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Justin Santiago, BAppSc (Hons), MBA, LLB (Hons) comes from a journalism, market research, intellectual property and strategic communications consulting background. Now based in Melbourne he spends his time advising businesses on how to communicate to their customers as well as writing on various subjects of interest in this blog.

Sunday, February 1, 2009


Too great a willingness to classify a term as a condition encourages termination of contracts rather than their performance - Justin Santiago

Because a contract consists of terms of varying importance it is necessary to separate the importance terms from the less importance ones. However in most contracts it will not be expressly stated whether a term is a condition or warranty which are how terms are typically classified. Because of the severe consequences attached to a breach of a condition namely resulting in the termination of the contract and the awarding of damages for any loss suffered (or alternatively in the affirmation of the contract and a recovery of damages for the breach) as opposed to a breach of a warranty which only entitled me to claim damages the courts are more cautious than willing to classify terms as conditions.

Courts would look into three ways of classifying terms into conditions or warranties – classification by the parties, statutory classification or judicial classification.

Classification by the parties puts the courts in their role squarely as an interpreter of contracts rather than a maker of them and will only consider it a condition if it has been alluded to as such by the parties. Under the doctrine of the freedom of contract, courts will also not question the parties’ own classification of the contractual term as amounting to a condition : Lombard North Central plc v Butterworth. However the courts must be satisfied that the parties intended to use the term ‘condition’ in its technical sense will be reluctant to give the meaning to the word condition merely by the parties expressly stating it as such : Schuler AG v Wickman Tool Sales Ltd.

The courts will look into what the parties had in mind when they drew up a contract and whether the parties intended it to be a condition : Couchman v Hill as well as other factors such as standard terms on contracts of a certain type as well as the views and practices of the commercial community : State Trading Corporation of India Ltd v M Goldetz Ltd.

Nevertheless the courts have had a difficult time in determining what exactly is meant by going to the root of the contract and this has lead to uncertainty exemplified in The Naxos where different levels of courts had different opinions as to whether the obligation of the seller to have the cargo ready for delivery at any time amounted to a condition or not.

The classification into a condition based on its importance could also result in injustice to an innocent party as in the case of Arcos v Ronnasen where the consequences of a breach of the condition was negligible. There would also be situations where the reason for withdrawal are wholly unrelated to the breach but rather for corollary economic reasons : The Mihalis Angelos.

This led the courts to consider a more flexible approach and to look at other approaches to redress the balance.

The first was to limit the number of terms which are classified as conditions.

The second approach was to place a statutory restriction upon the right of a buyer to reject goods for example S15A of SOGA 1979 restricts the right of a buyer to reject goods where the breach is so slight and it would be unreasonable for him to reject them. Thus the buyer would only have a claim in damages.

The third approach was to focus more attention on the consequences of breach thereby giving courts greater remedial flexibility. This led to the inonimate term definition which is distinguished based on the fact that a breach of this type of term would not give rise automatically to termination, the consequences would have to be serious enough to deprive the innocent party of substantially the whole benefit of what has been bargained for : Hong Kong Fir Shipping Co. Ltd v Kawasaki Kisen Kaisha Ltd.

This judicial classification was applied in the case of The Hansa Nord where even though a condition was breached the party that wanted to terminate the contract could not because the consequences were not serious. A party could also not use a minor breach by the other party to terminate a contract which has proven to be a bad bargain : Reardon Smith Line Ltd v Hansen Tangen.

The courts would also look into whether withdrawal as an exceptional form of relief be made available only where damages would not be an adequate remedy. More importance placed on the quantification of damages would negate the necessity of withdrawal as an easier route as decided in Bunge v Tradax.

Yet another approach was put forth by Roger Brownsword in his article "Retrieving Reasons, Retrieving Rationality" in which he opined the termination of a contract should boil to whether the innocent party had a good reason for doing so. Under this reason centered regime the courts should consider the parties’ reasons for withdrawing. Thus if an innocent party seeks in good faith to withdraw for breach then the right to withdraw should hold without restriction.

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