Title: Law of contract

 

 

Introduction

A contract is an agreement between two or more persons which creates rights and duties recognized and enforceable at law.[1] It could also refer to the document in which terms of the agreement are stipulated.[2] Contracts are applicable in various branches of law such as labour law, sale of goods and insurance law. The legal requirements for a contract to be binding are: i) an agreement; ii) contractual capacity; iii) consideration; iv) legality of the contract; and v) the form of the contract as required by the law.[3]

A contract is usually expressed in various terms. These terms stipulate the duties of the contractual parties while providing for the arrangement agreed upon.[4] The law gives remedy for breach of contractual duty which is sometimes laid out in the terms of the contract as agreed by the parties or otherwise implied.[5] The terms of a contract may be classified as: 1) conditions, 2) warranties; or 3) innominate terms.[6] This classification is dependent on the magnitude of the clause particularly its effect to the root of the contract.

In this case, it shall be important to note whether the date of delivery agreed to by Frigidaire and Freezeall affected the root of the contract and what is the possible consequence of the breach of such a term. Secondly, this paper shall analyse whether the inclusion of the clause of payment of £3000 daily for delay is allowable and enforceable in law or if it is unconscionable thus not amounting to any obligation on the part of Frigidaire. To arrive at the answers to the issues for determination, the legal framework relevant to both terms shall first be discussed and later analysed with regards to the case at hand.

The relevant legal framework                                                                                                                

Prior to the formation of a contract, parties may make statements to induce the other party to enter into the contract. These statements may consequently be included in the contract in which case they will form part of the contractual terms; otherwise, they remain mere representations.[7] Contractual terms carry different weight. The purpose of classification of terms is to enable parties identify available remedies.[8] Ideally, contractual parties will classify the terms in the contract. Other terms are implied by statute and are classified accordingly for example in the Sale of Goods Act 1979 (SGA).

Where terms are not classified under Statute, the classification offered in the contract by the contractual parties will be of assistance to the courts in determining which class those clauses fell. Section 11(3) of SGA provides that the construction of the contract will be the guide to classification. Generally, the courts will almost always follow the classification provided in the contract unless it is contrary to statute or precedence, where the consequences for breach are contrary to the classification provided and where such classification would impede the administration of justice.[9] This was the case in Schuler AG v Wickman Tools Sales Ltd[10] where the court found the classification of an obligation (to visit six firms) as a condition not a condition for the purpose of repudiatory breach. Similarly, in Rice v Great Yarmouth Borough Council[11] the court held that termination as a remedy can only be relied on where the breach was grievous enough to be repudiatory.

In the event terms are not classified under statute nor in the contract by the contractual parties, the court will decide where to classify those terms. Contract law is rich in case law which provides precedence to guide the court in classification.

Conditions

A condition is a prerequisite in a contract[12] and goes to the very root of the contract.[13] In a sale of goods contract, a stipulation of time of delivery may be a contractual condition. A breach of a condition is repudiatory. A repudiatory breach (also known as fundamental breach) allows the aggrieved party to terminate the contract and to also sue for damages. This however only occurs where strict compliance with the obligation is of the essence to the contract.[14] The aggrieved party can also choose to affirm the contract, but this does not exclude him from claiming damages. In Poussard v Spiers[15] an opera singer due to her illness was unable to participate in performances held in the first week. It was held that her attendance was a condition whose breach entitled the other party to repudiate the contract and substitute her with another singer.

Warranties

They are less significant contractual terms compared to conditions. A warranty in a certain contract may be a condition in a different contract. The significance of the term to the root of the contract is the basis of classification. In contrast with conditions, warranties do not exclude the aggrieved party from the whole of the benefit of the contract.[16] Warranties are often written as a promise or an assurance.[17] In Bettini v Gye[18] an opera singer due to an illness was late by three days to the rehearsals in preparation of a concert. The court held that the obligation to be present at the rehearsals was not a condition thus repudiation was not an available remedy. The contrast noted between the Poussard Case and the Bettini Case is the construction of the contract which viewed the failure to attend a performance a much grievous breach than the failure to attend a rehearsal.[19]

Innominate terms

Traditionally, terms of a contract were solely categorized as either warranties or conditions.[20] The category of innominate terms was first established in Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kasisha Ltd.[21] It was found that the rigid classification of terms as warranties and conditions could lead to injustice because the simple breach of a condition would ultimately lead to repudiation regardless of the triviality of the loss to the aggrieved party.[22] Innominate terms are neither warranties nor conditions. The possible remedy to the injured party is determined by the gravity of the consequences of the breach.[23] The test applied is that of substantial deprivation of the whole benefit of the contract. If it deprives the injured party of this benefit, then the term is a condition whose breach is repudiatory, otherwise it would only amount to a warranty whose breach can only attract a claim for damages.

