BUNGE CORPORATION, NEW YORK v. TRADAX EXPORT S.A., PANAMA

HOUSE OF LORDS [1981] 2 All ER 513, [1981] 1 WLR 711, [1981] 2 Lloyd’s Rep 1

HEARING-DATES: 23, 24, 25, 26 February, 7 May 1981

7 May 1981

Overview

By a contract made on January 30, 1974, the buyers agreed to buy from the sellers 15,000 tons, 5 per cent. more or less at buyers’ option, of U.S. soya bean meal, with shipment of 5,000 tons in each of the months May, June, July 1975, at U.S. § 199.50 a metric ton, f.o.b. one U.S. Gulf port at sellers’ option. The contract incorporated the terms of the Grain and Feed Trade Association Ltd.’s (GAFTA) standard form of contract 119, clause 7 of which in respect of the May shipment provided, “Period of delivery — during [May 1975] at buyers’ call. Buyers shall give at least [15] days’ notice of probable readiness of (vessels)…” By notice given by the buyers under clause 8 of GAFTA form 119 the period of delivery was extended for one calendar month. In consequence the last day upon which the sellers could ship goods in performance of* the contract was June 30, 1975, and the last day for the buyers to give the requisite notice under clause 7 was June 12. In the event, notice was not given until June 17. Subsequently the sellers declared the buyers in default and claimed damages for repudiation of the contract on the ground that the term as to notice was a condition. Clause 22 of GAFTA form 119 provided “… In the event of default in shipment or delivery any damages shall be computed upon the mean contract quantity.”

The dispute was referred to arbitration under the rules of GAFTA. The two arbitrators disagreed. The umpire awarded the sellers, inter alia, $ 317,500 as damages (the market price having fallen substantially below the contract price) the damages being calculated on the mean contract quantity of 5,000 tons. The Board of Appeal of GAFTA upheld the award subject to the opinion of the court. Parker J. held, inter alia, that the term as to time when notice was to be given was not a condition and in any event there had been no breach of it and therefore the sellers were not entitled to damages.

On appeal by the sellers the Court of Appeal allowed the appeal, but held that damages had to be assessed on 5,000 tons less 5 per cent., namely 4,750 tons, the minimum quantity which the buyers were obliged to take.

On appeal by the buyers and cross-appeal by the sellers held,

• that the court required precise compliance with stipulations as to time wherever the circumstances of the case indicated that that would fulfil the intentions of the parties, and that, in general, time was of the essence in mercantile contracts (post, pp. 716D-F, G — 717A, 718E-F, 725A-D).
• Dismissing the appeal, that in a mercantile contract when a term had to be performed by one party as a condition precedent to the ability of the other party to perform another term especially an essential term such as the nomination of a single loading port, the term as to time for the performance of the former obligation would in general fall to be treated as a condition; that accordingly, clause 7 was a condition for until the requisite notice had been given the sellers could not know for certain which loading port they should nominate so as to ensure that the contract goods would be available for loading on the ship’s arrival at that port before the end of the shipment period (post, pp. 714E, 716G — 717A, 718C, E-F, 723H, 729E-H). Hongkong Fir Shipping Co. Ltd. v. Kawasaki Kisen Kaisha Ltd. [1962] 2 Q.B. 26, C.A. and United Scientific Holdings Ltd. v. Burnley Borough Council [1978] A.C. 904, H.L.(E.) considered.
• Dismissing the cross-appeal, that on its true construction the expression “default in shipment or delivery” in clause 22 applied only to default by the seller, and that, therefore, damages for default by the buyer were to be assessed on ordinary principles, namely on the minimum quantity the buyers were obliged by the terms of the contract to take (post, pp. 714E, 716G — 717A, 718E-F, 731F-G).

Toprak Mahsulleri Ofisi v. Finagrain Compagnie Commerciale Agricole et Financiere S.A. [1979] 2 Lloyd’s Rep. 98, C.A. approved.

Decision of the Court of Appeal [1980] 1 Lloyd’s Rep. 294 affirmed.

