Derechos y Obligaciones de los becarios/as

2. Excelencia individual

3.2.4. Derechos y Obligaciones de los becarios/as

The distinction between conditions and warranties arises out of the relative importance attached to the terms when considered against the total background of the contract. Very often the parties to a contract may expressly agree to designate a term as a condition or warranty as an indication of the emphasis they wish to place on the importance of the term within the contract. Similarly, the law itself may give an indication of the import-ance of a term either by means of a statute, as in the case of the implied terms contained in the Sale of Goods Act 1979 for instance, or by means of a judicial decision as to the status of a particular term. In recent years, however, where no expression of the status of a particular term has arisen out of the agreement from whatever source, the courts have taken to classifying the term as an ‘innominate term’ (referred to by some authorities as an ‘intermediate term’). The effects of a breach of an innominate term do not depend on the status of the term in the contract when it is entered into but on the effects of a breach of the term on the contract. The concept of the innominate term first arose in the following case.

Hong Kong Fir Shipping Co. Ltd v Kawasaki Kisen Kaisha Ltd [1962]

1 All ER 474

The defendants had chartered a ship from the plaintiffs for two years. The charterparty con-tained a term which required the plaintiffs to provide a ship which was ‘in every way fitted for ordinary cargo service’. It transpired that the engine room crew were incompetent and that the ship was in a poor state of repair. In fact the plaintiffs openly admitted that the ship was unseaworthy. As a result of these factors some 20 weeks’ use of the ship was lost and the defendants claimed to treat the contract as terminated for breach of condition. The plaintiffs claimed that the breach only entitled the defendants to sue for damages. The plaintiffs suc-ceeded in their action against the defendants for wrongful termination. Lord Diplock stated:

The problem in this case is, in my view, neither solved nor soluble by debating whether the shipowner’s express or implied undertaking to tender a seaworthy ship is a ‘condition’ or a ‘war-ranty’ . . . There are many contractual undertakings of a more complex character which cannot be categorised as being ‘conditions’ or ‘warranties’ . . . Of such undertakings all that can be pre-dicted 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

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from the contract; and the legal consequences of the breach of such an undertaking, unless pro-vided for expressly in the contract, depend on the nature of the event to which the breach gives rise and do not follow automatically from a prior classification of the undertaking as a ‘condition’

or a ‘warranty’.

Where a term is found by the court to be an innominate term the rights of an inno-cent party in the event of a breach are found by applying the test as to whether they have been substantially deprived of the whole of the benefit which it was intended they should obtain from the contract. If they have been so deprived then they will be entitled to terminate the contract and sue for damages; if not, they can claim damages only.

The decision in the Hong Kong Fir case does create a certain level of uncertainty since the parties will not know what their rights are in relation to a breach of contract until an action is brought before the court. Of course the parties can expressly state within the contract itself what the consequences of breaking a particular term would be and, indeed, it would be in their interests to do so. The absence of such express intentions neverthe-less creates substantial problems, so much so that there have been attempts to limit the scope of the concept of the innominate term by the courts themselves. Such an attempt can be seen in the case of The Mihalis Angelos.

The Mihalis Angelos [1970] 3 All ER 125

A charterparty was entered into on 25 May 1965 providing that the ship in question would be

‘expected to be ready to load under this charter about 1st July 1965 at Haiphong’. The charter also provided that should the ship ‘not be ready to load on or before 20th July 1965’ the char-terers would be able to cancel the contract. In fact the ship was unable to be at Haiphong at this date and it transpired that the owners knew the ship would not be available on this date when they entered into the charter. The charterers purported to terminate the contract and the owners sued for breach of contract. Although the court was pressed to adopt the approach taken in the Hong Kong Fir case it declined to do so. The opinion was formed that the classic approach of labelling a term as a condition or warranty was still valid and, in fact, desirable in order to establish a level of certainty in such cases. It is clearly undesirable on a matter of commercial exigency to expect a charterer of a ship to have to delay the transportation of a cargo because the owners have failed to comply with the date of expected readiness to load, especially when the owners knew full well on the signing of the charter that that date could not realistically be met. Furthermore, it is unfair effectively to prevent a charterer from termin-ating the contract and chartering another ship on the basis of the possibility that the decision might be challenged by a legal action for breach of contract by the owners.

The point is summed up well by Megaw LJ:

One of the important elements of the law is predictability. At any rate in commercial law there are obvious and substantial advantages in having, where possible, a firm and definite rule for a particular class of legal relationship . . . It is surely much better both for shipowners and charterers (and incidentally for their advisers) when a contractual obligation of this nature is under consideration – and still more when they are faced with the necessity of an

THE CLASSIFICATION OF CONTRACTUAL TERMS questioned. Both courts had no hesitation in stating that this was a condition and rejected attempts to persuade them to apply the Hong Kong Fir test. Lord Wilberforce stated that to find otherwise ‘would fatally remove from a vital provision in the contract that certainty which is the most indispensable quality of mercantile contracts’.

