Monday, 10 March 2014

The Seaflower and "The Waller Test"


CONDITION, WARRANTIES OR INNOMINATE TERMS?

It is a general rule under common law that the performance of a contract must be precise and exact, otherwise the part not in fault will be entitled to claim for breach of contract. Therefore, it can be concluded that even the slightest deviation from the terms of the contract will be treated as a breach[1]. However, the identity between deviation and breach is not absolute: when the deviation is “microscopic” or “negligible”, for the de minimis non curat lex rule, such a divergence will be disregarded and the contract will be considered to have been correctly performed.
In Margaronis Navigation v. Peabody, Diplock L.J., said: “It seems to me that the law has always
regarded a contract to deliver or load a specific quantity of goods as satisfied if that quantity has been delivered with the margin of error which is not commercially practicable to avoid …”[2]
Under civil law, the way in which the performance is to be made seems to be less severe. Art. 1455 of Italian Civil Code[3] states that in terms of resolution of contract:” “the breach not to be of little importance“ Thus, the words little importance suggest that the breach, so as to lead to termination, is to have certain relevance to the nature of the contract. Therefore, this provision seems going further to de minimis non curat legis rule under common law, in so far the meaning of “microscopic” is to be considered narrower than the one of “not to be of little importance“. What is the regime applicable to the breach of contract?

Consequences of breach: damage or termination
Breach of contract entitles – depending on the term breached - the innocent party either to treat the contract as discharged or repudiated, or treat the contract still binding and allowing to claim damages only.
In the first case, the term of the contract is classified as a condition: it is an essential term of the contract, described also as the core of the contract[4], which – as pointed out by Devlin J[5] – “ underlies the whole contract so that, if is not complied with, the performance became totally different from that which the contract contemplates”. 
On the other hand, a term will be classed as a warranty whenever it is not fundamental, but only subsidiary or collateral so that the innocent party cannot be discharged from further performance[6].
The dominant approach of the Courts until the end of the last century was to classify terms ab initio as conditions or warranties, privileging the need of certainty rather than to reach a fair and just decision in individual cases. [7] In Bunge v. Tradax was held: “this classification is carried out by construing the particular term and the contract in which it appears, rather than by consideration of the seriousness of the breach of that term that has taken place in the instant case”
Today, a more flexible new approach has been given, heading the concept of innominate (or intermediate) term. The breach of an innominate term will not automatically give the right to terminate the contract without taking into account the gravity of the consequences of the breach itself[8]. It is, in other words, an evaluation ex post upon the effects of the breach, so as to permit, as remedies, the termination of the contract and damages or damages only whether or not the breach is so serious to go to the root of the contract[9]. The notion of “going to the root of the contract” was well established by Lord Diplock in Photo Production v. Securicor “the event resulting … has the effect to depriving the other party of substantially the whole benefit which it was the intention of the parties that he should obtain from the contract“.
Therefore, nowadays, as for the default position, terms are to be classified as innominate unless categorisation as condition is made - by statue or judicial decision or express designation in the contract, or finally, by implication from the nature of contract, subject- matter, or circumstances. The test applied by Waller L.J in The Seaflower[10] – also called “the Waller test” – establishes that:
 “...a term of a contract will be held to be a condition:
(i) If it is expressly so provided by statute;
(ii) If it has been so categorised as the result of previous judicial decision (although it has been said that some of the decisions on this matter are excessively technical and are open to re- examination by the House of Lords);
(iii) If it is so designated in the contract or if the consequences of its breach, that is, the right of the innocent party to treat himself as discharged, are provided for expressly in the contract; or
(iv) If the nature of the contract of the subject-matter or the circumstances of the case lead to the conclusion that the parties must, by necessary implication, have intended that the innocent party would be discharged from further performance of his obligations in the event that the term was not fully and precisely complied with”.  
Conclusion
In the light of the new authorities, the default position is to classify any terms included in the contract of carriage as innominate, to such an extent, applying the Waller test, they became eligible to be qualified as a condition. Once it occurs, the innocent party may rely upon the right of discharging the contract unless he - voluntarily - wishes to waive  such a right or affirm the contract or – involuntarily – accepts the contract by taking a substantial benefit under the contract. Alternatively, where such terms fail to be classified as a condition, then the innocent party will be only entitled to damages with no right to terminate unless he can prove that the consequences of the breach “go to the root of the contract”.   

Lorenzo Macchi


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