INTRODUCTION: APPEAL from the Court of Appeal

This was an appeal by the appellants, Bunge Corporation, New York, from an order dated December 14, 1979, of the Court of Appeal (Megaw, Browne and Brightman L.JJ.) allowing an appeal by the respondents, Tradax Export S.A., Panama, from an order dated April 11, 1979, of Praker J., setting aside an award of the Board of Appeal of the Grain and Free Trade Association Ltd. (GAFTA) dated November 7, 1978.

The questions raised by the appeal were (i) by what criteria should the court determine whether a provision in a mercantile contract that one party should perform some obligation by a stated time was a strict condition or an “innominate” or “intermediate” term; (ii) was the provision in an f.o.b. contract incorporating the terms and conditions of GAFTA form 119 wereby the buyer was to give to the seller 15 days’ notice of probable readiness of the buyer’s vessel to load a strict condition or an intermediate term?

The facts are set out in the opinion of Lord Roskill.

JUDGMENT-1: LORD WILBERFORCE

My Lords, I have had the advantage of reading in advance the speech to be delivered by my noble and learned friend, Lord Roskill. I agree entirely with it and desire only to add a few observations on some general aspects of the case.

The appeal depends upon the construction to be placed upon clause 7 of GAFTA form 119 as completed by the special contract. It is not expressed as a “condition” and the question is whether, in its context and in the circumstances it should be read as such.

Apart from arguments on construction which have been fully dealt with by my noble and learned friend, the main contention of Mr. Buckley for the appellant was based on the decision of the Court of Appeal in Hongkong Fir Shipping Co. Ltd. v. Kawasaki Kisen Kaisha Ltd. [1962] 2 Q.B. 26, as it might be applied to clause 7. Diplock L.J. in his seminal judgment illuminated the existence in contracts of terms which were neither, necessarily, conditions nor warranties, but, in terminology which has since been applied to them, intermediate or innominate terms capable of operating, according to the gravity of the breach, as either conditions or warranties. Relying on this, Mr. Buckley’s submission was that the buyer’s obligation under the clause, to “give at least [15] consecutive days’ notice of probable readiness of (vessels) and of the approximate quantity required to be loaded,” is of this character. A breach of it, both generally and in relation to this particular case, might be, to use Mr. Buckley’s expression, “inconsequential,” i.e. not such as to make performance of the seller’s obligation impossible. If this were so it would be wrong to treat it a breach of
condition: Hongkong Fir would require it to be treated as a warranty.

This argument, in my opinion, is based upon a dangerous misunderstanding, or misapplication, of what was decided and said in Hongkong Fir. That case was concerned with an obligation of seaworthiness, breaches of which had occurred during the course of the voyage. The decision of the Court of Appeal was that this obligation was not a condition, a breach of which entitled the charterer to repudiate. It was pointed out that, as could be seen in advance the breaches, which might occur of it, were various. They might be extremely trivial, the omission of a nail; they might be extremely grave, a serious defect in the hull or in the machinery; they might be of serious but not fatal gravity, incompetence or incapacity of the crew. The decision, and the judgments of the Court of Appeal, drew from these facts the inescapable conclusion that it was impossible to ascribe to the obligation, in advance, the character of a condition.

Diplock L.J. then generalised this particular consequence into the analysis which has since become classical. The fundamental fallacy of the appellants’ argument lies in attempting to apply this analysis to a time clause such as the present in a mercantile contract, which is totally different in character. As to such a clause there is only one kind of breach possible, namely, to be late, and the questions which have to be asked are, first, what importance have the parties expressly ascribed to this consequence, and secondly, in the absence of expressed agreement, what consequence ought to be attached to it having regard to the contract as a whole.

