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The Sales of good Act 1893 contains the definitions of ‘condition’ and ‘warranty’. In the period between 1893 and 1962, it was commonly accepted that ‘condition’ and ‘warranty’ were the only two types of terms which assist in ‘identifying the breaches which entitled the injured party to terminate the contract’ (Furmston, P.16) In the turning point of 1962, a new type of term – intermediate term brought about a whole new page into the Law of Contract. Hong Kong Fir Shipping Co. Ltd v Kawasaki Kisen Kaisha Ltd is the key case which owns the credit for this discovery.
Hong Kong Fir Shipping Co. Ltd v Kawasaki Kisen Kaisha Ltd has invented a brand new term in contract law, ‘intermediate term’. In this representative case, the ship owner hired out the Hong Kong Fir, ‘being in every way fitted for ordinary cargo service’. The ship was delivered on 13 February 1957, sailing from the United States to Osaka. Due to the age of the ship’s machinery, the engines were old inadequate. However, the numbers of staff were insufficient and the chief engineer was incompetent. Consequentially, twenty weeks out of twenty four months was the ship ‘off hire’ for repair. On the other hand, freight rates had fallen during that period. The new rate was a quarter and a third cheaper than the rate fixed originally. The charterer wished to terminate the contract for the owner’s failure to hire out a seaworthy ship which they claimed to be a ‘condition’ and that the consequences of the breach was so serious that it has frustrated their purpose in entering into the charterparty. It was held seaworthiness was not a condition in their contract and that the delay caused by the repairs was not as grievous as to frustrate the charterparty’s commercial purpose. Therefore the charterer cannot terminate the contract.
Diplock LJ’s judgment here has been highly influential and was first to introduce ‘intermediate term’. He reckoned that the problem of the case was ‘neither solved nor soluble by debating whether the shipowner’s express or implied undertaking to tender a seaworthy ship is a “condition” or a “warranty”‘. He drew attention to the circumstance that there are ‘many contractual undertaking…which cannot be categorised as being “conditions” or “warranties”…some breaches…will deprive the party not in default of substantially the whole benefit which it was intended that he should obtain from the contract…the legal consequences of a breach of such an undertaking…depend upon the nature of the event’. This famous judgment then authoritatively laid down the third classification of terms.
The main contribution generated by Hong Kong Fir is the flexibility bestowed upon contract law. In the traditional classification of terms, ‘condition’ gives rise to the right to withdraw, ‘the relative gravity of the actual consequences of the breach is rendered an irrelevant consideration’. (Brownsword, p.87). But thanks to the emergence of intermediate terms through the Hong Kong Fir case. The elasticity given by the modern approach is that the courts ‘can decide whether or not the breach was repudiatory by having regard to the consequences of the breach rather than the nature of the term broken’ (McKendrick P.959). Now, whether the innocent party is able to rescind the contract depends upon whether the innocent party was substantially deprived from its whole intended benefit which it was planning to obtain and whether the ‘the breach went to the root of the contract’. There is a middle ground of flexibility provided by intermediate terms, rather than the absolute approach of ‘conditions’ and ‘warranties’. The importance of the Hong Kong Fir’s flexibility is reinforced in the courts’ ‘narrowing of the contents of the implied conditions for any breach of which the statute provided that the buyer had to have a right to reject the goods’. For example Ashington Piggeries Ltd v Christopher Hill Ltd (1972) narrowed s.13 of the Sale of Goods Act 1979. Originally s.13 implied a condition into a contract of sale that the goods have to correspond with their description, but this case ruled that only those which ‘identified’ the goods should be the purpose of s.13. (Koffman &MacDonald, P.123). This narrowing provides flexibility in a way that it prevents minor breaches to be treated as breaches of condition.
Law of Contract Fairness
Another benefit contributed by Hong Kong Fir‘s intermediate approach to the Law of Contract is its fairness. This is justifiable because, after Hong Kong Fir, innocent parties are less likely to take advantage of any breach of contract to acquire economic benefits. A significant amount of previous cases that appeared before Hong Kong Fir showed a trend that the courts allowed retreat from innocent parties’ even their reasons for contract termination were completely unrelated to the breach. As Mellish LJ said in Shand v Bowes, ‘there is no requirement that the “real reason” for seeking release from a contract should coincide with the cited legal reason for withdrawal’. Economic reason and gains are mostly the underlying motives. Past cases such as Hong Kong Fir itself and the Hansa Nord case are clear evidence. But for Hong Kong Fir, this unfairness was minimized.
This modern approach proves to be significantly influential in the English Law of Contract, having been adopted by various cases afterwards and if not, have at least been considered. The Hansa Nord (Cehave NV v Bremer Handelsgesellschaft mbH) judgment followed the decision of Hong Kong Fir, asking whether, in Upjohn LJ’s words, ‘the breach went to the root of the contract’. In this case it was held that the breach was insufficiently serious to give rise to the right to terminate, given the fact that the ‘damaged’ pellets were still usable in almost exactly the same way to manufacture cattle food. This echoes the essence of Hong Kong Fir‘s decision, i.e. it does not deprive the innocent party of substantially his whole intended benefit. Moreover, Hansa Nord proves that intermediate term is capable of preventing a pecuniary termination, another contribute of Hong Kong Fir.