 

 

Analysis of the situation with respect to the law applicable

The legal position of Freezeall in relation to Frigidaire can be ascertained by identifying the term in the contract that was breached, its classification and thus the effect of that breach. The date of delivery agreed upon was 15th November, but actual delivery was effected on 1st December. Frigidaire was thus in breach of the term relating to date of delivery. The contract also included a clause stipulating a payment of £3000 per day for each day delivery was delayed. Frigidaire have refused to comply with this obligation stating its exorbitance.

As noted above, where the contract is silent, it is upon the court to classify the term and they categorize it as a condition where case law or statute classifies it as such, where the contract entitles the injured party to terminate the contract or where it is considered just to infer that the parties meant it to be a condition.[24] Additionally, as noted in the case of Schuler[25] the courts will not always rely on the classification provided by the parties but also the regular customs of parties in similar agreements.[26] Thus in Bunge Corp v Tradax Export SA[27] Lord Wilberforce stated that time clauses in mercantile contracts should be classified as conditions as it would be commercially undesirable to treat them as innominate terms. The rationale of this decision was that the delay would create uncertainty as to whether the supplier would still be able to supply the goods and whether the seller should still rely on him. Certainty, as mentioned in the case, is the most indispensable element in mercantile contracts.[28]

It is thus more probable that the time clauses in the contract between Freezeall and Frigidaire were intended by the parties to be conditions in the contract. Freezeall had informed Frigidaire of its past bad experiences with Chinese manufacturers and Frigidaire by conduct agreeing to be bound by the clause to pay £3000 for delay, is assumed to have noted that time was of the essence. Furthermore, from the case of Bunge Corp,[29] it is observed that clauses in relation to time should be construed as conditions to the contract. It is therefore more likely that the term was a condition rather than a warranty. If in the unlikely circumstances it is approached as an innominate term, the consequences of the breach are so grievous such that they deprive Freezeall of the whole of the benefit of the contract, which was to avoid delay; otherwise, they would have renewed their contract with the Chinese manufacturers.

Moreover, Blackburn J in Bettini v Gye[30] noted that in the absence of an express statement of intention in the contract, the test to determine whether a term was intended to be a condition is considering whether the term affects the root of the contract such that its performance would give rise to a substantial difference from what was intended by the aggrieved party.

It has also been noted that not all breaches give rise to an immediate cause of action.[31] A range of consequences lie for breach of terms such as the entitlement of the aggrieved party to damages, to specific performance or to repudiation of the contract.[32] However, a breach of a condition is a fundamental breach of the contract for which repudiation as a remedy lies. Like in the case of Poussard,[33] Freezeall can choose to terminate the contract or to affirm it. Nevertheless, they can pursue a claim for damages should they choose to terminate or affirm the contract. The damages will be awarded with regard to the loss suffered as a result of the breach.

However, the clause relating to payment of £3000 per day for each day of delay does not affect the root of the contract and operated simply as an assurance or promise[34] that delivery would be effected promptly. A breach of the term does not substantially deprive Freezeall of the whole benefit of the contract since it was not the principal aim of the contract in the first place. As observed in Bettini v Gye,[35] such clauses can only operate as warranties whose breach can only attract damages. Freezeall therefore has a claim for damages for the breach of this term.

Conclusion

The agreement in a contract is often expressed in contractual terms. The terms of a contract are classified in different categories which are conditions, warranties and innominate terms. This categorization helps the parties predict and determine the available remedies for them in case of a breach of a term. The principal test for determining the category of a term is its effect of substantially depriving the injured party of the whole benefit of the contract. Deprivation often occurs where the term affects the root of the contract and thus a breach for which specific performance is required will be impossible to effect.

In the case of Frigidaire and Freezeall, there is impossibility of delivery in the time specified as delay has already occurred. The very purpose of the contract was to obtain the goods in sufficient time and thus the breach with regard to timely delivery affected the root of the contract making remedy for repudiation available.  Supported by the case of Bunge Corp v Tradax Export SA,[36] Freezeall is likely to make a successful claim for repudiation as well as damages for the breach of the term and the consequent losses as a result of the breach.