The test suggested by the appellants was a different one. One must consider, they said, the breach actually committed and then decide whether that default would deprive the party not in default of substantially the whole benefit of the contract. They invoked even certain passages in the judgment of Diplock L.J. in the Hongkong Fir case [1962] 2 Q.B. 26 to support it. One may observe in the first place that the introduction of a test of this kind would be commercially most undesirable. It would expose the parties, after a breach of one, two, three, seven and other numbers of days to an argument whether this delay would have left time for the seller to provide the goods. It would make it, at the time, at least difficult, and sometimes impossible, for the supplier to know whether he could do so. It would fatally remove from a vital provision in the contract that certainty which is the most indispensable quality of mercantile contracts, and lead to a large increase in arbitrations.

It would confine the seller — perhaps after arbitration and reference through the courts — to a remedy in damages which might be extremely difficult to quantify. These are all serious objections in practice. But I am clear that the submission is unacceptable in law. The judgment of Diplock L.J. does not give any support and ought not to give any encouragement to any such proposition; for beyond doubt it recognises that it is open to the parties to agree that, as regards a particular obligation, any breach shall entitle the party not in default to treat the contract as repudiated.

Indeed, if he were not doing so he would, in a passage which does not profess to be more than clarificatory, be discrediting a long and uniform series of cases — at least from Bowers v. Shand (1877) 2 App.Cas. 455 onwards which have been referred to by my noble and learned friend, Lord Roskill. It remains true, as Lord Roskill has pointed out in Cehave N.V. v. Bremer Handelsgesellschaft m.b.H. (The Hansa Nord) [1976] Q.B. 44, that the courts should not be too ready to interpret contractual clauses as conditions. And I have myself commended, and continue to commend, the greater flexibility in the law of contracts to which Hongkong Fir points the way (Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen (trading as H. E. HansenTangen) [1976] 1 W.L.R. 989, 998). But I do not doubt that, in suitable cases, the courts should not be reluctant, if the intentions of the parties as shown by the contract so indicate, to hold that an obligation has the force of a condition, and that indeed they should usually do so in the case of time clauses in mercantile contracts.

To such cases the “gravity of the breach” approach of the Hongkong Fir case [1962] 2 Q.B. 26 would be unsuitable. I need only add on this point that the word “expressly” used by Diplock L.J. at p. 70 of his judgment in Hongkong Fir should not be read as requiring the actual use of the word “condition”: any term or terms of the contract, which, fairly read, have the effect indicated, are sufficient. Lord Diplock himself has given recognition to this in this House: Photo Production Ltd. v. Securicor Transport Ltd. [1980] A.C. 827, 849. I therefore reject that part of the appellants’ argument which was based upon it, and I must disagree with the judgment of the learned trial judge in so far as he accepted it. I respectfully endorse, on the other hand, the full and learned treatment of this issue in the judgment of Megaw L.J. in the Court of Appeal.

I would add that the argument above apples equally to the use which the appellants endeavoured to make of certain observations in United Scientific Holdings Ltd. v. Burnley Borough Council [1978] A.C. 904, a case on which I do not need to comment on this occasion.

In conclusion, the statement of the law in Halsbury’s Laws of England, 4th ed., vol. 9 (1974), paras. 481-482, including the footnotes to paragraph 482 (generally approved in the House in the United Scientific Holdings case), appears to me to be correct, in particular in asserting (1) that the court will require precise compliance with stipulations as to time wherever the circumstances of the case indicate that this would fulfil the intention of the parties, and (2) that broadly speaking time will be considered of the essence in “mercantile” contracts — with footnote reference to authorties which I have mentioned.

The relevant clause falls squarely within these principles, and such authority as there is supports its status as a condition: see Bremer Handelsgesellschaft m.b.H. v. J.H. Rayner & Co. Ltd. [1978] 2 Lloyd’s Rep. 73 and see Turnbull (Peter) & Co. Pty. Ltd. v. Mundas Trading Co. (Australasia) Pty. Ltd. [1954] 2 Lloyd’s Rep. 198. In this present context it is clearly essential that both buyer and seller (who may change roles in the next series of contracts, or even in the same chain of contracts) should know precisely what their obligations are, most especially because the ability of the seller to fulfil his obligation may well be totally dependent on punctual performance by the buyer.