Another case which followed the trail of Hong Kong Fir was Schuler (L. Schuler AG v Wickman Machine Tool Sales). Although it was stated Clause 7(b) of the contract was a condition, the majority of the House of Lord took no regard of the use of the word and held this interpretation to be unreasonable. (Poole, P.247) This case followed Hong Kong Fir‘s question of whether the breach and its consequence ‘goes to the root of the contract’ and even rewrote the parties’ contract.
Although the changes that the Hong Kong Fir approach brought about to the law of contract were greatly welcomed, it had, nevertheless, caused confusion to legal advisors. The existence of intermediate terms gave rise to ‘a degree of uncertainty in that it can be very difficult to predict whether or not the judge will conclude that the breach was sufficiently serious to entitle the innocent party to terminate the contract’ (McKendrick, P.959). Generally, the introduction has caused two problems. Firstly, it made it difficult for legal practitioners to distinguish an intermediate term from a condition and a warranty. Secondly, it is formidable to determine when the breach is detrimental enough to entitle the innocent party a withdrawal. To deal with this, the courts take into account a series of factors. Some are as follows: there is ‘a lack of commitment to the contract as a source of obligation’; the breach renders ‘radically different’ performance as stated; losses caused by the breach ‘gives rise to difficulties which put the innocent at risk’ etc. (Brownsword, P.93). However, it is arguable that these factors may be too general. The ‘balancing of these factors’ must ‘depend to a large extent upon the facts’ of each individual case. ‘This uncertainty can cause difficult in practice.’ (McKenDrick, P.965)
Bunge Corp v Tradax Export SA
Bunge Corp (Bunge Corp v Tradax Export SA) is a case that illustrates these difficulties. The argument of the Hong Kong Fir approach was rejected in Bunge Corp, where ‘it was affirmed that the question’ of whether the party’s benefit has been deprived completely ‘is relevant only after it has been decided that the term is innominate.’ (Koffman & MacDonald, P. 124). In Bunge, Lord Roskill said ‘the basic principles of construction for determining whether or not a particular term is a condition remain as before…the need of certainty’. The court held it was a condition because of the need for certainty when dealing with a time clause in a mercantile contract. Although not adopted, the court in Bunge did consider Hong Kong Fir‘s intermediate term approach, showing that it is a leading case which should be acknowledged.
Moreover, the uncertainty of this Hong Kong Fir approach created risk when terminating a contract. The court may, years later, claim that the withdrawal was previously wrongly decided. Innocent party will then have to pay the loss suffered by the other party because of the wrong termination.
Having been criticised for its uncertainty, Hong Kong Fir’s intermediate term approach still survived. With these difficulties, the courts and judges still choose to make it prevail, proving that the English law system values highly the flexibility which it has brought about. Therefore, Hong Kong Fir must be an influential key case and common law in English Law of Contract. Lord Wilberforce and Lord Scaxman both regarded its effect on contract law highly. Lord Wilberforce called Hong Kong Fir ‘seminal’ which has become ‘classical’. Lord Roskill in Bunge acclaimed that Hong Kong Fir‘s judgment was ‘a landmark in the development of one part of our law of contract’ in the 20th century.
Bibliography: (according to publishing year)
- Laurence Koffman & Elizabeth MacDonald, The Law of Contract (3rd Edition), Tolley, 1998
- Guenter Heinz Treitel, Some Landmarks of Twentieth Century Contract Law, Oxford Claredon Press, 2002
- G.H Treitel, The Law of Contract (11th Edition), Thomson Sweet & Maxwell, 2003
- Michael Furmston, Cheshire, Fifioot & Furmston’s Law of Contract (14th Edition), Butterworth Lexis Nexis, 2004
- Jill Poole, Textbook on Contract Law (7th Edition), Oxford University Press, 2004
- WT Major, Law of Contract (7th Edition), The M&E Handbook Series, 1992
- Robert Upex & Geoffrey Bennett, Davies on Contract (9th Edition), Thomson Sweet &Maxwell, 2004
- Ewan McKenDrick, Contract Law Text, Cases and Materials (2nd Edition), Oxford University Press, 2005
- Jill Poole, Casebook on Contract Law (8th Edition), Oxford University Press, 2006
- Janet O’Sullivan & Jonathan Hilliard, The Law of Contract (2nd Edition), Oxford University Press, 2006
- Laurence Koffman & Elizabeth MacDonald, The Law of Contract (6th Edition), Oxford University Press, 2007
- Roger Brownsword, Retrieving Reasons, Retrieving Rationality? A New Look at the Right to Withdraw for Breach of Contract, 1992
- http://www.lawlink.nsw.gov.au/lrc.nsf/pages/R51CHP3 15/3/2008 12:45pm
- http://ojls.oxfordjournals.org/cgi/reprint/9/4/441 15/3/2008 13:25
- William Bojczuk, When is a condition not a condition?, Journal of Business Law, 1987
- Shand v Bowes (1876-7) 2 QBD 112 at 115
- Hong Kong Fir Shipping Co. Ltd v Kawasaki Kisen Kaisha Ltd  2 QB 26 (CA)
- Ashington Piggeries Ltd v Christopher Hill Ltd  A.C. 441
- L. Shuler AG v Wickman Machine Tool Sales  AC 235 (HL)
- Cehave NV v Bremer Handelsgesellschaft mbH, The Hansa Nord  QB 44 (CA)
- Bunge Corporation v Tradax SA  1 WLR 711
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