I. COMMON LAW RULES PERMITTING TERMINATION
3.1 At common law there are four main bases of termination for breach: express contractual right; breach of condition; breach of intermediate term with sufficiently serious consequences; and repudiation of obligation.1 Throughout the Sale of Goods Act 1923 (NSW) the right to terminate is described as a right to “treat the contract as repudiated”.
3.2 The Sale of Goods Act 1923 (NSW) expressly allows termination for breach of condition2 and for repudiation of an instalment goods contract.3 There is implicit recognition of termination pursuant to an express contractual right,4 but no recognition of a right to terminate for breach of an intermediate term or for repudiation of obligation. However, there is no doubt that the saving of the “rules of the common law” in s4(2) preserves the right to terminate in cases of repudiation of obligation5 Any doubts therefore relate solely to termination for a sufficiently serious breach of an intermediate term.
II. INTERMEDIATE TERMS
A. Definition
3.3 An intermediate term, frequently described as an “innominate term”, is a contractual term the importance of which lies somewhere between a condition and a warranty. Every breach of such a term gives rise to a right to claim damages, but only a serious breach gives rise to a right to terminate the performance of the contract. The seriousness of the breach depends on its consequences (both actual and foreseeable) for the promisee.
B. General Law of Contract
3.4 The intermediate term concept is derived from the decision in 1961 of Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd.6 The English Court of Appeal held that where shipowners breached a charter party contract by delivering an unseaworthy vessel, the fact that the term could not be classified as a condition did not mean that the charterers were necessarily precluded from terminating the performance of the contract. According to Upjohn LJ 7 even if the term were a warranty the charterers would have been justified in terminating if the breach of the term was sufficiently serious. Diplock LJ said8 the term was too complex to be classified and that the charterers would have been entitled to terminate had the shipowners’ breach deprived the charterers of substantially the whole benefit which it was intended they should obtain from performance of the contract.
3.5 The judgments in the Hongkong Fir case relied on nineteenth century decisions, prior to the enactment of the Sale of Goods Act 1893 (UK). These cases certainly justified the view that breach of condition is not the only basis for termination for breach of a contractual term. Surprisingly, however, the terminology of “intermediate” or “innominate” terms is not to be found in either the nineteenth century cases or the Hongkong Fir case itself. Thus, although there was nothing particularly novel in the Hongkong Fir decision, the terminology adopted by the courts in reliance on the case is not reflected in the sale of goods legislation.
C. Sale of Goods Law
3.6 In its Working Paper on the Sale of Goods9 the Commission tentatively suggested that amendment to the Sale of Goods Act 1923 (NSW) would be necessary (and desirable) for the decision in the Hongkong Fir case to be applied to a sale of goods contract. Although not referred to in the Working Paper (no doubt because the report of the case had not arrived in time) Mocatta J in Cehave NV v Bremer Handelsgesellschaft mbH (The Hansa Nord)10 had reached the same conclusion and held that the Hongkong Fir analysis could not be applied to a sale of goods contract. Subsequently, however, Mocatta J’s decision was reversed by the English Court of Appeal11 and the Hongkong Fir analysis applied.
3.7 In The Hansa Nord a clause in a cif contract for the sale of citrus pulp pellets required “shipment to be made in good condition”. This term was breached by the sellers and the buyers claimed that as the term was a condition their rejection of the goods was justified. Although Mocatta J had upheld that contention the Court of Appeal was unanimous in holding that the term was not a condition. The question then arose whether the buyers could base their decision to terminate on the common law stated in the Hongkong Fir case. Although the Court unanimously accepted the proposition that the Hongkong Fir case could be applied, it was held that, on the facts, the sellers’ breach was not serious enough to justify termination by the buyers.
