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LA1040 Contract Law
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LA1040 Contract Law
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Course Code: LA1040
University: University Of London
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Country: United Kingdom
Question:
What is the effect of the classification of contractual terms on the remedies available for breach of contract? How are breaches of innominate terms treated?
Answer:
Introduction
A contract is an agreement between the parties which is enforceable legally in the courts. There are several provisions of law which governs how the terms related to the contract would operate. A contract consists of a set of provisions which are known as contractual terms. The weightage of such terms are not equal as one term may have a more significant consequence as compared to the other in relation to their breach. In common law the terms of a contract are divided into three types of terms which are conditions, warranties and innominate terms (Hunter 2017).
All terms of a contract are binding on the parties to the contract. When the parties fail to perform such obligations the aggrieved party is entitled to claim compensation and other remedies for the breach of contract. However not all contractual terms have the same effect when they are breached. The breach of the different terms of a contract results in different remedies for the aggrieved party. Under common law as well as statues it is a rule that when one party has violated a promise in relation to the contract he or she is liable to pay damages. When a party breaches a condition of a contract the aggrieved party is not only allowed to have compensation but also repudiate, rescind or get discharged from the contractual obligations (Poole 2016). When a party does not comply with a term which is a warranty to the contract the aggrieved party is entitled to compensation only and not to rescind the contract. How breaches of innominate terms are treated are discussed latter in the paper.
Conditions in a contract
The most important terms of a contract are treated as conditions. These terms go to the root of the contract. The parties to the contract can end the contract where a condition has been violated. The concept in relation to contractual terms had been discussed in the famous case of Poussard v Spiers (1876) 1 QBD 410. In this case a contract was entered into by the parties where the plaintiff Poussard was to perform as an opera singer for a period of three months. Five days prior to the opening night the plaintiff got ill and was not able to perform the act for the first four nights. The defendant therefore replaced the plaintiff with another singer. The plaintiff had brought a claim against the defendant for the breach of contract. A claim was made by the plaintiff that she had only violated a minor term of a contract and not a significant term and therefore she should be entitled to damages from the defendant. The court analyzed the facts of the case and ruled that a condition of the contract has been violated and therefore the defendant was entitled to end the contract. The reasoning of the court was that it was a major term of the contract that the plaintiff would not be able to perform and therefore the defendant would have been subjected to significant losses. In addition performing from the opening night by the plaintiff was a fundamental promise to the contract and therefore is to be termed as a condition.
In the case of Baldry v Marshall [1925] 1 KB 260, the plaintiff consulted a car dealer and notified him that he wants to buy a car for the purpose of touring. The defendant care dealer suggested him that a Bugati car would be applicable for this purpose. Putting his belief on the defendant the plaintiff purchased the car. However it was found that the car was not appropriate for the purpose of touring. The plaintiff brought an action against the defendant claiming the breach of contract. it was found by the court that the defendant has violated the condition of the contract which is in relation to the suitability of the car for the purpose of touring. This is because the very purpose of the purchase of the car by the plaintiff was touring. Therefore it was ordered by the court that the plaintiff is entitled to repudiate the contract as well as claim damages suffered by him in the tour.
Therefore when it is identified by the court that a condition has been violated in the contract based on its importance in the overall context of the contract the parties whose rights have been violated has the right to rescind the contract as well as claim compensation.
Warranties in a contract
Minor terms of a contract which do not form a central part of the existence of the contract are known as warranties. In case of the breach of warranties the aggrieved party unlike the breach of conditions is entitled to damages only and not to repudiate or end the contract. The concept in relation to warranties had been discussed in the case of Bettini v Gye 1876 QBD 183. In this case the plaintiff had entered a contract whereby he was to perform as an opera singer for a period of three months. He had become ill and was not able to attend the rehearsals for 6 days. The employer during the period sacked him and hired a replacement. A claim was brought by the plaintiff that he only breached the warranties of the contract and therefore the defendant is not liable to repudiate the contract. It was held by the court in this case that the plaintiff had violated a warranty as a six day training period did not form the fundamental to the contract which was to actually to perform as a opera singer. Therefore the court held that the defendant had breach the contract by replacing the plaintiff with another singer.
In the case of Wills v Amber [1954] 1 Lloyd’s Rep 253 the plaintiff was sold a four-berth motor boat by the defendant upon a innocent representation that all its parts were good. It was later found that one of its parts were rotten. The court held the representation as a warranty citing that it is not to the root of the contract.
Therefore in case of a warranty where it is discovered that the term is not to the root or fundamental to the contract the aggrieved party can only claim damages for the breach of such terms and not repudiate the contract.
Classification of conditions and warranties
The condition is an essential term of the contract which means that its stipulation is very important to the terms if the contract. on the other had warranties are collateral which means that the nature of the terms themselves is collateral classifies it is a warranty. A breach of condition is considered as a breach of warranty, however the breach of warranty cannot be considered as a breach of condition. In the case of Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 it had been held by the court that the parties cannot designate a term of a contract as a condition or a warranty. This is because the word condition is not conclusive. The context of the contract depicted that the parties did not have the intention to treat the word condition in its technical sense. Whether a term is a condition or warranty is implied by an existing statue or a precedent decision.
Innominate term or intermediate term and how their breach is treated by courts
A term which is not clearly definable is known an innominate term or intermediate term. The consequence of the breach is used to determine whether the term is a condition or a warranty. The concept of innomiate terms had been established in the case of Hong Kong Fir Shipping v Kawasaki Kisen Kaisha [1962] 2 QB 26. In this case the court rather than classifying the terms of the contract into warranties or conditions, developed an intermediate approach which considers the effect of the breach of the terms on the parties to the contract. The court determined whether the breach deprived the aggrieved party substantially of the whole benefit of the contract. Only in case it has been determined that the aggrieved party was substantially deprived of the whole benefit of the contract can the party be allowed to repudiate or end the contract. The approach had faced significant criticism for the purpose of not giving importance to certainty. The approach makes the innocent party liable for wrongful repudiation in case they treat the contract in such a way were it is determined that the breach did not take away from them substantially the whole benefit of the contract (McKendrick 2014).
