Nordisk 101 – Contractual Terms - conditions for a Condition?

During these Nordisk 101 articles, we shall look at the nuts and bolts of contract law (principally English law, but sometimes other jurisdictions including US law and Norwegian law), with a focus on contracts of carriage.  It seldom hurts to go back to basics!

In the last edition, we covered some key issues to ponder when sizing up a contractual counterparty.  In this and subsequent editions, we will cover express terms of a contract, starting with conditions.

The term “condition” can be a confusing one, as it is sometimes used in other ways such as, for example, a condition precedent or interchangeably as a synonym for ‘terms’.  In this article however we are considering a “condition” as a class of term that is so fundamental to the contract that any breach allows the innocent party to terminate the contract, as well as claim damages.

Contrast this to a term which is merely a “warranty,” the breach of which allows the innocent party to claim damages alone and what are perhaps the most difficult, “innominate” or “intermediate” terms which fall somewhere between the two and the remedy for breach of which depends on the consequences.  If the consequences of a breach are such as to deprive the innocent part of substantially the whole benefit of the contract, then the term is treated as a condition and the innocent party can terminate the contract and claim damages. If the effect of a breach is not sufficiently serious, it is treated as a warranty and the innocent party is only entitled to claim damages.

The question of whether a term is a condition or not, is answered by looking at the contract as a whole to assess its importance to the purpose of the contract.  Whilst not conclusive, labelling a term a “condition” is a good start.  Other considerations include previous court decisions that have categorised a term as a condition, the importance of the term, the consequences of treating the term as a condition and whether there is a need for the certainty which a condition provides[1].

Examples from charterparties may illustrate these considerations:

• Some items of a vessel’s description which are relevant to when the vessel is expected to start the chartered service, such as the expected date of readiness to load provisions[2] and statements as to the location of the ship[3], both of which have been found by the Courts to be conditions.
• Descriptions relating to status, undertakings as to a vessel’s class at the date of delivery[4] and descriptions of a vessel being oil major approved[5]. In contrast, note the 2019 Court of Appeal decision in The Arctic[6] in which an ongoing obligation to maintain the vessel in class throughout the entire (bareboat) charter period was not a condition, but an innominate term.

The answer is not always an easy one, as illustrated by the first instance decision in The Astra[7] and the Court of Appeal in Spar Shipping[8] – the former concluding that the obligation to pay hire is a condition, the latter confirming that it is not.  For an in-depth analysis of these two decisions, please see our articles in Nordisk Medlemsblad no.576 and Nordisk Circular November 2016 edition.

Examples of conditions in sale contracts:

• In the Norwegian Saleform 2012, a failure to lodge the deposit (clause 2) or pay the purchase price (clause 3) are both conditions, which entitle the seller to cancel the contract and claim damages if breached.
• Under the Sales of Goods Act 1979 (“SGA 1979”) certain conditions can be implied into the contract for the sale of a second-hand vessel. For example, the sale contract may be subject to an implied condition that the vessel will correspond to the description given, (see s.13(1) of SGA 1979).
• In the Singapore Saleform 2011, it is a condition of the contract that the vessel be free from encumbrances, charters, mortgages etc. on delivery (see clause 9a). In contrast, under the corresponding clause in the Norwegian Saleform 2012, that same provision is only a warranty.

Conclusions

As can be seen from this last example, the classification of a term as a condition as opposed to a warranty can leave the innocent buyer in a very different position, even though the consequence of the breach to the innocent party would be identical.

When deciding whether to terminate a contract for breach of a condition, it is important that any decision to terminate is made within a reasonable time. Otherwise, the innocent party can be deemed to have affirmed the contract, i.e. confirmed their intention to continue performing, despite the breach. In that scenario, the remedy is limited to damages.

As highlighted from the above examples, it may not always be easy to distinguish whether a term is a condition or something lesser, especially when under time and commercial pressure to make a decision. If an innocent party terminates due to their counterparty’s breach of a clause they wrongly believe to be a condition, the consequences are serious and the innocent party can end up themselves facing a significant liability in damages for their own wrongful termination/repudiation of the contract.

Nordisk is always available to assist our members when faced with such issues, so please get in touch if you have any questions.

[1] See Chapter 3.21 to 3.25 of Time Charters (7th ed, Informa, 2014) T Coghlin et al for a closer discussion on these considerations.
[2] The Mihalis Angelos [1970] 2 Lloyd’s Rep 43 at [47].
[3] Behn v Burness (1863) 3B. & S. 751 at [759].
[4] The Seaflower No.2 [2001] 1 Lloyd’s Rep 341 (C.A) as per Rix LJ at [63].
[5] The Rowan [2012] 1 Lloyd’s Rep at [16].
[6] [2019] EWCA Civ 1161.
[7] Kuwait Rocks Co v AMN Bulk Carriers Inc [2013] EWCH 865 (Comm).
[8] Grand China Logistics Holding (Group) Co Ltd v Spar Shipping AS [2016] EWCA Civ 982.