3.8 Each member of the Court of Appeal in The Hansa Nord thought that s6l(2) of the Sale of Goods Act 1893 (UK),12 saving the “rules of the common law”, allowed recourse to the common law as interpreted in the Hongkong Fir case because it was not inconsistent with the provisions of the Act. Lord Denning MR and Roskill LJ considered that there was nothing in the Act to prevent the relevant clause being interpreted as an intermediate or innominate term. Ormrod LJ doubted, however, whether it was necessary to create a third category of contractual terms. In his view the Hongkong Fir case involved the recognition of a basis for termination for breach of warranty, namely, “that, de facto, the consideration for his [ie the buyer’s] promise has been wholly destroyed”.13 Although this difference of opinion has not been finally resolved in England, the House of Lords gave its approval to The Hansa Nord in Reardon Smith Line Ltd v Yngvar Hansen-Tangen.14
D. Justification of the English Law
3.9 There are sound commercial reasons to justify the decision in The Hansa Nord. The main justification is the flexibility generated by the Hongkong Fir case. Under a literal interpretation of the Sale of Goods Act 1923 (NSW) there is a choice between two types of terms: conditions and warranties. A third category of terms gives greater choice and precludes the argument that a breach of condition is the only basis for termination. Where, as in The Hansa Nord, a standard form contract is in issue, the classification of the term by the court will bind subsequent parties using the same form and there is the danger that justice will not be achieved in all cases. The Court in The Hansa Nord was reluctant to construe the term as a condition because the sellers’ breach, objectively considered, was not particularly serious. It would have served to encourage the avoidance of contractual obligations for technical breaches associated with a downward movement in market prices. On the other hand, construing the term as a warranty would have implied that, subject to Ormrod LJ’s suggestion,15 no breach of the same term in a subsequent contract, no matter how serious, would justify termination by a buyer. The main application of the Hongkong Fir analysis is to terms capable of being breached with varying degrees of seriousness, such as those relating to the quality or condition of goods,16 and it seems eminently sensible to allow a flexible approach to such terms. On the other hand, it is difficult to see how a sale of goods contract can contain intermediate (innominate) terms when the Act implicitly17 requires terms to be classified as either conditions or warranties.
E. Australian Law
3.10. Although the intermediate term concept has yet to be approved by the High Court,18 the Hongkong Fir case has been referred to with approval in the State Supreme Courts on a number of occasions. 19 Given this approval under the general law of contract, it would be sufficient, in any statutory adoption of the concept in the sale of goods context, merely to state expressly that the concept is not to be seen as excluded by the terms of the Act (see para 3.12).
3.11 Further discussion is necessary, however, on the relationship between the concept of warranty (as employed in the Act) and the repudiation doctrine (implicitly preserved by s4(2)). Under the common law even a breach of warranty will justify termination if the promisor has also repudiated his contractual obligations.20 But in The Hansa Nord21 Lord Denning MR was of the opinion that the term “repudiation” should be restricted to cases of “anticipatory” breach, and not applied to termination based on the “actual” breach of a contractual term. There is a valid distinction between the Hongkong Fir approach and the repudiation doctrine.22 Under the former, termination is justified because of the consequences of the promisor’s breach. Evidence must be produced indicating that serious loss or damage has been (or will be) suffered by the promisee. Under the repudiation concept, there must be an express or implied refusal to perform and the promisee must therefore produce evidence which shows such a refusal on the part of the promisor. There is clearly an overlap between the concepts, but in many cases it would be artificial to ask whether a seller has impliedly refused to perform the contract by tendering or delivering defective goods. The complaint of a buyer in cases such as The Hansa Nord is not the conduct of the seller, who may be doing the very best to perform, but rather the consequences of receiving goods which are not in accordance with the contract.
III. RECOMMENDATION
3.12 We recommend that the Act be amended to make it clear that the Sale of Goods Act does not exclude the right to treat a contract of sale as repudiated for a sufficiently serious breach of an intermediate stipulation. Two problems then arise: first, the terminology to be employed; and, secondly, the way in which the Act should be amended.
3.13 There are two possible approaches to terminology: either the amendment can be expressed by reference to the consequences of breach; or the terminology of the intermediate term itself can be employed.
3.14 One approach to amendment of the Act would be to expand s4(2), so that it contained the words “the effect of breach of an intermediate stipulation” after the word “agent”. A second possibility would be to insert a new subsection, to the following effect:
(2A) Nothing in this Act shall be construed as excluding a right to treat a contract of sale as repudiated for a sufficiently serious breach of a stipulation that is neither a condition nor a warranty but is an intermediate stipulation.