Even in cases where the terms have been classified by the parties to the contract themselves, it can be held by the court that the term was a minor term and therefore there would not be any right to repudiate the contract to the aggrieved party (Knapp et al. 2016).
In the case of Schuler v Wickman Tools [1974] AC 235 the plaintiff was a manufacturer of a certain tool and the defendant was a sale organization which has been provided the sole right to sell the tools manufactured by the plaintiff. In this case the parties described one of the terms to the contract as a condition to the contract. According to the term the defendant was supposed to send a sales person to all sales companies to solicit the sales every week. Therefore an obligation was imposed in the defendant to make a total of 1400 visits. A few visits had not been made by the defendant and therefore the plaintiff terminated the contract. The court based on the approach provided by innominate terms held that in spite of the fact that the parties classified the term as a condition it was in reality a warranty of the contract.
In the case of Lombard North Central v Butterworth [1987] QB 527, Butterworth had leased a computer from the plaintiff. The defendant was under the terms of the contact required to pay £584 in 20 installments in a period of every three months. There was a term in the contract that in case of any unpunctuality in payment of the installment the party would be liable to terminate or repudiate the contract. Arrears were made by the defendant in relation to the installments and thus the plaintiff took possession of the computer and sold it to another person for a price of £175. In addition the plaintiff sued the defendant claiming all future payments along with arrears which accounted to £6,869. In this case it was held by the court that the term of prompt payment was a condition to the contract. This was because Nicholls LJ stated that the term was essential and the consequence of the breach was set out in the contract. it was further stated by the judge that even in case one payment had failed the plaintiff was entitled to repudiate the contract.
In The Mihalis Angelos [1970] 3 WLR 601, Mihalis Angelos who was the owner of the ship charted the ship to the defendant for the purpose of cargo carriage. The owner had no ground to believe that the ship would be ready by the date which was required by the defendant. The ship was not ready for use by such date, however the contract was repudiated by the defendant as the cargo which was to be shipped had not arrived due to bombing in the railway line in Vietnam. A claim was filed by the plaintiff with respect to the anticipatory breach of contract, however it was argued by the defendant that the plaintiff did not get the ship ready in time for loading the cargo and therefore breached the condition of the contract. It was held by the court that although it did not cause any loss to the defendant the expected ready to load clause was a condition of the contract. This was because the commercial contract required certainty to function properly.
In Bunge Corporation v Tradax [1981] 1 WLR 711 the buyer was required to give the seller a fifteen days notice for readiness of loading in relation to the sale of soya beans. The term in the contract had been expressly classified as a condition to the contract. A shorter period had been provided by the buyer and therefore the seller repudiated the contract and made a claim for damages. The price of soya had reduced by $60 for every ton. The initial hearing which was done through arbitration ruled that the buyer was found to breach the condition and thus the seller had the right to repudiate the contract and was in addition was awarded 317,500 as the value of soya had decreased. The high court reversed the decision of the arbitrator through the application of the innominate term approach. The decision of the high court was revered by the court of appeal and thus the decision was appealed by the buyer to the House of Lords. It was held by the HOL that the condition has to be treated as a condition only in the contract. This is because commercial contracts require certainty and that the approach of innominate term had caused maNy litigations and therefore must only be used in cases where it is impossible to classify terms as conditions and warranted by referring to the terms itself.
Conclusion
The approach of innominate terms while determining the remedies which are to be provided to aggrieved party is very confusing. The approach does not have any certainty in relation to its application. Certainty is a major element of the judicial system which has to be maintained in order to ensure that similar cases are decided in a similar way. Where the courts take the approach in relation to innominate terms the court decide the extent of detriment which has been suffered by the aggrieved party. Therefore the approach makes the innocent party liable for wrongful repudiation in case they treat the contract in such a way were it is determined that the breach did not take away from them substantially the whole benefit of the contract. Even in cases where the terms have been classified by the parties to the contract themselves, it can be held by the court that the term was a minor term and therefore there would not be any right to repudiate the contract to the aggrieved party. However the court in order to provide certainty in commercial agreements does not take the innominate term approach and takes the approach of the conditions and warranties only. According to this approach the courts determine the type of term which has been violated by the party whether they are conditions or warranties. In case a condition which is a root to the contract is violated the party is allowed to repudiate the contract as well as claim damages. On the other hand the breach of warranties would only entitle the aggrieved party to damages and not to repudiate the contract. This approach provides a more certain structure towards determining the remedies in contract which is not present in the approach provided by innominate terms.
References
Baldry v Marshall [1925] 1 KB 260
Bettini v Gye 1876 QBD 183
Bunge Corporation v Tradax [1981] 1 WLR 711
Hong Kong Fir Shipping v Kawasaki Kisen Kaisha [1962] 2 QB 26
Hunter, H., 2017. Modern Law of Contracts.
Knapp, C.L., Crystal, N.M. and Prince, H.G., 2016. Problems in Contract Law: cases and materials. Wolters Kluwer Law & Business.
Lombard North Central v Butterworth [1987] QB 527
McKendrick, E., 2014. Contract law: text, cases, and materials. Oxford University Press (UK).
Mihalis Angelos [1970] 3 WLR 601
Poole, J., 2016. Textbook on contract law. Oxford University Press.
Poussard v Spiers (1876) 1 QBD 410
Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235
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