Carter ’ s Breach of Contract · The construction of a term as a condition is a conclusion as to the legal effect of the contract, not a statement of what the contract ‘means’

Carter ’ s

Breach of Contract

Second Edit ion

J W Carter BA, LLB (Syd), Ph D (Cantab), FAAL

Emeritus Professor of Law, University of Sydney

General Editor, Journal of Contract Law

Consultant, Herbert Smith Freehills

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151

ChaPter 5

Breach of ConditionGeneral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [5-01]Conditions by Express Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [5-04]Conditions by Implied Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [5-09]

(a) General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [5-09](b) Express Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [5-15](c) Implied Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [5-35]

Time Stipulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [5-39](a) General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [5-39](b) The Position Prior to the Statutory Rule . . . . . . . . . . . . . . . . . . . . . . [5-40](c) The Statutory Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [5-43](d) Classification of Time Stipulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [5-44](e) Notices to Perform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [5-55](f) Commercial Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [5-64]

Effect of Breach of Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [5-70]

General[5-01] Definition. ‘Condition’ is the label applied under the tripartite classification to a contractual term any breach of which is sufficient to justify termination.1 Breach of condition is the principal common law basis for termination of the performance of a contract under English law.

In Wallis v Pratt2 Fletcher Moulton LJ said3 conditions are terms:

… which go so directly to the substance of the contract or, in other words, are so essential to its very nature that their non-performance may fairly be considered by the other party as a substantial failure to perform the contract at all.

This description is not exhaustive. A term may be a condition even though ‘non-performance’ is unlikely to amount — in fact — to a ‘substantial failure to perform the contract at all’. Two other situations can be therefore envisaged. A contractual term may be a condition because any breach is ‘accounted’ a serious matter by the parties, who regard any breach as a ‘substantial failure’ to perform.4 Alternatively, a term may be a condition for reasons of commercial convenience.

1. See [3-13], [4-09].2. [1910] 2 KB 1003.3. [1910] 2 KB 1003 at 1012 (adopted [1911] AC 394). See also Luna Park (NSW) Ltd v Tramways

Advertising Pty Ltd (1938) 61 CLR 286 at 302; Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 at 69–70; State Trading Corp of India Ltd v M Golodetz Ltd [1989] 2 Lloyd’s Rep 277 at 282.

4. See Cehave NV v Bremer Handelsgesellschaft mbH (The Hansa Nord) [1976] QB 44 at 84 per Ormrod LJ (breach is ‘assumed to go to the root of the contract’); Lombard North Central Plc v Butterworth [1987] QB 527 at 535 per Mustill LJ, with whom Lawton LJ agreed (‘any breach … is treated as going to the root of the contract’). See also Stocznia Gdynia SA v Gearbulk Holdings Ltd [2010] QB 27 at 36; [2009] EWCA Civ 75 at [15]. See further [5-12].

Carter BreachOfContract 2ed Sept2018.indb 151 26/09/2018 3:14 PM

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Carter’s BreaCh of ContraCt Part II Breach of Contractual Terms

The construction of a term as a condition is a conclusion as to the legal effect of the contract, not a statement of what the contract ‘means’. However, that word is simply a label applied to express a conclusion of law about a particular intention of the parties. Accordingly, the term is one for which the promisee enjoys a right to terminate the contract ‘irrespective of the gravity of the event that has in fact resulted from the breach’5 of the term. While it is convenient to ask whether the parties intend a term to be a condition, what is actually at issue is whether breach of the term discharges the promisee, thus enabling the promisee to terminate the contract.6 That issue is, of course, resolved by construction of the contract. Precedent is a vital consideration.

Breach of condition is often termed a ‘repudiatory breach’.7 However, that is simply an elliptical statement of the rule that breach of condition entitles the promisee to ‘treat the contract as repudiated’. The consequences of exercise of the right to terminate are therefore those applicable on termination for repudiation of obligation.8

[5-02] Ways of establishing that a term is a condition.

Article 5.1 — When a term is a condition.

A contractual term may be a condition:

(a) because the contract expressly so provides;(b) because the construction of the contract indicates an implied agreement that

the term is a condition; or(c) by implication of law.

