9th October 2019
Gwendoline Davies, Head of Dispute Resolution at Walker Morris explains why businesses need to understand the different categories of contractual terms. In light of the recent Court of Appeal case of Ark Shipping v Silverburn Shipping , Gwendoline clarifies the correct approach to the classification of terms, and offers practical advice for anyone involved in contract drafting or interpretation.
In the fast-paced world of commercial negotiations, contractual language is often deployed without parties necessarily appreciating the correct legal meaning, and practical impact, of certain words. However, whether a contractual provision is classed, as a matter of law, as a ‘condition’; a ‘warranty’; or an ‘innominate’ (or ‘intermediate – these latter two are interchangeable) term is a technical issue which can have very significant practical and financial implications. The classification of a contractual provision is crucial because it can determine the remedies that will be available in the event of breach.
It is essential that anyone involved in the negotiation, drafting or interpretation of commercial contracts understands the different categories of contractual terms. In particular, where appropriate, it is important that parties are able to decide upon their requirements and then to provide for conditions, warranties and/or innominate terms accordingly within their contractual arrangements.
In the recent Ark Shipping case, the Court of Appeal provided a cautionary reminder of the different categories of contractual terms. The court also clarified the correct approach for classifying terms.
Overall, in the absence of express wording, the categorisation of contractual terms is a balancing exercise. In accordance with prior authority, the court should generally find that a term is innominate unless it is clear on the face of the contract that the term is a condition or a warranty; and in making that assessment, the court will take into account the language, structure and scheme of the contract, together with business common sense.
A key point for contract negotiators and drafters to appreciate is that, in many cases, a judgment call will be needed as to whether a contractual term should be expressed to be a condition or a warranty, or whether the terms should be innominate. There is, of course, the advantage of certainty on the one hand; but the flip-side is that it can be undesirable for trivial breaches to carry the consequences of a breach of condition.
As a general guide, where a point is absolutely critical to your business and to the success of the contractual arrangement, such that you would require termination to be an option in the event of breach, it may be best to expressly state within the contract that the term is a condition. Where, however, flexibility will be preferable, the contract should perhaps remain silent as to classification of the term.
Ark had leased, by way of an industry standard charterparty contract, a vessel from Silverburn. The contract included, amongst other terms, certain obligations on Ark for the ongoing maintenance of the vessel. Several disputes arose between the parties and, in December 2017, Silverburn argued that a specific maintenance obligation was a condition and that Ark had breached it. Silverburn therefore sought to both terminate the contract and claim damages. The Court of Appeal was asked to determine (solely) whether the obligation was a condition or an innominate term. In doing so, the Court of Appeal confirmed that the correct approach as to the classification of contractual terms is as follows:
The Court of Appeal concluded on this occasion that the provision was an innominate term. Consequently, albeit this was not a matter for the Court of Appeal to decide in the current proceedings, an assessment must be made as to whether the remedies available in the event of breach will be as for a breach of condition (termination and damages) or as for a breach of warranty (damages only). Any such assessment will depend upon on the particular facts and circumstances of any individual case.
If you would like any advice or assistance with the negotiation, drafting, interpretation or application of any of your contractual terms, or if you would like any further information or advice relating to the classification of contractual terms, please do not hesitate to contact Gwendoline or any member of the Commercial Dispute Resolution Team.
  EWCA Civ 1161
 Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd  EWCA Civ 7
 Spar Shipping AS v Grand China Logistics Holdings (Group) Co Ltd  EWCA Civ 982