Topics this week…

So far we have looked at contract formation and how terms are incorporated into the contract. We have also looked at how to interpret the meaning of contract terms and whether extrinsic evidence can be used in that process.

In this lecture we now look at the classification of contract terms and this is important because a term’s classification will determine what happens in the event of breach.

Part A – Classification of Contract Terms

Part B – Performance, Breach & Right of Termination

Classification of Contract Terms - introduction

Historically contractual terms, whether express or implied, could only be classified as:

Conditions, or

Warranties,

The significance of such classification lay in the available remedy to an innocent party following a breach of contract by the other party.

If a condition is breached then the impugned party has the right to terminate the agreement AND claim for damages. Why is the right to terminate significant?

Classification of Contract Terms - introduction

Why is the right to terminate significant?

Brings the contract to an end!

Distinguishing between conditions & warranties

Broadly, a 'condition' is a major term (essential term) and a warranty is a minor term of the contract.

Even if the parties do not describe a particular term as a 'condition' a court may nonetheless construe a term as a condition if it is an essential term of the contract.

Similarly a term described in the contract as a condition may in fact be a warranty. Remember ‘conditions’ is a word often used as a non-legal generic term to describe all the terms of a contract (e.g. terms and conditions)

Distinguishing between conditions & warranties

Confusion

Warranty (in the sense of a minor term) versus warranty (in the sense of a representation and warranty)

Condition (in the sense of a material term) versus condition (in the sense of a condition precedent or subsequent to a contract)

Don’t get confused!

(Luna Park (NSW) Ltd v Tramways Advertising P/L (1938) 61 CLR 286)

A case in which the High Court looked at the rights of a party after a term has been breached and how the court should assess whether a term is a condition or not was:

Case analysis: (Luna Park (NSW) Ltd v Tramways Advertising P/L

(Luna Park (NSW) Ltd v Tramways Advertising P/L (1938) 61 CLR 286)

FACTS:

Tramways contracted to display advertising boards on trams for three seasons and said ‘WE GUARANTEE that these boards will be on the tracks AT LEAST eight hours per day throughout the season’.

After two seasons Luna Park purported to terminate the contract because each board was not being displayed for eight hours each day.

Tramways responded that they had promised only an AVERAGE exposure for all trams over the season, and continued the display.

Tramways sued for the agreed fee.

Luna Park (NSW) Ltd v Tramways Advertising

ISSUES

1. Was the promise to display the boards for 8 hours a day an essential term (i.e. a condition) of the contract?

2. Was that term breached?

HELD

The relevant term was a condition and it had been breached.

The wording of the contract strictly said “We guarantee that these boards will be on the tracks at least eight hours per day throughout your season”, and Tramways broke this condition by not having the boards up for a minimum of eight hours per day.

Luna Park (NSW) Ltd v Tramways Advertising

RATIO

Latham CJ – “The question whether a term in a contract is a condition or warranty, that is, an essential or inessential promise, depends upon the intention of the parties as appearing in or from the contract.

The test of essentiality is whether it appears from the general nature of the contract, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or substantial performance of the promise,as the case may be, and this ought to have been apparent to the promisor.”

Factors that affect classification

As we have seen from the Luna Park case, the court will look to the importance of a term to the parties in determining whether it is an essential condition or not.

A case that illustrates the significance of this factor is:

Case analysis: Associated Newspapers Ltd v Bancks (1951)

Associated Newspapers Ltd v Bancks (1951) 83 CLR 322FACTS

There was a ten year contract between Bancks and Associated Newspapers. The agreement stated:

• Bancks would provide a weekly full page drawing of ‘US Fellers’

• Associated Newspapers would publish the drawing each week on the front page of the comic section

Over three consecutive weeks the newspaper did not publish Bancks’ drawings on the front page

On the ground that the newspaper had repeatedly and without his consent broken its undertaking, Bancks sent a letter to the newspaper stating he was no longer bound by the contract

The newspaper commenced proceedings for an injunction restraining the threatened breach by Bancks

Associated Newspapers Ltd v Bancks (1951) 83 CLR 322

ISSUE

Was the promise to publish the cartoon on the front page a condition or a warranty?

HELD

The term was considered a condition and therefore its breach lead to the legal termination of the contract as well as the right to sue for damages.

Associated Newspapers Ltd v Bancks (1951)RATIO

The promises provided by each party were concurrent and correlative promises. The Court found Bancks’ promise to provide a drawing was a condition. Therefore, it would be strange if Bancks’ obligation was a condition yet the newspaper’s promise to provide salary and publish the drawing on the front page was not a condition.

It would be impossible to attach different values to the defendant’s obligations and the plaintiff ’s undertakings. The plaintiff (newspaper) would not have employed the defendant (Bancks) unless he would perform his promise, and the defendant would not have made the promise unless he was assured his work was published in a particular manner.