Whether a contractual term is a condition depends on the construction of the contract.9 As stated in Article 5.1, there are three relevant situations:10

(1) the contract may expressly provide that the term is a condition;

(2) construction may indicate an implied agreement that the term is a condition; or

(3) construction may indicate that the parties have not departed from an implication of law that the term is a condition.

[5-03] Onus of proof. The promisee bears the onus of proving the existence of a right to terminate the performance of the contract.11 Unless the contract provides otherwise, it is sufficient for the promisee to prove a breach of condition.

5. Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 at 849 per Lord Diplock. See also [5-70].

6. See [3-45].7. See [3-36].8. See [3-36], [3-42]. Cf Stannard, (2013) 30 JCL 178 at 184–5.9. See [4-06].10. See [5-04]–[5-38]. Cf Contract and Commercial Law Act 2017 (NZ), s 37(2)(a) (a party may

‘cancel’ a contract if the ‘parties have expressly or impliedly agreed that the … performance of the term is essential’).

11. See [3-05]. See also [10-04] (promisee must justify an election to terminate).

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Chapter 5 Breach of Condition

Conditions by Express Agreement[5-04] Freedom of contract. It is always open to contracting parties to provide expressly that a particular contractual term is a condition. As Blackburn J (for the court) said in Bettini v Gye:12

Parties may think some matter, apparently of very little importance, essential; and if they sufficiently express an intention to make the literal fulfilment of such a thing a condition precedent, it will be one.

Therefore, if it is contended that the promisor has breached a condition, the first issue is whether the parties have ‘sufficiently’ expressed an agreement that the term at issue is a condition.

[5-05] Difficulties of expression. There is no generally accepted form of words which will be regarded as indicative of an express agreement that a term is a condition. A statement that a term is a ‘condition’ is not conclusive.13

With respect to time stipulations, an express statement that time is ‘of the essence’ of the contract is a recognised way of classifying (defining) time stipulations as conditions.14 In United Scientific Holdings Ltd v Burnley Borough Council,15 Lord Salmon said the time stipulations at issue ‘could easily be drafted so that they state expressly whether time is or is not to be treated as of the essence’. He pointed out16 the virtue of such a provision, namely, that ‘a great deal of expensive litigation would be avoided’. By analogy — and more generally — an express designation of a term as an ‘essential’ term, or a statement that strict compliance is ‘of the essence’ or ‘essential’, may be a sufficient expression of intention.17

If there is an express agreement, its scope is a question of construction. The agreement may be general, and therefore make all promissory terms conditions. Alternatively, and more usually, it may be a specific agreement, and apply only to a particular term or a particular type of term, as where the time of payment is expressly made ‘of the essence’.

[5-06] Use of the word ‘condition’. Because of the inherent ambiguity of the word ‘condition’,18 the mere description of a term as a ‘condition’ is not an express agreement that the term is a condition in the sense that any breach of the term gives rise to a right to terminate the performance of the contract.

Similarly, the fact that a term includes the word ‘condition’ is not conclusive. However, certain statements in L Schuler AG v Wickman Machine Tool Sales Ltd19 provide some support for the view that where a promissory term uses the word

12. (1876) 1 QBD 183 at 187 (approved L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 at 251). See also Tarrabochia v Hickie (1856) 1 H & N 183 at 188; 156 ER 1168 at 1170; Hoad v Swan (1920) 28 CLR 258 at 263; Dawsons Ltd v Bonnin [1922] 2 AC 413 at 435. Cf Lombard North Central Plc v Butterworth [1987] QB 527 at 535.

13. See [5-06].14. See [5-50].15. [1978] AC 904 at 947.16. [1978] AC 904 at 947.17. Cf Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd (2008)

234 CLR 237 at 255; 244 ALR 1; [2008] HCA 10 at [47] (‘fundamental obligation’).18. See [4-09]–[4-12].19. [1974] AC 235 at 250–1, 264–5 (see Baker, [1973] CLJ 196).

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‘condition’ there is a presumption in favour of construction of the term as a condition.20 In that case, a distributorship agreement made visits by Wickman to Schuler’s clients a ‘condition’ of the contract. However, the House of Lords held that this was not an express agreement that the term was a condition.21 There was no clear expression of an intention that any breach of the term would give rise to a right to terminate the performance of the contract. Therefore, to the extent that a presumption arose, it was rebutted by construction.

