Objective Notes: W300 – Agreements, rights & responsibilities
UNIT 8 - MANUAL ONE
TERMS: CLASSIFICATION & RELATIVE IMPORTANCE
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How terms are classified
A: TRADITIONAL APPROACH:
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Division into conditions or warranties (wtys) emanates from common law
traditional classification approach taken by courts who, where express terms
are breached, determine what classification applies - important because of
impact on remedy available;
Courts consider parties’ intentions, whether, viewed objectively, terms
conditions or wtys, how terms ‘labelled’/ worded , circumstances in which
contract created & contract as a whole;
Task is whether reasonable person would consider term condition or wty in
situation in which contract made – perceived intentions, ‘labelling’/
wording & entire contract;
Parties’ wording is strong indication of how term to be interp, but not
conclusive – ‘condition’ may not have been used in technical, legal way
(Schuler v Wickman Machine Tool Sales Ltd);
Where term described as being essence of contract, it becomes condition
enabling other party to terminate on breach, irrespective of magnitude of
breach since parties free to classify importance of contract provisions where term expressly a condition, courts will interp as such even if it
would not be in absence of such provision (Lombard North Central Plc v
Butterworth);
Focus on importance of term rather than ensuing loss so where term deemed
condition, innocent party can terminate, irrespective of loss suffered but
where conclusion = term is wty, only remedy is damages even if innocent
party has incurred major loss;
Can be unfair & traditional approach criticised accordingly;
With contracts for sale of goods, implied terms are conditions except where
s.15A SOGA (& s.5A of SOG&SA 82) apply– taking into account effect of
breach in determining classification but only where buyer does not deal as
consumer.
B: INNOMINATE APPROACH:
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Classification ignoring consequences of breach can result in unfairness;
Led to concept of innominate terms - intermediate – neither condition nor
wty & effect of breach depends on its nature/ gravity;
Test is whether breach deprived innocent party of substantially entire benefit
– effect of breach was crucial factor in deciding remedies (Hong Kong Fir
Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd);
But breach effect test did not apply where parties expressly agreed when
party could terminate or where governed by statute so where term simple/
clear & breach would always result in either termination or not, traditional
classification remained appropriate but contract terms often too complex for
such absolute approach -some breaches would deprive innocent party of
substantial benefit & some would not so not appropriate to state in advance
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Objective Notes: W300 – Agreements, rights & responsibilities
what effect of a breach would be – decision should be made after breach
depending on its effect.
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Importance of classification vis-à-vis remedies for breach
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In trad approach, condition = major term so innocent party can terminate or
affirm irrespective of gravity (plus right to damages re losses suffered) & this
enables termination for non-legal reasons – e.g. change of mind or
discovering better deal elsewhere (Arcos Ltd v Ronaasen & Son);
But where term = wty it’s minor term - & remedy is limited to damages,
irrespective of loss suffered.
With innominate terms, effect of breach determines remedy & relates it to
breach’s gravity;
Trad approach promotes certainty so parties know from outset consequences
of breach but unfairness can result– where term = condition innocent party
may terminate even if loss is minor but where term = wty cannot terminate
even if has suffered major loss.
Conversely, innominate terms introduce flexibility & fairness but certainty
lost - parties do not know from the outset consequences of breach as it’s
only determined if & when breach occurs & in commercial situations there
should be definite rules for commonly used terms (The Mihalis Angelos).
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