29 Nov 2014

How you distinguish contractual terms?

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It is essential for proper contracts execution to classify terms of agreement as of their importance and meaning. I listed main groups to which contractual terms could be distributed below. I hope you would find it useful!

The  relevant classification depends upon the intention of the parties, ascertained objectively, at the time when contract was made (Associated Newspapers Ltd. v Bancks).

(a) Conditions

A condition of a contract is a term which is essential or is so important to the contract that if breached the innocent party has the right to terminate the contract and sue for damages (Tramways Advertising v Luna Park).

Test of essentiality – one party would not have entered into the contract unless assured of the strict or substantial performance of the term and the party knows or ought know of this (Associated Newspapers Ltd. v Bancks).

The fact that a term is described in the contract as condition, is persuasive not conclusive (L Schuler AG v Wickman Machine Tool Sales Ltd.).

Breach of the condition gives rise to the right to terminate and/or claim damages no matter how small the breach.

(b) Warranty

A warranty is a term that is subsidiary to the main purpose of the contract (Bettini v Gye).

A breach of a warranty entitles the innocent party to damages only and does not give him or her right to terminate the contract.

A consistent approach to the meaning of “warranty” is taken in the sale of goods legislation. “Warranty” is defined in s.3 of the Sale of Goods Act 1896 (Qld) to mean –

an agreement with reference to goods which are the subject of a contract of sale but collateral to the main purpose of such contract, a breach of which gives rise to a claim of damages but not to a right to reject the goods and treat the contract as repudiated.

(c) Intermediate Terms

An intermediate term may be defined as one capable of a variety of breaches, some serious some trifling (Bunge Corporation New York v Tradax Export S.A. Panama).

An intermediate term can not be categorized as either a condition or warranty (Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha Ltd).

In Bunge Corporation v Tradax  it was established that to determine whether a term is an intermediate term, two steps must be followed:

  • it is necessary to determine the type of term the parties intended using general objective test i.e. is it a term or warranty; and then
  • if it is a term that is capable of both major and minor breaches (intermediate term) how serious was the breach?

If the breach was serious in that it deprived the innocent party of substantially the whole of the benefit of the contract, the innocent party has the right to terminate the contract and sue for damages, and if the breach was not to serious, the innocent party will only be entitled to damages.

Time clauses are terms which are capable of only one kind of breach, namely to be late, and therefore can not be an intermediate term.

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