[5-07] Attaching consequences. From the perspective of the right to terminate for breach, an obvious way to avoid difficulties of expressing an intention that a term is a condition is to confer an express right to terminate ‘for any breach of this term’. However, such a statement does not define the term to which the clause applies as a condition. Instead, such a provision confers an express right to terminate the contract. It remains a question of construction whether the term is a condition.22

Nor is it necessary for the parties to attach the consequences of breach of condition in order to state an express agreement that a term is a condition. If a contract states that ‘strict compliance’ with a particular term is ‘essential’, the term may be construed as a condition even though there is no express statement that breach entitles the promisee to terminate the performance of the contract. Although the inclusion of such a right serves to confirm the literal meaning of the contract, there remains for consideration the question of the sense in which strict compliance is intended to be ‘essential’. But the matter is put beyond doubt if the contract also provides for the recovery of loss of bargain damages.23

[5-08] Condition distinguished from express right.24 A promisor’s breach of contract may activate a provision of the contract which expressly confers a right to terminate. The scope of application of any such express right is relevant to the construction of any term alleged to be a condition.25 However, even if the express right accrues on any breach of a particular term, whether the term to which it applies is a ‘condition’ still depends on construction of the contract as a whole.26 Notwithstanding that such terms have sometimes been described as ‘conditions’,27 conferral of the express right to terminate is not in itself sufficient

20. The presumption cannot be made simply on the basis of the use of the word in a description of the document. See Zeus Tradition Ltd v Bell (The Zeus V) [2000] 2 Lloyd’s Rep 587 at 595 (no presumption that terms were conditions just because they appeared under the heading ‘conditions’). See also [4-11].

21. See also Australia and New Zealand Banking Group Ltd v Beneficial Finance Corp Ltd (1982) 44 ALR 241; 57 ALJR 352 (‘conditional’). See further [5-21] (no implied agreement).

22. [5-08].23. Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd (2008) 234

CLR 237 at 255; 244 ALR 1; [2008] HCA 10 at [48]. Cf Kuwait Rocks Co v AMN Bulkcarriers Inc (The Astra) [2013] 2 Lloyd’s Rep 69 at 97; [2013] EWHC 865 (Comm) at [120] (disapproved on another point Spar Shipping AS v Grand China Logistics Holding (Group) Co Ltd (The Spar Capella) [2016] 2 Lloyd’s Rep 447; [2016] EWCA Civ 982).

24. See Carter and Courtney, (2017) 133 LQR 395.25. See [5-20]–[5-22]. See also [5-26].26. [4-09].27. See [3-09].

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to justify construction of the term as a condition.28 Accordingly, classification of the term under the tripartite characterisation is a distinct issue.

Of course, if any breach of a term is sufficient to activate an express right to terminate, from the perspective of availability of the right to terminate, there is no difference between the express right and a common law right to terminate for breach of condition. This led Glass JA in Honner v Ashton29 to suggest that where a clause allows termination on any default, the question whether the ‘clause is to be treated as raising all terms of the contract to the level of conditions or as giving a power to discharge for inessential breach is a matter of purely academic interest’. However, for purposes other than the right to terminate the matter is far from being ‘purely academic’.30

Conditions by Implied Agreement(a) General

[5-09] No presumption that terms are conditions. There is no presumption of law to the effect that a promissory contractual term is a condition.31 This is true even in commercial contracts, where conditions are most frequently encountered. Accordingly, in the absence of express agreement, the question is always whether it should be inferred from construction of the contract that the parties impliedly intended the term at issue to be a condition.32

Except in respect of time stipulations33 in commercial contracts,34 courts now generally take the view35 that a contract should be performed, notwithstanding breach by one party of a term of the contract.36 Construing terms as intermediate terms,37 rather than conditions, serves to promote this view by preventing the avoidance of contractual obligations by termination in respect of a commercially insignificant breach. It also promotes good faith, since the most likely motive for termination in such a situation is an adverse market movement. Because termination disrupts commercial activities there are also sound economic reasons for not treating terms

28. An important recent example is Spar Shipping AS v Grand China Logistics Holding (Group) Co Ltd (The Spar Capella) [2016] 2 Lloyd’s Rep 447; [2016] EWCA Civ 982 (see [3-09]). See further [5-51], [5-54].

