CONTENTS
In the last edition of the Nordisk Circular, we explained what is meant by classifying a contractual obligation as a “condition” of a contract, which if breached entitles the innocent party to terminate the contract and claim damages. This article focusses on another contractual obligation, the “innominate” or “intermediate” term, breach of which may (but not always) give rise to a right of termination, together with a claim in damages.
Classifying terms as “innominate”
Innominate terms represent the middle ground between conditions and warranties. A condition is so important to the contract that a breach of the same no matter how minor, will always give rise to a right of termination. By contrast, the question of whether a breach of an innominate term will permit a lawful termination, is generally met with the answer “maybe”. Such an equivocal answer arises because in determining whether a right of termination arises, a number of factors, generally specific to the facts of the particular case have to be considered, as further shown below.
Identifying an innominate term is perhaps best achieved by a process of elimination. As we know, a condition is recognised by its utmost importance to the contract, or in many cases, because it has already been helpfully classified by the Courts or the parties themselves as such.
If not a condition, then consider the nature of the obligation imposed and ask whether a breach of the same would only ever lead to limited adverse consequences for the innocent party. If the answer to that is “yes”, you are probably looking at a warranty, breach of which will only ever entitle the innocent party to claim damages.
If the term in question does not fit easily into either of these categories, then we have reached our middle ground (or “no man’s land”) of innominate terms. These terms cover a range of contractual obligations, breach of which in some circumstances could lead to serious consequences, whereas in others, the consequences are insignificant.
Take, for example, a well-known innominate term: the obligation to provide a seaworthy vessel and consider a breach of the same resulting in a vessel breakdown. In some circumstances, the breach may only give rise to very limited consequences, if for example the breakdown lasts only a few days before repairs are made. In other circumstances however, where a protracted delay results and the repairs are having no effect; a breach of this obligation could be very serious indeed and may well justify a termination.
Termination for breach of an innominate term
So, having identified a term is an innominate one, we are then back to the question of when a breach of such term permits the innocent party to terminate the contract? The answer to that question is far from straightforward and as mentioned above, depends on the nature of the breach itself, and the consequences in the relevant circumstances. In legal terms the key question is whether the breach is such as to deprive the innocent party of substantially the entire benefit of the contract? If the answer to that is yes, then the innocent party may terminate the contract and claim damages. If not, the innocent party may claim damages but otherwise remains bound to perform the contract.
So, in what circumstances is the innocent party deprived of substantially the entire benefit of the contract? To answer this question, we can contrast the approach of the Court in two well known cases which considered the question of termination in relation to a breach of the seaworthiness obligation.
In the case of Hongkong Fir Shipping Company Ltd., v Kawasaki Kisen Kaisha, Ltd[1], the “Hongkong Fir” was chartered out for 24 months. Whilst she was delivered with engines in a reasonable condition, because of their age, they required careful attention. Unfortunately, the engineers on board were too few in number and incompetent.
Unsurprisingly, this led to a number of engine breakdowns shortly after delivery with a delay of about 20 weeks in total whilst repairs were being made. Before the ship was made seaworthy again, charterers purported to terminate the charter. The owners said this was an unlawful termination and sued the charterers for damages.
The Court held that the owners were right, and that whilst the owners were no doubt in breach of their seaworthiness obligation, since that obligation was not a condition of the charter, the charterers had to show that the owners’ breach of the seaworthiness obligation went to the root of the contract in order to terminate. In other words, the charterers had to show that the consequences which resulted (the delay) was such as could be regarded as depriving them of substantially the whole benefit of the contract.
The Court found that when compared to the length of the charterparty (24 months) and the fact that under this particular charter, off hire periods (which effectively covered the delay which had arisen) could be added back to the charter period, the 20-week delay was not so serious so as to deprive charterers of the whole benefit of the contract and thus, their termination was unlawful.
By way of comparison, in Snia v Sukuzi[2], the Court held that the defects in the vessel’s propeller on delivery, in respect of which the owners had spent over two months trying to repair but without success, were enough to permit a lawful termination for breach of the seaworthiness obligation.
The Court in that case paid particular attention to the fact that there was good reason (namely the owners continued lack of success in repairing the defective propeller) to believe that the vessel would never in fact be seaworthy. In those circumstances, the charterers would be deprived of the entire benefit of the charter and were thus entitled to terminate.
Health warning!
Given the difficulty of classifying terms in the first place, together with the not so straightforward question of whether a breach of an innominate term can permit a lawful termination of the contract, it goes without saying that caution must always be exercised when deciding whether to terminate a contract or not.
If you terminate a contract when there is no legal right to do so, you will be the party facing what could be a significant claim in damages from the party who was initially the one in breach!
[1] [1961] 1 Lloyd’s Rep. 159
[2] (1924) 18 Li.L Rep. 333
By Joanne Conway-Petersen