#19848 - Termination Notes - Contract Law

Termination for Breach: Establishing a Right to Terminate

Some breaches of contract allow termination as well as damages. Unlike rescission, termination does not mean the contract is wiped out from the beginning.

Old Orthodoxy: Conditions and Warranties

Writers used to think there were two types of contractual promise:

• Condition

• Warranty

If it was a condition, any breach allowed termination + damages. Warranty means only damages. The nature of the term – condition or warranty – was determined in light of the state of affairs when the contract was made. Nature of the breach didn’t matter.

In practice, courts seemed to consider the effect of the breach in deciding whether C could terminate. As example, compare the cases of Bettini v Gye and Poussard v Spiers. Both involved a singer who was unable to perform on the day because of illness. In Bettini, the courts held the contract terminated, in Poussard they did not.

This is fine under the modern approach where courts can account for the nature and effect of a contractual breach when considering a third category of terms – innominate terms – placed between conditions and warranties on the scale of terms.

Modern Approach: Innominate Terms

Innominate terms (aka intermediate terms) may or may not allow C to terminate. this depends on the nature and effect of the breach.

To summarise the three types of term:

• Breach of Condition Damages + Can Terminate

• Breach of Innominate Term Damages + Can Terminate Depending on the Nature and Effect of Breach

• Breach of Warranty Just Damages

Termination isn’t automatic with innominate terms because they usually don’t have a major effect on the subsequent performance of the contract.

Innominate terms recognised in Hongkong Fir. Contract for charter of a ship for 24months. Shipowner promised the ship was fine, ‘being in every way fitted for ordinary cargo service’. Previous authorities had interpreted this term strictly. But in Hongkong Fir, the court thought it would be silly to terminate the contract because of such a small breach. But they didn’t want to bar charterers terminating in the event that there was a major breach of this term. Need to consider the particular breach that’s occurred and estimate its effect on the further performance of the contract when deciding if C can terminate. If D can still substantially do what they promised to, C can’t terminate. But if the breach would deprive them of substantially the whole benefit they expected to receive from the contract, they can terminate.

So, when looking at innominate terms, determine the effect of that particular breach when deciding if C can terminate. As a starting point, in Hongkong Fir, despite the 20 week delay of the 24 month charterparty, Diplock LJ said the breach didn’t deprive C of substantially the whole benefit of the contract so they can’t terminate.

In Maple Flock v Universal Furniture Products, Hewart LCJ said for sale of goods by instalments, consider the ratio quantitatively which the breach bears to the contract as a whole and secondly the degree of probability or improbability the breach will be repeated. In that case, the 16^th delivery of rag flock had too much chlorine – a breach of contract. Buyers refused to take further delivery, arguing there’d been a repudiatory breach (breach allowing C to terminate) by D. CA said no – the previous 15 deliveries had been fine, and this was a small amount compared with the rest of the quantity. Buyers were in breach for not accepting delivery.

Lewison LJ set out some general guidance on whether C can terminate for breach of an innominate term in Telford Homes v Ampurius Nu Homes Holdings:

• What financial loss is there?

• How much of the intended benefit under the contract has C received thus far?

• Can C be adequately compensated by a damages award?

• Is the breach likely to be repeated?

• Will D resume compliance?

• Has the breach fundamentally changed the value of D’s future performance?

Court seems to prefer allowing the contract to continue than to terminate. in Telford Homes, C couldn’t terminate when a construction company was late in building half of the mixed-use blocks C was to lease out. This was because the delay was 9 months and the lease would have been 999 years. In Valilas v Januzaj, CA said dental practice owner couldn’t terminate contract with dentist for late payments for using facilities. Owner knew money would eventually paid, and was not substantially deprived of the whole benefit of contract. Floyd LJ: need a multifactorial assessment involving nature of contract and relationship it creates, nature of term, kind and degree of breach, and consequences of breach for C when determining if termination’s allowed.

Conditions and Warranties: What Now?