 

Bibliography

Hugh Collins, The Law of Contract (4th edn, Cambridge University Press, 2003)

Brenda Mothersole & Ann Ridley, A-Level Law in Action, (2nd edn, Cengage Learning EMEA, 1999)

John D. Calamari & Joseph M. Perillo, The Law of Contracts (4th edn, 1998)

Samuel Williston, A Treatise on the Law of Contracts (Walter H.E. Jaegered., 3rd edn, 1957)

Benjamin Leisinger, Fundamental Breach Considering Non-Conformity of the Goods (sellier, European Law Publishers, 2007)

Helewitz JA, Basic contract law for paralegals (Aspen Publishers Online, 2010)

Richard Stone, The Modern Law of Contract (Psychology Press, 2005)

E-law resources, ‘Conditions, Warranties and Innominate Terms’ (e-law resources) http://e-lawresources.co.uk/Conditions,-warranties-and-innominate-terms.php accessed, 28 February 2016

DAC Beachcroft, ‘Contract Basics: The Differences Between Conditions and Warranties’ (DAC Beachcroft, 20 August 2015) http://www.dacbeachcroft.com/publications/publications/contract-basic-series-the differences-between-conditions-and-warranties accessed 28 February 2016

 



[1] Black’s Law Dictionary, 9th edn

[2] John D. Calamari & Joseph M. Perillo, The Law of Contracts 1.1, at 3 (4th ed. 1998)

[3] Contracts: Basic Principles Available at: http://www.shsu.edu/klett/CONTRACTS%  Accessed 27 February 2016

[4] Brenda Mothersole & Ann Ridley, A-Level Law in Action, at p.374 (2nd edn, Cengage Learning EMEA, 1999)

[5] Samuel Williston, A Treatise on the Law of Contracts 1,at p. 1-2 (Walter H.E. Jaegered., 3rd edn. 1957)

[6] Richard Stone, The Modern Law of Contract (Psychology Press, 2005)

[7] Brenda Mothersole & Ann Ridley, A-Level Law in Action, (2nd edn, Cengage Learning EMEA, 1999)

[8] DAC Beachcroft, ‘Contract Basics: The Differences Between Conditions and Warranties’ (DAC Beachcroft, 20 August 2015) http://www.dacbeachcroft.com/publications/publications/contract-basic-series-the-differences-between-conditions-and-warranties accessed 28 February 2016

[9] Ibid, DAC Beachcroft, ‘Contract Basics: The Differences Between Conditions and Warranties’

[10] (1974) AC 235; (1973) 2 All ER 39

[11] (2001) 3 LGLR 4

[12] Black’s Law Dictionary, 9th edn

[13] Ibid, DAC Beachcroft

[14] Benjamin Leisinger, Fundamental Breach Considering Non-Conformity of the Goods (sellier, European Law Publishers, 2007) 34

[15] (1876) 1 QBD 410

[16] See Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kasisha (1962) 2 QB, See also Richard Stone, The Modern Law of Contract (Psychology Press, 2005) p.425

[17] Ibid, DAC Beachcroft

[18] (1876) 1 QBD 183

[19] Ibid, Richard Stone

[20] E-law resources, ‘Condotions, Warranties and Innominate Terms’ (e-law resources) http://e-lawresources.co.uk/Conditions,-warranties-and-innominate-terms.php accessed, 28 February 2016

[21] (1962) 2 QB

[22] Brenda Mothersole & Ann Ridley, A-Level Law in Action, (2nd edn, Cengage Learning EMEA, 1999)

[23] See DAC Beachcroft

[24] Ibid, DAC Beachcroft

[25] Ibid

[26] See Richard Stone, The Modern Law of Contract (Psychology Press, 2005) p.426

[27] (1981) 2 All ER 513

[28] Ibid, p.541

[29] ibid

[30] (1876) 1 QBD 183

[31] Helewitz JA, Basic contract law for paralegals (Aspen Publishers Online, 2010)

[32] Richard Stone, The Modern Law of Contract (Psychology Press, 2005) p.423

[33] ibid

[34] See DAC Beachcroft, ‘Contract Basics: The Differences Between Conditions and Warranties’ (DAC Beachcroft, 20 August 2015) http://www.dacbeachcroft.com/publications/publications/contract-basic-series-the-differences-between-conditions-and-warranties accessed 28 February 2016

[35] ibid

[36] (1981) 2 All ER 513

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