The plaintiffs actions therefore represented a substantial failure in performance and enabled the defendant to treat the contract as terminated.

Associated Newspapers Ltd v Bancks

Key points:

Bancks would not have entered into the contract in the first place unless this term was present, therefore it was a condition that gave him the right to terminate if breached.

A third classification??

This historical approach (i.e. condition or warranty) led to an all or nothing approach with too much focus on the status of the term as opposed to the consequences of the breach.

This changed in the early 1960’s with Hongkong Fir Shipping v Kawasaki Kisen Kaisha in which a 3rd category was recognised (i.e. intermediate term).

Case Analysis: Hongkong Fir Shipping v Kawasaki Kisen Kaisha

Hongkong Fir Shipping Co v Kawaski Kisen Kaisha Ltd [1962] 2 QB 26

FACTS

Hong Kong Fir Shipping Co chartered one if its ships for a 2 year period to Kawasaki. The agreement provided that the ship was to be made available to the charterers at Liverpool since it was in ‘every way fitted for ordinary cargo service’.

After delivery, the ship sailed to Virginia to load coal and then onto Osaka. The trip lasted 8 ½ weeks but then a further 5 weeks was taken up with repairs.

The vessel was berthed at Osaka for another 15 weeks to render it seaworthy after considerable mechanical breakdowns and corrosion.

The Charterers (Kawasaki) purported to terminated the contract for the long delays, alleging the ship was not seaworthy and claimed for breach of contract.

The ships owners (Hong Kong Fir) cross claimed for wrongful repudiation of the agreement by the charterers (Kawasaki).

Hongkong Fir Shipping Co v Kawaski

LEGAL HISTORY

At trial Salmon J. held that although the shipowners had failed in their promise to provide a seaworthy vessel this did not amount to a breach of condition (condition being an essential term) and the plaintiffs (Kawasaki) therefore didn’t have the right to repudiate the contract.

Kawasaki appealed.

ISSUES

Were the seaworthiness clauses essential terms (i.e. conditions) of the contract, the breach of which would allow termination by the aggrieved party?

HELD

The appeal was denied. The terms were not conditions of the contract but ‘intermediate terms’. The owners could claim for wrongful repudiation.

Hongkong Fir Shipping Co v Kawaski

RATIO

1. The seaworthiness clauses could not be classified as “conditions” as they could be broken in a variety of ways, some minor and some major. For example, if the anchor winch didn’t work then the ship would be technically unseaworthy but this wouldn’t mean it couldn’t be fixed without affecting its ability to carry cargo.

2. These terms fitted between the then classified terms of “condition” and “warranty”.

3. The seriousness of the breach in this 3rd category of terms (now known as intermediate terms) would determine if the aggrieved party could terminate the contract.

4. In this case the breach of the terms did not deprive the charterers of substantially the whole benefit of the contract. The ship actually completed the trips but there were delays.

Hongkong Fir Shipping v Kawasaki Kisen Kaisha

Key points:

There are many contractual undertakings of a more complex character that cannot be categorised as being conditions or warranties.

A breach of an intermediate term will sometimes and sometimes not give rise to an event that will deprive the other party of substantially the whole benefit of the contract.

If, as a consequence of the breach, a party has been deprived of substantially the whole benefit of the contract then that party has the right to terminate.

Modern Australian approach to classification

HongKong Fir was an English case and this therefore begs the question as to what the law is in Australia.

In Koompahtoo Local Aboriginal Land Council v SanpinePty Ltd. (2007), the majority of the High Court adopted the tripartite approach as established in Hong Kong Fir Shipping.

As a result, warranty as a category of contractual term is likely to be less used as courts have more flexibility by classifying non-essential terms as intermediate terms –Hongkong Fir Shipping v Kawasaki Kisen Kaisha.

Case Analysis: Koompahtoo LALC v Sanpine Pty Ltd

Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115FACTSKoompahtoo and Sanpine entered in a joint venture agreement for the development of commercial land.

Sanpine agreed to manage the development and Koompahtoocontributed the land to be developed. Management of the development required Sanpine to:

• Prepare annual accounts

• Ensure proper books were kept to permit the affairs of the venture to be duly assessed

• Submit reports on expenditure and progress of the development

These reports were never prepared by Sanpine, and on the basis of these breaches Koompahtoo terminated the joint venture agreement, alleging Sanpine’s conduct constituted repudiatoryconduct (i.e breach of a condition). Sanpine sought a declaration that Koompahtoo’s termination was invalid.

Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115ISSUE

Were the terms breached by Sanpine considered conditions?