29. (1979) 1 BPR 9478 at 9483. Hope JA agreed. See also More OG Romsdal Fylkesbatar AS v Demise Charterers of the Ship ‘Jotunheim’ [2005] 1 Lloyd’s Rep 181 at 186; [2004] EWHC 671 (Comm) at [33] (in context of demise charterparty, no need to specify that time is ‘of the essence’ where there is an express right of termination).

30. See [7-38]–[7-39] (anticipatory breach), [10-14] (exercise of express right in advance), [13-06]–[13-08] (damages).

31. See [1-24].32. For the relevance of general construction principles see [5-11].33. For the meaning of this expression see [1-03] and [5-39].34. See generally [5-64]–[5-69].35. See [4-27]. In Compagnie Generale Maritime v Diakan Spirit SA (The Ymnos) [1982] 2 Lloyd’s Rep

574 at 583, Robert Goff J referred to the ‘marked reluctance in recent years to classify terms as conditions’.

36. See [3-03]. 37. For the meaning of the description see [4-20].

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as conditions unless the parties clearly intended this to be the case. Nevertheless, for some terms precedent may create a preference (or presumption) in favour of classification as a condition.38 By contrast, for provisions which state the time for payment, there is a contrary presumption of intention.39

[5-10] Relevance of prior cases. Particularly when considering whether the parties to a third-party standard form contract have impliedly agreed that a particular term is a condition, it is important to ask how the term has previously been construed.40 If the term has been construed as a condition in a prior case, it can be presumed that the parties intended to be bound by that decision.41 Because the English cases have frequently concerned such contracts, terms are commonly held to be conditions on the basis of a prior decision.42

Where a term is similar to one which has previously been construed as a condition the court may lean towards that construction in order to promote certainty and consistency of decision. For example, in Maredelanto Compania Naviera SA v Bergbau-Handel GmbH (The Mihalis Angelos)43 the English Court of Appeal construed cl 1 of a voyage charterparty, which stated that the vessel the subject of the contract was ‘expected ready to load under this charter about’ a specific date, as a condition because similar terms in sale of goods contracts had been so construed. There was nothing in the contract to indicate a contrary agreement, and certainty required uniform construction.44

At a more general level, construction of a term as a condition is a conclusion of law on which there is a substantial body of case law. This operates at two levels. First, lines of authority favour particular constructions for certain types of terms.45 Second, precedent provides important guidelines on the considerations relevant to the construction conclusion.46

[5-11] Commercial construction principles. Obviously, general principles of commercial construction are relevant to the specific question of whether the parties intend a particular term to be a condition.47 Although those principles necessarily

38. See [5-10].39. See [5-54].40. See Carter, Construction, §2-46.41. See, eg Lusograin Comercio Internacional de Cereas Ltda v Bunge AG [1986] 2 Lloyd’s Rep 654 at

657 (term held to be a condition because it was the same as that so construed in Bunge Corp New York v Tradax Export SA Panama [1981] 1 WLR 711). But cf Lord Devlin, [1966] CLJ 192 at 196; and see Jenkins, [1969] CLJ 251 at 258.

42. The converse is also true. See [6-05] (terms classified as intermediate terms on basis of prior authority).

43. [1971] 1 QB 164 (see also [5-21]).44. See also Etablissements Georges et Paul Levy v Adderley Navigation Co Panama SA (The Olympic

Pride) [1980] 2 Lloyd’s Rep 67 at 71 (‘expected load ready’ clause); Geogas SA v Trammo Gas Ltd (The Baleares) [1993] 1 Lloyd’s Rep 215 at 225 (‘expected ready’ clause); SHV Gas Supply & Trading SAS v Naftomar Shipping & Trading Co Ltd Inc (The Azur Gaz) [2006] 1 Lloyd’s Rep 163 at 173; [2005] EWHC 2528 (Comm) at [53] (ETA clause).

45. See [5-33] (terms to which special considerations apply), [5-64]–[5-69] (time stipulations in commercial contracts).

46. See [5-14].47. See Carter, Construction, §2-42.

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inform the whole discussion in this chapter, three aspects may be noted here. First, whether the express48 or implied49 agreement of the parties is at issue, the contract must be construed as a whole50 in light of context.

