all the agreed promises and obligations of contractual parties, those terms are called express terms. These kind of terms can be agreed in written form or/and orally. The content of the contract can be freely agreed between a buyer and a seller, based on their interests. However, once the contractual parties have elected to save their contract in written document, the courts have held that no variations or contradictions can be made to contract. This rule is called ‘parol evidence rule’ [3] , which arose after Jacobs v. Batavia & General Plantations Trust Ltd [4] case. The purpose of the rule is to give some certainty to contractual parties about the stability of the contract. This rule does not apply for every kind of contracts though.

However, there are obligations which may automatically be included into the contract by the courts or a statute. Those obligations are known as implied terms and can be found in the Sale of Goods Act 1979 ss.12-15.Thus it is an implied condition that the seller has a right to sell the goods [5] and there is an implied warranty that the goods are free from charges or encumbrances in favour of third parties [6] . Most of the contractual disputes arise from the misunderstandings of the terms, especially when it comes to the breach of the contract and the injured party claims for damages or repudiation. The reason is that contractual obligations are not all of equal importance. The aim of this essay is to criticise the classification of contractual terms only into warranties and conditions. The classifications of contractual terms under the Sale of Goods Act 1979 should widen to three categories nowadays: conditions, warranties and innominate terms.

Conditions and warranties

Traditionally, all contract terms were divided into two general categories which are known as warranties and conditions. For example, when a person wants to buy the laptop he or she would be more interested in the system configurations than in the colour of the laptop. Thus the colour would be a warranty and the system configurations would be a condition in this case. The conditions are very important and essential terms, which are going to the root of the contract; they create the base of any agreements. For instance, seller’s concurrent condition is to deliver the goods while the concurrent condition of a buyer is to accept and pay for the products. [7]

A warranty is the term which is not treated as an essential part of a contract, but still plays a big part. The failure to meet the requirements of the contract is called the breach of the contract. If one of conditions of the contract was breached the injured party can claim for both damages and for the right to repudiate the contract, while the breach of warranty gives the injured party only the right to claim for damages. [8] The main purpose of damages is to compensate the loss he or she suffered after the breach of the contract, damages are not meant to punish the defendant.

The following cases will show the main difference between a warranty and a condition. Poussard v Spiers [9] shows clearly what is the breach of condition is. Madame Poussard was an opera singer who had a contract obligating her to give a number of performances over a three months period of time. Unfortunately she became ill, which was the reason why she was not able to perform first four concerts. Her employers wanted to repudiate the contract, as it was impossible to find a replacement for the rest period of time. The court held that the Madame Poussard did breach the contract and Spiers had the right to terminate the contract. Bettini v Gye [10] is the case very similar to the previous one, but has different circumstances which lead to the opposite decision of the court. Unlike Poussard Bettini missed half of the six days rehearsal schedule, as a result of his illness. His employees considered it as a breach of a contract, as the contract had terms regarding the attendance of rehearsal sessions. Bettini claimed that the term was a warranty, thus Gye did not have a right to sack him. The court held that Bettini was right, and as the result Gye had to pay damages to the opera singer.

The innominate terms

However in the second half of the last century the common law faced a new category of contractual terms called innominate terms, or intermediate terms. Thus if the term has been classified as innominate term and if that term is breached the injured party can elect to terminate the contract for breach of an innominate term, but only in the case when “the consequences of the breach are so serious as to deprive the innocent party of substantially the whole benefit which it was intended that he should obtain from the contract”. [11]

The innominate term was introduced by Lord Diplock in 1962. The case Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [12] showed that the existing classification of contractual terms into either conditions or warranties is not sufficient enough. As a result the innominate (sometimes called intermediate) term was created, when Lord Diplock said:

‘There are many … contractual undertakings … which cannot be categorised as being “conditions” or “warranties” … Of such undertakings all that can be predicted is that some breaches will and others will not give rise to an event which will deprive the party not in default of substantially the whole benefit which it was intended that he should obtain.’ [13]

In this case the ship was chartered to defenders for 24 months period. However, during the first seven months the ship was not available for voyages due to repair works. The engines of the ship were not working properly and the crew was not efficient. However, after the seven months period the ship has employed a new crew and all the repairs were done, thus the ship was ready for the voyages in all respect. Both parties have agreed that the term “the ship should be in every way fitted for ordinary cargo service” has been breached. Contractual parties considered this terms in deferent ways though. The shipowners claimed the term to be a warranty, while charterers treated the term as a condition by repudiating the contract. As a result the shipowners sued charterers for wrongful repudiation. After consideration the court held that the term regarding the seaworthiness of the ship cannot be classified as either a condition or a warranty. The term was called innominate, and the defendants did not have a right to repudiate the contract. The reason was the fact that the charterers did not lose “substantially the whole benefit which it was the intention of the parties they should obtain”.

