[1975] 3 All ER 739
Court of Appeal
In September 1970 a German company sold citrus pulp pellets to a Dutch company for £100,000. Clause 7 of the contract of sale stated
'Shipment to be made in good condition'.
On 14 May the buyers paid the price and got the shipping documents. When the cargo was unloaded from the Hansa Nord on 25 May it was discovered that the cargo in hold two, 2,053 tons, was in good condition but that some of the cargo in hold one, 1,260 tons, was damaged. By this time the market price for the cargo was only £86,000 and the buyers, looking for a way to get out of the contract, rejected the whole cargo (both holds one and two) on the ground that it was not shipped 'in good condition'; they also claimed repayment of the purchase price of £100,000. The sellers refused to accept the rejection of the cargo. Later the cargo was sold by order of the Rotterdam County Court. The cargo was bought by a third party for £33,000 who then sold it to the original buyers for £33,000. The buyers then used the entire cargo for its original purpose.
The issue before the court was whether the 'Shipment to be made in good condition' term in the contract was a condition.
Ormrod LJ
I now turn to the problems arising from cl 7... Under this clause the sellers were under an obligation to ship the goods 'in good condition' and to comply with other requirements which are not relevant. The [arbitrators] have found that the sellers were in breach of this stipulation but to a limited extent... [T]hey concluded, by inference, that 'not all the goods in hold no 1 were shipped in good condition' and that, in consequence, over-heating took place in this hold and caused further damage to that part of the cargo. The sellers now accept that they were in breach of contract to the extent found against them.
Counsel for the buyers submitted that cl 7 must be construed as a condition of the contract and that therefore his clients were entitled to reject the goods. Counsel for the sellers argued that it would be wrong to construe this stipulation as a condition. He argued that it should be regarded as a warranty, giving the buyers a right to damages or an allowance only; or, if the principles laid down in the judgements in the Hong Kong Fir Shipping case were applicable to contracts for the sale of goods, as he submitted they were, as an 'intermediate' or 'innominate' term. The learned judge accepted counsel for the buyers' submission and held that this stipulation must be construed as a condition.
Counsel for the buyers, relying on s 11(1)(b) [of the Sale of Goods Act 1893], argued that in a contract of sale the court was required to categorise all relevant stipulations as conditions or warranties, that this must be done by way of construction of the contract, and that, once done, the buyer's remedy for breach was determined; if a condition, he could reject, subject to the other provisions of the Act; if a warranty, he had no right to reject in any circumstances, his only remedy being damages. Construction, at least in theory, means ascertaining the intention of the parties in accordance with the general rules. If this submission is right, it means that a buyer can always reject for breach of a condition, however trivial the consequences, subject only to the so-called de minimis rule, and never reject for breach of warranty, however serious the consequences. So, on a falling market the buyer can take advantage of a minor breach of condition and, on a rising market, waive the breach and sue for damages. It also means, as Mocatta J pointed out in his judgement, that if breach of a stipulation could have potentially serious consequences for a buyer, the court may be obliged, whatever the results in the instant case, to construe the stipulation as a condition. Moreover, where the contract is in a standard form as in the case, a decision in one case will, in effect, categorise the stipulation for other cases in which the same form is used.
We have all been brought up since our student days to ask the question in the form: 'Is this stipulation a condition or a warranty?' But before the Sale of Goods Act 1893 was passed the question was whether the buyer was bound to accept the goods. The answer depended, to use modern language, on whether the stipulation 'went to the root of the contract', although it was differently phrased, eg 'the buyer was entitled to get what he bargained for' or 'the seller had failed to perform an essential term of the contract'. The words 'condition' and 'warranty' were used in various senses in different cases but the distinction depended largely on the old rules of pleading. Section 11(1)(b) of the 1893 Act was clearly intended to remove this confusion of terminology but the essential dichotomy was not affected; it was and is, between the right to reject or the right to damages. The modern form of the question tends to put the cart before the horse and to obscure the issue.