Second, evidence of the subsequent conduct for the prior negotiations of the parties is inadmissible when construing the clause. For example, in L Schuler v Wickman Machine Tool Sales Ltd,51 in performing the contract the parties may have acted on the basis that the term in question was not a condition. Although a majority of the English Court of Appeal52 construed the term in reliance on that conduct, the House of Lords said this was not permissible even if the term was ambiguous.53

The exclusion of subsequent conduct as an aid to construction includes the actual consequences of breach of a term. As long ago as Behn v Burness,54 it was said that a term cannot be construed as a warranty simply because the actual consequences of a breach of the term are not serious. Notwithstanding statements in some of the subsequent cases,55 that the gravity of a particular breach can be taken into account, the House of Lords affirmed the exclusion of such evidence in Bunge Corp New York v Tradax Export SA Panama.56 It was alleged that the term in question was intermediate in character because the breach which had occurred did not deprive the promisees of substantially the whole benefit which it was intended they should obtain from performance of the contract. This ex post facto construction was rejected, and the House of Lords said that the issue is resolved by construction of the contract at the time it was entered into. In the same way, a term cannot be construed as a condition merely because its breach has in fact had serious consequences for the promisee.57

Third, an overriding concern of commercial construction is to arrive at a commercially sensible conclusion. The general construction preference in favour of reasonable results applies in the construction of terms alleged to be conditions.58 Accordingly, if construction of the term at issue as a condition would lead to a commercially unreasonable result, that may be taken into account in construction.59

[5-12] Is there a ‘test’? There are many statements in the authorities suggesting that it is possible to frame a ‘test’ capable of being applied in all contracts, or at least

48. Telfair Shipping Corp v Athos Shipping Co SA (The Athos) [1983] 1 Lloyd’s Rep 127 at 137–8.49. See [5-20]. For illustrations see [5-06], [5-12], [5-18].50. See Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd (2008)

234 CLR 237 at 255; 244 ALR 1; [2008] HCA 10 at [48].51. [1974] AC 235 (see [5-06]). See also Wallis v Pratt [1910] 2 KB 1003 at 1015; [1911] AC 394

at 400.52. Sub nom Wickman Machine Tool Sales Ltd v L Schuler AG [1972] 1 WLR 840.53. Of course, any ‘ambiguity’ related to the legal effect of the clause, not its meaning.54. (1863) 3 B & S 751 at 758; 122 ER 281 at 284.55. See, eg Cehave NV v Bremer Handelsgesellschaft mbH (The Hansa Nord) [1976] QB 44 at 58. For

an early example see Davidson v Gwynne (1810) 12 East 381 at 389; 104 ER 149 at 152. But cf Devlin, [1966] CLJ 192 at 198.

56. [1981] 1 WLR 711.57. It is, however, legitimate to have regard to likely consequences. See [5-23]–[5-25].58. See, eg L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235.59. See [5-27]–[5-28]. See also [3-10] (construction of express right).

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in a wide variety of contexts, to determine whether a given term is a condition. For example, in Bettini v Gye60 the court stated:

[A]nd in the absence of … an express declaration, we think that we are to look to the whole contract, and … see whether the particular stipulation goes to the root of the matter, so that a failure to perform it would render the performance of the rest of the contract by the plaintiff a thing different in substance from what the defendant has stipulated for; or whether it merely partially affects it and may be compensated for in damages.

An oft-quoted61 formulation is that of Bowen LJ in Bentsen v Taylor Sons & Co (No 2):62

There is no way of deciding [the] question except by looking at the contract in the light of the surrounding circumstances, and then making up one’s mind whether the intention of the parties, as gathered from the instrument itself, will best be carried out by treating the promise as a warranty sounding only in damages, or as a condition precedent by the failure to perform which the other party is relieved of his liability.

In Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd,63 Diplock LJ suggested64 that a term is a condition if

… it can be predicated that every breach of such an undertaking must give rise to an event which will deprive the party not in default of substantially the whole benefit which it was intended that he should obtain from the contract.