HELD

The terms were not conditions but the defaults of Sanpine were found to significantly undercut the benefits entitled to Koompahtoo. Such defaults to this extent were held to justify termination of the contract.

What do you think the essential terms were?

Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115RATIO

While it was held the terms breached by Sanpine were not considered conditions, a sufficiently serious breach of a non essential term may entitle a party to terminate the contract – the court applied Hong Kong Fir Shipping.

Although not an essential part of the agreement, the maintenance of proper books and accounts were of importance to the parties.

The court commented:

“even if we were to accept that all of the contractual obligations with which Sanpine failed to comply were inessential .…. the breaches of Sanpine were in a number of respects gross and their consequences serious”.

It was held the breaches went to the root of the contract...and “ought to be accepted that breaches of that order deprived Koompahtoo of a substantial part of that benefit for which is contracted. Such breaches justified termination”.

Summary of Australian approach to classification

3 types of term:

1. Condition (party wouldn’t have entered contract without it)

2. Intermediate

3. Warranty

In case of breach:

1. Condition = terminate and sue for damages

2. Intermediate (Major) = terminate and sue for damages

3. Intermediate (Minor) = sue for damages

4. Warranty = sue for damages

Part B

Performance, Breach & Right of Termination

TerminationThe ability to be able to terminate a contract is important as it relieves the parties from any future obligations.

A contract may be terminated in a number of different ways (both unilaterally and bilaterally).

Termination as a result of a breach

A breach of contract occurs where a party fails to perform his or her contractual obligations to the standard required under the contract.

The mere fact that one party has breached a term of the contract does not necessarily mean that the other party has the right to terminate the contract, although the innocent party has the right to damages arising from the breach.

Consequences of a breach

Subject to contract (there may be express terms that deal with breaches), a breach of a term has the following consequences:

Condition - the innocent party may terminate the contract and sue for damages.

Serious breach of an intermediate term - the innocent party may terminate and sue for damages.

Other breaches - innocent party may only claim damages, and must continue to meet their own obligations

Termination under the Original Contract

Express Power to Terminate

Contracts often include clauses specifying how the contract can be terminated. Methods of termination could include:

• Fixed period e.g. lease

• General right to terminate (i.e. at will)

• By notice

• Triggered by certain events e.g. whether conditions or not

If there is a right to terminate then there is normally a procedure that needs to be followed for the termination to be effective (e.g. notice and time to rectify)

Termination by agreement

As shown earlier, the original contract may contain a term that gives the parties the right to terminate under certain conditions.

Even in the absence of such an express condition a contract can be terminated by the subsequent agreement of the parties, i.e. a separate contract.

Although consideration can be the promise to release the other party from their obligations under the first contract, if one party has fully performed its obligations then safest way is to terminate by way of a deed or by providing additional (nominal?) consideration. (e.g. deed of release)

Unilateral discharge

This occurs where one party has obligations that remain outstanding under the contract and the other party agrees not to enforce performance of those obligations.

Again the promise to give up existing rights must be supported by consideration to be enforceable otherwise it must be done by a deed.

This type of contract termination was considered in:

Case analysis: McDermott v Black

McDermott v Black (1940) 63 CLR 161 FACTS

Black (purchaser/respondent) alleged that he was induced by fraudulent misrepresentation made by McDermott (vendor/appellant) to enter into a contract for sale of shares and that he deposited certain bonds with McDermott to secure payment of the deposit.

Prior to date of completion, Black complained by letter of the misrepresentation but later withdrew all the allegations conditional on McDermott granting him an extension of time to complete the contract, which was granted.

Black then refused to complete on the extended date, whereupon McDermott rescinded the contract.

Black sued McDermott for damages for deceit, relying on the complaint of misrepresentations that he had withdrawn.

McDermott v Black (1940) 63 CLR 161 ISSUES

Unilateral discharge occurs where one party has obligations that remain outstanding under the contract and the other party agrees not to enforce performance of those obligations. Was the promise to give up existing rights supported by consideration and therefore enforceable?

HELD

Appeal allowed, judgment in favour of McDermott (vendor/appellant).

RATIO

Dixon J – held that the extension of time was the promised thing. He further held that the withdrawal of the allegations of improper conduct meant that he would make no claim based upon misrepresentation but would accept the promise of further time instead.

McDermott v Black (1940) 63 CLR 161 Key points:

1. Unilateral discharge (occurs where one party has obligations that remain outstanding under the contract and the other party agrees not to enforce performance of those obligations. The promise to give up existing rights must be supported by consideration to be enforceable otherwise it must be done by a deed or may make use of an agreement known as an accord and satisfaction).

2. Accord and satisfaction – is the purchase of a release from an obligation. The accord is the agreement and the satisfaction is the consideration.

Next week

Termination of Contract: Repudiation

Termination of Contract: Frustration