These two still exist, but courts may now be increasingly willing to interpret a term as innominate as it allows them to take into account nature of the breach (Ark Shipping v Silverburn Shipping). This might explain why the term ‘shipment in good condition’ was considered an innominate term over a condition in The Hansa Nord.

Conditions in the Sale of Goods Act

In 1893, the Sale of Goods Act didn’t know about innominate terms. So, s.13 of the 1979 Act says in a contract for sale of goods by description, there’s an implied term the goods will correspond with the description, and that term is a condition. This is so even if the description is very detailed specification. Thus, in Arcos v EA Ronaasen & Son, the width of a timber was 1/16^th an inch bigger than it was supposed to be, HL said purchasers can reject timber for breach of a condition despite it not having a real effect on how C was to use the timber. If these facts were to arise today, the courts might interpret the condition as an innominate term:

• Wilberforce in Reardon Smith v Hansen-Tangen said some prior caselaw on s.13 was excessively technical.

He said the term must be a condition as a matter of interpretation before it can become a condition under s.13.

• In 1994, s.15A was inserted into the sale of goods act. It says where the buyer is not a consumer, and the breach is so slight it would be unreasonable for him to reject the goods, the breach is treated as though it were a breach of warranty.

s.15A applies to s.14 and s.13 meaning they are both essentially innominate terms in non-consumer contracts.

Particular Terms Expressly Made Conditions by the Parties

Parties are allowed to make certain terms conditions. However it’s still a question of interpretation – the fact the parties call a term ‘condition’ is not conclusive. In Schuler AG v Wickman Machine Tool Sales, the term required D to send someone to visit the 6 largest UK motor manufacturers at least 1/week. This was labelled condition. But HL looked at contract and found there was some ambiguity about whether the parties truly intended the breach should entitle termination. This ambiguity was resolved in favour of D – HL thought parties wouldn’t have wanted to terminate contract.

Where parties don’t understand the legal import of ‘condition’ but use the word in a contract, the Schuler AG approach makes sense – the parties may not really intend a breach terminates. But in Schuler AG the parties were commercial who deliberately used ‘condition’ – it wasn’t used anywhere else in the contract, and they could be expected to understand the significance of such language. The case is an outlier: in most commercial contracts ‘condition’ is understood to actually make the term ‘condition’ (Personal touch Financial Services).

Stipulations as to Time

The effects of a breach of such a stipulation vary – i.e. if a seller is 1 day late v 1 month late delivering goods. Obviously if the time term is interpreted as a condition, it doesn’t matter how late the seller is; it will let C terminate on breach.

Fletcher Moulton LJ in Wallis v Pratt thought a breach of a condition term is considered a substantial failure to perform the contract at all. But this needs qualifying – the parties might think something insubstantial is very important, and if they express an intention to make the literal fulfilment of such a thing a condition precedent, it will be one (Blackburn J in Bettini v Gye). It can also be inferred from commercial custom and precedent. For example, caselaw has established most stipulations as to time are conditions in the maritime context (Lombard North Central v Butterworth). Thus, in Bunge Corp v Tradax a contract for sale of goods required buyers to give sellers at least 15 consecutive days notice of probable readiness of the vessel to be loaded. Buyer gave only 13 days notice, seller repudiated. Court said this is fine – the term’s a condition.

But obligations to make payments on time aren’t usually conditions. In Grand China Logistics v Spar Shipping, CA said failure to pay an instalment of hire on time was not in breach of condition. This is consistent with s.10(1) Sale of Goods Act 1979 which says unless a different intention appears from the contractual terms, stipulations as to time of payment aren’t of the essence of a contract of sale.

Warranties

Warranties now have a much more limited role – why specify breach of a particular term can never entitle the injured party to terminate the agreement? It makes more sense to retain flexibility by interpreting the term as innominate, keeping termination open as an option. In practice, courts are now reluctant to find a term is a warranty such that the injured party is only ever entitled to claim damages. But some terms are still seen as warranties – e.g. sale of goods act 1979 s.12...