The decision of a court to adopt the traditional or the Hong Kong Fir approach is driven by several considerations. The most important of these by far is the need for certainty and this takes on even more importance where a term is a fairly standard one, always found in particular types of contract. The ‘expected readiness to load’ clause in the above cases is a good example of such a term since it is common to all charterparties and one which is commonly broken. It is thus desirable to have a high level of certainty with regard to such a clause. The same considerations do not arise to the same degree where the contract is non-standard or a ‘one-off’ contract. Here the prime consideration may be one of doing what is just between the parties, and the innominate term concept usually achieves a greater level of fairness in such a situation. The reason for this is that parties to a contract may attempt to terminate the contract for breach of condition when they have no real justification other than purely economic or commercial motives. The choice open to the courts then is usually governed by a judicial impression of a need to achieve either certainty or fair play.

One must not assume from the above that the concept of the innominate term has been rejected by the courts. This is most certainly not so and the above cases merely qualify its use. The application of the concept can be seen in Cehave NV v Bremer Handelsgesellschaft GmbH, The Hansa Nord [1975] 3 All ER 739, where a cargo of citrus pellets was sold to a buyer in Rotterdam. The contract provided for ‘shipment to be made in good condition’. Part of the cargo was not transported and the buyer then purported to reject the whole cargo, even though there was nothing wrong with the pellets them-selves. In fact the rejected cargo, when eventually sold by the Rotterdam Court, was ultimately bought by the original buyers at a greatly reduced price, and this probably reflects the true reason for rejecting the cargo in the first place. The buyers attempted to persuade the court that the Hong Kong Fir approach was inappropriate since the Sale of Goods Act 1979 by implication envisaged that all terms in such contracts should be classified as conditions or warranties. The court rejected this contention and applied the Hong Kong Fir test, stating that the consequences of the breach were not so serious as to allow the buyer to reject the whole cargo; they had not been deprived of substantially what they had contracted for.

The reasoning in The Hansa Nord case was confirmed in Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 3 All ER 570 by the House of Lords.

Conclusion

Having examined the relative importance of contractual terms and the different approaches used to assess an innocent party’s rights where a breach of contract arises, we shall now take an overview of the choices and possibilities that might confront that individual.

First, the parties can always expressly state what the effects of a breach of a particular term may be. If the contract specifically gives the innocent party the right to terminate the contract then the courts will allow that right to be exercised.

Second, if the contract does not expressly provide a right to terminate the contract it may be that such a right is implied. For example, in Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 it was stated by the House of Lords that the use of the expression ‘condition’ would tend to indicate a right of the innocent party to terminate

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the contract, whilst the use of the expression ‘warranty’ would tend to indicate only a right to recover damages.

Third, if the right to terminate is not implied from the description ascribed to a term then it may be implied from the operation of law. This may arise through statute, as in the case of the implied conditions and warranties contained in the Sale of Goods Act 1979.

It may also arise from judicial impression, as in the case The Mihalis Angelos, which established that all ‘expected readiness to load’ clauses contained in charterparties will be regarded by the courts as conditions, thus achieving considerable certainty as to the position of the innocent party.

Lastly, where the status of a term is not ascribed from the operation of some rule of law then one must ask the Hong Kong Fir question, namely: ‘Has the innocent party been deprived substantially of what it was intended that he should receive under the con-tract?’ If the answer to this question is in the affirmative he can terminate the contract;

if not, he may only claim damages and has no right to terminate.

Summary

Express terms

l Can be agreed upon either orally or in writing, or both.

l Court to decide issues of interpretation of the terms within the contractual document.

Incorporation of statements as terms of the contract

l Distinctions should be made between terms and representations.

Timing

Reduction of the contract into writing The importance of the statement Special knowledge or skill The parol evidence rule

l Generally, evidence will not be admitted which seeks to add, vary or contradict the terms of a written contract.

l Today the rule is virtually extinct.

Exceptions to parol evidence

l Custom

l Non-operation

l Invalidity

l Rectification

l Incompleteness

The classification of contractual terms

Warranties and conditions

l A condition is regarded as a major term – one which goes to the very root of the contract.

l A warranty is regarded as a minor term – one which imposes a term that is merely ancillary to the main thrust of the contract.

Innominate terms

l Hong Kong Fir Shipping Co. Ltd v Kawasaki Kisen Kaisha Ltd.

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In document ACUERDO Nro MARIA DEL PILAR TROYA FERNÀNDEZ SECRETARIA DE EDUCACIÓN SUPERIOR, CIENCIA, TECNOLOGÍA E INNOVACIÓN (S) Considerando: (página 25-29)