The expressions “intermediate stipulation” and “treat contract of’ sale as repudiated” have been chosen to achieve consistency with other sections of the Act, particularly sl6. A third possibility would be to enact the first reform with the words “the effect of breach of a stipulation not classified as either a condition or a warranty”, after “agent” in s4(2). A fourth possibility would be to enact a new subsection (2A) in s4, similar to that proposed in the second reform, but ending with the words “breach of a stipulation which is not classified as either a condition or a warranty”. We favour the second of these four possible approaches.
3.15 It might be objected that, given the discussion of s4 in Chapter 2, it is not appropriate to give that section more work to do, and that sl6 is the appropriate place in which to bring in the intermediate term concept. However, we take the view that it would be inappropriate to insert an amending provision in such a specific section of the Act without also amending the terms of other sections of the Act, such as s54.
IV. OTHER ISSUES
3.16 A number of other issues arise in relation to the breach of contractual terms, such as the quantum of damages recoverable where a buyer (or seller) terminates the performance of a contract of sale, for breach by the seller (or buyer), in reliance on an express contractual right to terminate. Is it necessary, in order for the buyer (or seller) to recover loss of bargain damages, to prove a repudiation or fundamental breach by the seller (or buyer)?23 We propose to deal with this issue, and other controversial issues, in the Issues Paper foreshadowed earlier in this Report. 24
FOOTNOTES
1. See Carter, Breach of Contract (1984) Ch 3.
2. See s16.
3. See s34(2).
4. See, eg s16(3).
5. See, eg Francis v Lyon (1907) 4 CLR 1023; Peter Turnbull and Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd (1954) 90 CLR 235.
6. [1962] 2 QB 26.
7. [1962] 2 QB 26 at 64. It seems that Sellers LJ took the same view.
8. [1962] 2 QB 26 at 69-70.
9. New South Wales Law Reform Commission, Working Paper on Sale of Goods (WP 13 1975) para 13.18.
10. [1974] 2 Lloyd’s Rep 216. But see W N Lindsay and Co Ltd v European Grain Shipping Agency Ltd [1963] 1 Lloyd’s Rep 437 at 443.
11. [1976] GB 44.
12. See now s62(2) of the Sale of Goods Act 1979 (UK). This provision is relevantly in identical terms to s4(2) of the Sale of Goods Act 1923 (NSW) (set out at para 2. 1).
13. [1976) QB 44 at 84.
14. [1976] 1 WLR 989. See also Bremer Handelsgesellschaft mbH v Vanden Avenne-Izegem PVBA [1978] 2 Lloyd’s Rep 109; Bunge Corp New York v Tradax Export SA Panama [1981] 1 WLR 711.
15. See para 3.8.
16. Thus, it is not usually applied to time stipulations: Bunge Corp New York v Tradax Export SA Panama [1981] 1 WLR 711.
17. For example, s16(2) seems to assume that a breach of condition is the only basis for termination for breach of a contractual term.
18. Cf Shevill v Builders Licensing Board (1982) 149 CLR 620 at 626, 637; Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 59 ALJR 373 at 380.
19. See Direct Acceptance Finance Ltd v Cumberland Furnishing Pty Ltd [ 1965] NSWR 1504 at 1510-1511 per Walsh J with whom the other members of the Full Court agreed; Academy of Health and Fitness Pty Ltd v Power [1973] VR 254 at 264; Honner v Ashton (1979) 1 BPR 9478 at 9490 per Mahoney JA: Wood Factory Pty Ltd v Kiritos Pty Ltd (1985) 2 NSWLR 105 at 144-145 per McHugh JA.
20. See Associated Newspapers Ltd v Bancks (1951) 83 CLR 322.
21. [1976] GB 44 at 59.
22. See Carter, Breach of Contract (1984) paras 639-643.
23. See Shevill v Builders Licensing Board (1982) 149 CLR 620 and Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 59 ALJR 373 (both cases on leases of land) and cf Sotiros Shipping Inc v Sameiet Solholt (The Solholt) [1983] 1 Lloyd’s Rep 605 (sale of goods).
24. See para 1.19.