Under Australian law, the test stated by Jordan CJ in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd 65 has often been applied.66 He said67 that a term is a condition if the promisee ‘would not have entered into the contract unless assured of a strict and literal performance’ of the term.

There are several problems with these formulations. First, there is a conceptual problem, namely, the view (actually a non sequitur) that it is possible to frame a single test of general application. Any generalised test is ultimately a reformulation of the question, namely, the intention of the parties.68

60. (1876) 1 QBD 183 at 188. See also Friedlander v Bank of Australasia (1909) 8 CLR 85 at 99–100. Such terms are often described as ‘essential’ or ‘fundamental’ terms. See, eg Suisse Atlantique Société d’Armement Maritime SA v NV Rotterdamsche Kolen Centrale [1967] 1 AC 361 at 422; Shevill v Builders Licensing Board (1982) 149 CLR 620 at 626–7; 42 ALR 305. See also [4-38]–[4-39].

61. See, eg Francis v Lyon (1907) 4 CLR 1023 at 1034; Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286 at 303; Bunge Corp New York v Tradax Export SA Panama [1981] 1 WLR 711 at 725; Compagnie Generale Maritime v Diakan Spirit SA (The Ymnos) [1982] 2 Lloyd’s Rep 574 at 584; Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 at 556; 70 ALR 641; State Trading Corp of India Ltd v M Golodetz Ltd [1989] 2 Lloyd’s Rep 277 at 282.

62. [1893] 2 QB 274 at 281.63. [1962] 2 QB 26.64. [1962] 2 QB 26 at 69. Cf Wallis v Pratt [1910] 2 KB 1003 at 1012 (adopted [1911] AC 394);

Clifton v Coffey (1924) 34 CLR 434 at 440.65. (1938) 38 SR (NSW) 632 at 642 (reversed on other grounds sub nom Luna Park (NSW) Ltd v

Tramways Advertising Pty Ltd (1938) 61 CLR 286). See also Guy-Pell v Foster [1930] 2 Ch 169 at 180.

66. See [5-17].67. See [4-24].68. Cf State Trading Corp of India Ltd v M Golodetz Ltd [1989] 2 Lloyd’s Rep 277 at 283 per Kerr LJ,

with whom Lloyd and Butler-Sloss LJJ agreed (test in Bentsen v Taylor Sons & Co (No 2) [1893] 2 QB 274 at 281 to be resorted to where there is ‘no other specific guide’).

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Second, each formulation relies on a particular perspective or criterion for the construction question. That focus or criterion may have been relevant, even decisive, in relation to the contract at issue. But that does not mean that the test has general relevance.

Third, the obvious conclusion is that each test states a sufficient basis for concluding that a term is a condition.69 Therefore:■ although the likelihood of serious loss (or damage) is a sufficient basis for saying

that a term is a condition, a term may be a condition even if serious loss is unlikely;70

■ similarly, notwithstanding Diplock LJ’s statement, it was emphasised in Bunge Corp New York v Tradax Export SA Panama71 that a term may be a condition even though it is clear that a breach will not ‘give rise to an event’ depriving the promisee ‘of substantially the whole benefit which it was intended that he should obtain from the contract’; and

■ motivation for entry into the contract cannot be regarded as universally important. Particularly where the contract is on a third-party standard form, there may be nothing to indicate whether the bargain would have been entered into without an (implied) assurance of ‘strict and literal performance’.72

It follows that the assistance of the various ‘tests’ put forward over the years lies in the identification of potentially relevant factors.73 The modern approach to the construction question involves identification (and consideration) of factors a reasonable person would take into account, that is, to infer an agreement that the term at issue is intended to operate as a condition. But the tests do not limit the number of potentially relevant factors.74

[5-13] Commercial judgment. Even though the question whether a term is a condition is one of law,75 the search is for a commercially sensible construction.76 In the absence of binding authority, the question may be approached as a matter of commercial judgment.77

The views of arbitrators and commercial judges who deal with questions of this nature on a regular basis must therefore be respected. For example, in Compagnie

69. See [5-24] (rejection of satisfaction of Diplock LJ’s test in Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 at 69 as a necessary requirement).

