Advice for a Contract Law Case - Essay Example

I will advise Red that he can terminate the time-charter party contract (the “contract with Blue and at the same time claim for damages against Blue as compensation for any past and future losses. The issues in the problem are - (1) whether Blue has breached the contract vesting upon Red the right to terminate the performance of such contract and claim compensation for past and future losses; and (2) whether such terms violated is a condition or a warranty entitling Red the dual right to terminate the performance of the contract and to claim compensation for past and future losses. In regard to the first issue, a party is considered in breach of a contract when a party fails to perform its obligations under the said contract. In the problem, the contract provides that the barge will be delivered in safe working order for the purpose of sea-faring voyages (Clause 4) and that a condition of the agreement is that the barge will be available from 1st January 2006 until 31st December 2008 (Clause 8). Blue is guilty of breach of contract because the barge was only actually ready-to-load on the 3rd of January 2006 in violation of the owner’s promise (Clause 8) that the barge will be ready-to-load from the start of the charter, i.e. the 1st of January. Moreover, Blue is guilty of breach of contract because the barge had to be towed sometime January 2008 (when the contract is still effective) from Oslo to Liverpool due to serious engine failure in violation of Clause 4. Having failed to perform its obligations under the contract, Blue is therefore in breach of contract. In regard to the issue of whether Red may exercise the right both to terminate the contract and to claim compensation for past and future losses, the answer depends on whether the terms of the contract violated by Blue is a condition or a warranty. This is because not all contract terms are of equal significance. Some are more important than others. A condition is an essential term of the contract which goes to the root or the heart of the contract while a warranty, on the other hand, is a lesser, subsidiary term of the contract. The distinction between a condition and a warranty is vital in the event of a breach of contract. A breach of a condition enables the party who is not in breach of contract (“the innocent party”) either to terminate the performance of the contract and obtain damages for any loss suffered as a result the breach or to affirm the contract and recover damages for the breach. A breach of a warranty, on the other hand, only enables the innocent party to claim damages, such that the innocent party cannot terminate the performance of the contract and must therefore continue to perform his obligations under the contract. Simply stated, if a party violated a warranty, the innocent party is confined to a remedy in damages. Thus, it is necessary to know how to determine whether a term is a condition or warranty. A term is declared a condition in one of three ways: by statutory classification, by judicial classification or by the classification of the parties. Firstly, a term may be classified as a condition by statute such as for example sections 12-15 of the Sale of Goods Act 1979 implying certain terms into contracts for the sale of goods. These sections classify these implied terms: satisfactory quality, fitness for purpose and compliance with description and sample are declared as conditions. By analogy, it can be argued that Clause 4 is akin to the implied terms of satisfactory quality and fitness for purpose. Secondly, a term may be classified as a condition by the courts. There are two grounds, apart from the stipulation of the parties, on which courts may decide that a term is a condition. The first is where performance of the term goes into the root of the contract so that, by necessary implication, the parties must intended that the term should be treated as a condition, breach of which would entitle the other party to treat himself as discharged. (Couchman v. Hill [1947] KB 544) To ascertain the significance of the violated term, courts considers the views and practices of the commercial community because, as Kerr LJ has stated, the court is, in the absence of any other “more specific guide” making “what is in effect a value judgment about the commercial significance of the term in question.” Thus, where a decision has been made by an experienced trade arbitrator or tribunal as to the status of a particular term and that decision is based upon the commercial significance of the term, the courts will be extremely reluctant to interfere with such finding. (State Trading Corporation of India Ltd v. M Golodetz Ltd [1989J 2 Lloyds Rep 277,284 and The Naxos [1990] 1 WLR 1337,1348). Applying the foregoing to the problem, it is to be noted that when the barge had to be towed from Oslo to Liverpool due to a serious engine failure, Blue’s chief engineer and Green, a consultant engineer, significantly found that the engines will take 5 months to repair and that the engine fault was at least 3 years old and had reduced the barge’s engine capacity by 20%. It can hence be argued that findings of the Blue’s chief engineer and Green may be deemed to be well considered views and practices of the seafaring community that maintaining a vessel on a sea worthy condition during a charter party is a condition. The second ground on which a court may decide that term is a condition is that binding authority requires the court to hold that the term is a condition. In some industries, parties trade on standard terms and decision that a particular standard term is a condition will affect not only that contract, but also all subsequent contracts of that type. Thus, in the case of The Mihalis Angelos [1971 ] 1 QB 164, it was ruled that a stipulation in a voyage charter party relating to the time at which the vessel is expected ready to load is generally treated as a condition. Thus, applying the ruling in the Mihalos case, Clause 8 should be considered a condition. The third method of classification is the parties own classification of the contract as a condition. Thus, if a contract states that a particular term is a condition, the term will generally be regarded as a condition. Thus, in the case of Lombard North Central pic v. Eutterworth [1987] 1 QB 527, a contract for the hire of computers stated in clause 2 of the agreement that it was of the essence of the contract that the hirer should pay each instalment promptly. The Court of Appeal held hat making punctual payment of the essence of the contract was sufficient to turn the failure to pay a single instalment into a repudiation of the contract entitling the claimant owners to terminate the contract and recover, not only in respect of arrears as at the date of termination, but also the loss of future instalments. The court held that there was no restriction upon the right of the parties to classify the relative importance of the terms of their contract. In the problem, when the parties have expressly classified Clause 4 and 8 as condition, then Red as the innocent party is entitled not only to terminate the contract but to recover damages as compensation for past and future losses as well. The parties’ classification, notwithstanding, the court must be satisfied that the parties intended to use the word “condition” in its technical sense. Thus, in Schiller AG v. Wickman Machine Tool Sales Ltd (1974) AC 235, clause 7(b) of a four-year distributorship agreement stated that “it shall be a condition” was rejected by the House of Lords because it was by no means “conclusive” evidence. However, in the problem, Clause 4 and 8 as to the seaworthiness of the vessel and as to the time at which the vessel is expected ready to load, is conclusively a condition because it goes into the roots of the obligation of the contract. Thus, Lord Wilberforce in Schiller validly dissented challenging the majority approach on the ground that it assumed “contrary to the evidence, that both parties ... adopted a standard of easy-going tolerance rather than one of aggressive, insistent punctuality and efficiency.” In view of the foregoing premises, and viewed from all angles, Clause 4 and Clause 8 in the problem are both conditions, the breach of which by Blue entitles Red not only to terminate the performance of the contract but to claim compensation for past and future losses as well. Hence, Red will be so advised. Read More