Law of Contract

The introduction of the ‘innominate’ (there being no other technical name for them) or ‘intermediate’ (as they sit somewhere between a condition and a warranty in terms of relative importance) is said to remove the certainty or ‘repress sharp practice’ Weir (1976) CLJ 33 since it prevents a minor breach from enabling a party to withdraw from a contract for ulterior reasons (e.g., Reardon Smith Line Ltd v Hansen-Tangen (1976) 1 WLR 989; and see Torvald Klaveness v Armi Maritime, The Gregos (1994) 1 WLR 1465) and have been equally criticised for their supposed detrimental effect on commercial contracts, for this reason. The Courts now have the flexibility to effectively alter the foundations of a contract, as they have the flexibility to alter the importance of a term after that particular term has been breached, it being not possible to pre-empt the effect or extent of the breach prior to the breach occurring.

The majority decision in Torvald Klaveness v Armi Maritime, The Gregos (1994) 1 WLR 1465 was based upon achieving flexibility in terms of remedy in the event of a short delay, whereas Lord Templeman’s dissent was based the commercial importance of the provision that time stipulations in commercial/mercantile contracts are to be treated as conditions and the need for commercial certainty. The conflict between flexibility and certainty is evident throughout this area of law. The essential element of decision lies with the more general justification for innominate terms, primarily the avoidance of a classification of a term as a condition which enables a party to repudiate the contract for a minor breach, justifying the avoidance of a contract for other reasons, such as economic reasons, as was the case in Reardon Smith Line Ltd v Hansen-Tangen (1976) 1 WLR 989. Lord Mustil stated in Klaveness v Armi Maritime, The Gregos (1994) 1 WLR 146:

‘[A]lthough it is well established that certain obligations under charterparties do have the character of conditions I would not…wish to enlarge the category unduly, given the opportunity which this provides for a party to rely on an innocuous breach as a means of escaping from an unwelcome bargain.’

However welcomed (as by Lord Wilberforce in Reardon Smith Line Ltd v Hansen-Tangen (1976) 1 WLR 989), the reaction of the analysis proposed by Lord Justice Diplock in Hong Kong Fir Shipping created a reaction of uncertainty that the doctrine introduced into commercial contracts because of the flexibility of consequences once a breach has occurred. It was the responsibility of the courts to decide if a term chould be classified innominate and determine whether the breach is sufficient or not to render the contract terminated.

Although parties are invited to expressly state in the contract the consequences of breaching a particular term. Without expressly stating these consequences, significant problems can arise, so significant in fact that the courts themselves have sought to minimise the scope of innominate terms. Such as can be seen in the case of Maredelanto Compania Naviera SA V Bergbau-Handel GmbH, The Mihalis Angelos (1971) 1 QB 164 (CA) (The Mihalis Angelos), The charterers attempted to terminate the charterparty on the grounds of force majeureas there was no cargo at Haiphong due to war conditions. The owners accepted the repudiation on these grounds and claimed for damages. It was later found that there were no grounds for force majeure, so the question was whether the charterers had grounds to terminate. It was held by the courts that since the owners had broken the ready to load clause, which was a condition, when the contract was entered into on the 25 May, as it was not reasonable to expect the ship to be ready on 1 July, the charterers did have the right to terminate on 17 July. The decision in this case enforces the need for commercial certainty, as stressed in the decision in Compagnie Commerciale Sucres et Denrées v C. Czarnikow Ltd, The Naxos (1990) 3 All ER 641, in the context of  a readiness to load clause in a mercantile contract which was interpreted as a condition. Classification of a term as either a condition or a warranty has the advantage of certainty of remedy if a term is breached, the disadvantage is once classification of one or the other had been made it entitles the non-breaching party to rely on a trivial breach of that particular term to terminate the contract, with perhaps ulterior motive, for example the contract may not have been as profitable as originally anticipated, thus making the certainty inflexible.

The Mihalis Angelos case can be seen as an example of a party avoiding an obligation which has become unprofitable or which they are unable to perform purely on the basis of the other party having breached a condition.. ‘The right approach seems to be to look at the effect of the breach as per the Hong Kong Fir case, and also at the intention and understanding of the parties at the time it was made [The Mihalis Angelos] [1970] 3 All ER 125).  Calling a particular term a condition or warranty is misleading, except perhaps as a declaration of intention by the parties.’

The approach taken in The Mihalis Angelos case was a return to the classic approach of certainty of labelling terms as conditions or warranties, however pressed the courts may have been to adopt the Hong Kong Fir they rejected the flexibility of this approach in favour of establishing rigidity in such cases. It was considered commercially unviable to be flexible in the consideration of terms concerning ‘the date of expected readiness to load’. A point that is well made by Lord Justice Megaw:

‘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: for example, as here, the legal categorization of a particular, definable type of contractual clause in common use. 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 for an urgent decision as to the effects of a suspected breach of it, to be able to say categorically: "If a breach is proved, then the charterer can put an end to the contract", rather than that they should be left to ponder whether or not the Courts would be likely, in the particular case, when the evidence has been heard, to decide that in the particular circumstances the breach was or was not such as "to go to the root of the contract". Where justice does not require greater flexibility, there is everything to be said for, and nothing against, a degree of rigidity in legal principle.’

The approach adopted in The Mihalis Angelos was also adopted in the case of Bunge Coporation v Tradax Export SA (1981) 2 All ER 513, where the ‘expected readiness to load’ clause was again questioned. The courts chose to reject the Hong Kong Fir Shipping approach and stated the term was a condition. ‘Lord Wilberforce stated that to find otherwise ‘would fatally remove from a vital position in the contract that certainty which is the most indispensable quality of mercantile contracts’.

It is not to be assumed that the courts wish to reject the flexibility of the Hong Kong Fir Shipping approach, only to enforce proper application of it. The application of the approach can be seen clearly in the case Cehave NV v Bremer Handelgesellschaft GmbH, The Hansa Nord (1975) 3 All ER 739(The Hansa), the buyers attempted to persuade the courts that the Hong Kong Fir Shipping approach did not apply as the Sale of Goods Act stipulates that every term needs to be classified as either a condition of warranty. This was rejected by the courts and they applied the approach stating the consequences of the breach were of minor importance and did not go to the root of the contract and were not substantially deprived of the benefit for which they had contracted.

‘The essential flexibility, or fatal uncertainty, of innominate terms’ arises from the unpredictability of the consequences of a breach of term. Therefore, if the result of the breach deprives the innocent party of their benefit from the contract, the breach of the innominate term will be treated as repudiatory, as in the case of Federal Commerce & Navigation Co Ltd v Molena Alpha Inc. (1979) AC 757 , where it was held that although the term broken was not a condition, the breach went to the root of the contract and the non-breaching party were deprived of ‘substantially the whole benefit’ because the issue of such bills was essential to the charters’ trade.

To conclude when a court is weighing up the benefits of certainty and flexibility they must look in detail at the term that has been breached and in particular the consequences of that breach. Upon labelling a term innominate or intermediate, it is defining that particular term as ‘one which can be broken in so many different ways and with such varying consequences that the parties cannot be taken to have intended that any such breach should entitle the innocent party to terminate the whole contract’. As stated by Sir McKenzie Chalmers in his address to the American Bar Association in 1903:

‘Though I am a strong advocate of codification. I am no disparager of the common law, which is unsurpassed for its collection of reasoned principles and applied precedents.’

Undoubtedly, when a term becomes innominate it loses certainty, but it is the flexibility of this approach which allows what is considered reasonable and fair to prevail. Thus, that which is reasonable and fair must carry the weight in any decision.