70. See [5-24].71. [1981] 1 WLR 711. See also [5-01] and further [5-24].72. See DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 at 436; 19 ALR 223;

Shevill v Builders Licensing Board (1982) 149 CLR 620 at 631; 42 ALR 305; Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115 at 154; 241 ALR 88; [2007] HCA 61 at [100].

73. Petrotrade Inc v Stinnes Handel GmbH [1995] 1 Lloyd’s Rep 142 at 149; Shakibaee v Chan (2001) 24 WAR 97 at 108; [2001] WASC 60 at [54].

74. See [5-14].75. See [4-06].76. See Carter, Construction, §§2-44–2-46. See also [5-11].77. Warde v Feedex International Inc (No 2) [1985] 2 Lloyd’s Rep 289 at 298; State Trading Corp of India

Ltd v M Golodetz Ltd [1989] 2 Lloyd’s Rep 277 at 281–2, 284; Compagnie Commerciale Sucres et Denrées v C Czarnikow Ltd (The Naxos) [1990] 1 WLR 1337 at 1347. Contrast Gill & Duffus SA v Société pour l’Exportation des Sucres SA [1986] 1 Lloyd’s Rep 322 at 325 (arbitrator’s finding that those in sugar trade find strict punctuality difficult not enough to displace construction of term as condition).

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Commerciale Sucres et Denrées v C Czarnikow Ltd (The Naxos)78 the House of Lords upheld the reasoning of arbitrators that sellers had breached a condition in performing a sale of goods on FOB terms incorporating the Rules of the Refined Sugar Association of London. The contract related to white crystal sugar to be delivered by the sellers to one or more vessels ‘presenting ready to load during May/June 1986’. The award reasoned that once the buyers had given a reasonable notice in accordance with r 14, they were entitled to call for delivery within the contract period. It was said to be a corollary of this that the sellers were under an obligation to deliver promptly once the notice was given. In addition, time was of the essence. Lord Ackner said79 ‘the evaluation by this experienced trade tribunal of the commercial significance of r 14(1) was wholly justified’.

Of course, the fact that commercial judgment is an ingredient of the conclusion does not convert the legal question of whether a term is a condition into a question of fact,80 or a matter for subjective opinion. Nor does it deny the importance of precedent not amounting to binding authority.81 Accordingly, the decision of an arbitrator or trial judge may be vitiated by an error of law in the formulation of the issue, in the evidentiary material relied on to determine the issue or in the application of precedent.82

[5-14] Relevant factors.

Article 5.2 — Factors relevant to whether term a condition.

In construing a contract to determine whether the parties impliedly agreed that the term in issue is a condition, account may be taken of the following factors, so far as relevant:

(a) the form and structure of the term;(b) whether entry into the contract was motivated by an understanding on the

part of the promisee that the term would be strictly complied with;(c) the relationship between the term and the other terms of the contract;(d) the likely effects of any breach of the term;(e) the extent to which the promisee would be adequately compensated by an

award of damages for breach of the term;(f) whether construing the term as a condition would achieve an unreasonable

result;(g) the nature of the contract in which the term appears;(h) the nature of the subject matter of the contract; and(i) the nature of the term and the obligation which it creates.

78. [1990] 1 WLR 1337 (see Treitel, [1991] LMCLQ 147; Clarke, [1991] CLJ 29; Carter, (1992) 5 JCL 60).

79. [1990] 1 WLR 1337 at 1348. Lords Bridge, Oliver and Jauncey agreed.80. Compagnie Generale Maritime v Diakan Spirit SA (The Ymnos) [1982] 2 Lloyd’s Rep 574 at 586.81. See [5-10].82. See Tradax Export SA v Italgrani di Francesco Ambrosio [1986] 1 Lloyd’s Rep 112 at 119, 120

(board of appeal misdirected itself); RG Grain Trade LLP v Feed Factors International Ltd [2011] 2 Lloyd’s Rep 432 at 441; [2011] EWHC 1889 (Comm) at [42] per Hamblen J (board of appeal proceeded on erroneous basis that a quality term is a condition unless the contract provides otherwise).

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Carter BreachOfContract 2ed ch04-06 3pp.indd 160 27/09/2018 6:06 PM

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Carter ’ s Breach of Contract · The construction of a term as a condition is a conclusion as to the legal effect of the contract, not a statement of what the contract ‘means’