Some of the facts influenced the decision of judges; these facts can be called circumstances. The main concern of the court is to divine objectively the intention of the parties from the words they have agreed in their contract. [14] The first concern was about the current freight market. At the time when charterers terminated the contract the market has fallen from 47s per ton (the freight rate the ship was hired for) to 13s 6d per ton. Thus the court identified the intention of charterers unfaithful, as the defendant’s motive was to escape the non-profitable bargain. The term regarding the seaworthiness of the ship covered every minor breaches, including even the absence of a rivet. At the same time the same the term was covering such a big thing as a sinking of the ship. Thus if the term was called a condition, the charterers would have a right to repudiate the contract in case of finding a missing rivet. However, it could not be classified as a warranty neither, as the contract could not be repudiated even in the case of ship sinking. As the result now the contract terms can be classified either as a conditions, warranties or innominate terms.

The breach of an innominate term can lead to different consequences. Thus it is up to the court decide how seriously the injured party suffered, and the way the term should be treated either as a condition or a warranty. The innominate terms give judges more flexibility in their decisions, allowing them to justify the facts and consequences wisely. [15] In contrast when dealing with conditions or warranties courts do not usually wait to see the actual consequences. Instead the judges look back to the time of formation of the contract to justify how important the term was for both parties; the level of importance would categorise the term into the warranty or the condition. While dealing with innominate terms the judges consider the effect of the breach. [16] The innocent party is able to claim for damages and repudiate the contract in case when it is “deprived of substantially the whole benefit of the contract”. Otherwise the injured party can only claim for damages. [17]

An innominate term leaves another difficulty of distinguishing between an innominate term, a condition and a warranty. There are a few ways to find out which terms are conditions. A party which has breached one of the terms would more likely to claim that the term was a warranty, not an innominate term so as “to restrict the innocent party to a remedy in damages and to deprive him of ability to terminate [18] “. The terms might have been already classified as a condition by statute in the past, thus they will be most likely continue to be regarded as a condition.

To prove that the innominate terms should be counted as another classification there is a following example of case, which used innominate terms: The Hansa Nord [19] . In this case the buyer was searching for a way out of a bad bargain. According to buyers the shipment of citrus pulp was not made in “good condition”, that is why they have rejected the cargo totalling in £100,000. The sellers had to resell the cargo, and the buyers managed to buy it through the agent for £30,000. It should be mentioned that the condition of the product was the same as for its original purpose. The Court of Appeal has held that the term which had been broken was neither the warranty nor the condition, and applying Hong Kong Fir, held that the term was an innominate term, as the consequences of the breach were not sufficiently serious to give grounds for termination of the contract. The contracts should be encouraged to be performed, not terminated, that is the reason why the terms classified conditions should be limited. Roskill lj stated in The Hansa Nord [20] :

“…in principle, contracts are made to be performed and not to be avoided according to the whims of market fluctuation and where there is a free choice between two possible constructions I think the court should tend to prefer that construction which will ensure performance, and not encourage avoidance of contractual obligations.”

As the result of this case the buyers were only able to claim damages for the loss in value of the cargo caused by its defective state.

Ronaasen &Son v Arcos [21] is simular to The Hansa Nord; the motive of the buyer was to escape a bad bargain. A term has been classified as a condition, even though the effect of a breach of the contract was not significant. This case would now be judged by section 15A of the Sale of Goods Act 1979, in this case the effect of breach would be “slight”. However, on the approach of The Hansa Nord [22] , the injustice of cases similar to Ronaasen &Son v Arcos need no longer occur.

Conclusion

In conclusion it should be said that the current situation in the classification of contractual terms should divided into three different terms: conditions, warranties and innominate terms. Implied terms (warranties and conditions) are classified by the statutes. Conditions are more important than warranties, as the breach of the condition will give the right to repudiate the contract, while breach of warranty will only let the injured party to claim for damages. Meanwhile the innominate terms are those which were not classified as the statutory implied terms, unless the contractual parties did not indicate the term in either condition or warranty. However, the rule of law can specify the particular term to be treated as either a condition or a warranty [23] . In case when the innominate term is breached the injured party can treat the contract as repudiated if it could lose/or lost the whole possible benefit.

The innominate terms brought more justice into the law process, as now the consequences of breaches matter much more, as they used to be. Thus the decisions of judges can be fair by implying the innominate terms. The courts are able to consider bad/not fair intentions of both parties, as some of the cases show that the intentions of injured parties are not always trustworthy. Thus all contractual parties should understand the importance of terms, and the right to repudiate the contract should be limited.

APPENDIX A

The amendments of the Sale of Goods Act since 1893:

Sale of Goods Act 1893

The Misrepresentation Act 1967

The Supply of Goods (Implied Terms) Act 1973

The Unfair Contract Terms Act 1977

Sale of Goods Act 1979

The Sale and Supply of Goods Act 1994

The Sale of Goods (Amendment) Acts 1994 and 1995

The Sale and Supply of Goods to Consumer Regulations 2002