If one asks oneself the question in the form, 'Did the parties intend that the buyer should be entitled to reject the goods if they were not shipped in good condition?' the answer must be that it depends on the nature and effects of the breach. This is directly in line with Diplock LJ's approach in the Hong Kong Fir Shipping case; not surprisingly, since there can be very little difference in principle between whether the ship is seaworthy and whether goods are in good condition. There is obviously a strong case for applying the general principle of the Hong Kong Fir Shipping case to contracts for the sale of goods. The question remains, however, and it is the kernel of counsel for the buyers' submission, whether it is open to the court to do so. The parties themselves, of course, can do it by express agreement as, indeed, they have done in the present case in relation to quality. Clause 5 provides that breach of the terms as to quality shall entitle the buyer to an allowance, but that if the goods contain over five per cent of sand or in excess of 0.0005 per cent of castor seed husk, the buyer may reject the parcel. If it can be done expressly, it can be done by implication, unless it is in some way prohibited. Counsel for the buyers argues that s 11(1)(b) compels the court to choose between condition and warranty. I do not think that the subsection was intended to have any prohibitory effect. It is essentially a definition section, defining 'condition' and 'warranty' in terms of remedies. Nor is the classification absolutely rigid, for it provides that a buyer may treat a condition as a warranty if he wishes, by accepting the goods. It does not, however, envisage the possibility that a breach of warranty might go to the root of the contract, and so, in certain circumstances, entitle the buyer to treat the contract as repudiated. But the law has developed since the Act was passed. It is now accepted as a general principle since the Hong Kong Fir Shipping case that it is the events resulting from the breach, rather than the breach itself, which may destroy the consideration for the buyer's promise and so enable him to treat the contract as repudiated.
The problem is how to integrate this principle with s 11(1)(b). In practice it may not arise very often. Faced with a breach which has had grave consequences for a buyer, the court may be disposed to hold that he was entitled ex post facto to rescind or reject the goods, without categorising the broken stipulation, applying the general principles of the law of contract. The difficulty only arises if the court has already categorised the stipulation as a warranty. The present case provides an example. If the relevant part of cl 7 is construed as a warranty in this case, and later another dispute occurs in relation to another contract in the same form, between the same parties, for the sale of similar goods, in which the breach of cl 7 has produced much more serious consequences for the buyer, is the court bound by its decision in this case to hold that the buyer is precluded from rejecting the goods under the later contract because, as a matter of construction, it has already categorised the stipulation as a warranty? This is the converse of the Mihalis Angelos situation. If the answer is in the affirmative s 11(1)(b) has, by implication, excluded one of the general common law rules of contract. It was clearly not intended to have this effect and I agree with Lord Denning MR, for the reasons that he has given in his judgement, that the Act should not, if it can be avoided, be construed in this way. Section 61(2) seems to provide an answer. If this view is correct it is bound to have important repercussions on the way in which courts in future will approach the construction of stipulations in contracts for the sale of goods. It will no longer be necessary to place so much emphasis on the potential effects of a breach on the buyer, and to feel obliged, as Mocatta J did in this case, to construe a stipulation as a condition because in other cases or in other circumstances the buyer ought to be entitled to reject. Consequently, the court will be freer to regard stipulations, as a matter of construction, as warranties, if what might be called the 'back-up' rule of the common law is available to protect buyers who ought to be able to reject in proper circumstances. I doubt whether, strictly speaking, this involves the creation of a third category of stipulations; rather, it recognises another ground for holding that a buyer is entitled to reject, namely that, de facto, the consideration for his promise has been wholly destroyed.
The result may be summarised in this way. When a breach of contract has taken place the question arises: is the party who is not in breach entitled in law to treat the contract as repudiated or, in the case of a buyer, to reject the goods? The answer depends on the answers to a series of other questions. Adopting Upjohn LJ's judgement in the Hong Kong Fir Shipping case, the first question is: does the contract expressly provide that in the event of the breach of the term in question the other party is entitled to terminate the contract or reject the goods? If the answer is No, the next question is: does the contract when correctly construed so provide? The relevant term, for example, may be described as a 'condition'. The question then arises whether this word is used as a code word for the phrase 'shall be entitled to repudiate the contract or reject the goods', or in some other sense as in Wickman Machine Tool Sales Ltd v Schuler AG. The next question is whether the breach of the relevant term creates a right to repudiate or reject. This may arise either from statute or as a result of judicial decision on particular contractual terms. For example, if the requirements of s 14(1) or (2) of the Sale of Goods Act 1893 are fulfilled, the buyer will be entitled to reject the goods, as a result of this section read with s 11(1). In fact, in all those sections of the 1893 Act which create implied conditions the word 'condition' by definition a code word for 'breach of this term will entitle the buyer to reject the goods', subject to any other relevant provision of the Act. In other cases, the courts have decided that breach of some specific terms, such as, for example, an 'expected ready to load' stipulation, will ipso facto give rise to a right in the other party to repudiate the contract (The Mihalis Angelos per Lord Denning MR). In these two classes of case the consequences of the breach are irrelevant or, more accurately, are assumed to go to the root of the contract, and to justify repudiation. There remains the non-specific class where the events produced by the breach are such that it is reasonable to describe the breach as going to the root of the contract and so justifying repudiation.
If this approach is permissible in the present case I would unhesitatingly hold that the stipulation in cl 7 that the goods were to be shipped in good condition was not a condition, and that on the facts of this case the breach did not go to the root of the contract, and that, consequently, the buyers were not entitled to reject the goods.