I would dismiss the appeal, and for the reasons given by my noble and learned friend, Lord Roskill, the cross-appeal.

JUDGMENT-2

LORD FRASER OF TULLYBELTON. My Lords, I have had the advantage of reading in draft the speeches of my noble and learned friends, Lord Wilberforce and Lord Roskill, and I agree with them. For the reasons stated by them I would dismiss the appeal and crossappeal.

JUDGMENT-3

LORD SCARMAN. My Lords, I have had the advantage of reading in draft the speeches of my noble and learned friends, Lord Wilberforce and Lord Roskill. I agree with both of them, and would, therefore, dismiss the appeal and the cross-appeal.

I wish, however, to make a few observations upon the topic of “innominate” terms in our contract law. In Hongkong Fir Shipping Co. Ltd. v. Kawasaki Kisen Kaisha Ltd. [1962] 2 Q.B. 26, the Court of Appeal rediscovered and reaffirmed that English law recognises contractual terms which, upon a true construction of the contract of which they are part, are neither conditions nor warranties but are, to quote my noble and learned friend Lord Wilberforce’s words in Bremer Handelsgesellschaft m.b.H. v. Vanden Avenne-Izegem P.V.B.A. [1978] 2 Lloyd’s Rep. 109, 113, “intermediate.” A condition is a term, the failure to perform which entitles the other party to treat the contract as at an end. A waranty is a term, breach of which sounds in damages but does not terminate, or entitle the other party to terminate, the contract. An innominate or intermediate term is one, the effect of non-performance of which the parties expressly or (as is more usual) impliedly agree will depend upon the nature and the consequences of breach.

In the Hongkong Fir case the term in question provided for the obligation of scaworthiness, breach of which it is well known may be trivial (e.g. one defective rivet) or very serious (e.g. a hole in the bottom of the ship). It is inconceivable that parties when including such a term in their contract could have contemplated or intended (unless they expressly say so) that one defective rivet would entitle the charterer to end the contract or that a hole in the bottom of the ship would not. I read the Hongkong Fir case as being concerned as much with the construction of the contract as with the consequences and effect of breach.

The first question is always, therefore, whether, upon the true construction of a stipulation and the contract of which it is part, it is a condition, an innominate term, or only a warranty. If the stipulation is one, which upon the true construction of the contract the parties have not made a condition, and breach of which may be attended by trivial, minor or very grave consequences, it is innominate, and the court (or an arbitrator) will, in the event of dispute, have the task of deciding whether the breach that has arisen is such as the parties would have said, had they been asked at the time they made their contract: “it goes without saying that, if that happens, the contract is at an end.”

Where, therefore, as commonly happens, the parties do not identify a stipulation as a condition, innominate term, or warranty, the court will approach the problem of construction in the way outlined by Upjohn L.J. [1962] 2 Q.B. 26, 63, 64. As the Lord Justice put it:

“Where, however, upon the true construction of the contract, the parties have not made a particulr stipulation a condition, it would in my judgment be unsound and misleading to conclude that, being a warranty damages is necessarily a sufficient remedy.”

Unless the contract makes it clear, either by express provision or by necessary implication arising from its nature, purpose, and circumstances (“the factual matrix” as spelt out, for example, by Lord Wilberforce in his speech in the Reardon Smith case [1976] 1 W.L.R. 989, 995-997), that a particular stipulation is a condition or only a warranty, it is an innominate term, the remedy for a breach of which depends upon the nature, consequences, and effect of the breach.

When the Court of Appeal had taken the logical step of declaring that the Hongkong Fir analysis applied to contracts generally (Cehave N.V. v. Bremer Handlesgesellschaft m.b.H. [1976] Q.B. 44), the law was back where it had been left by Lord Mansfield in Boone v. Eyre (1777) 1 Hy.Bl. 273n and the judgment of Bramwell B. in Jackson v. Union Marine Insurance Co. Ltd. (1874) L.R. 10 C.P. 125. Section 11 (1)(b) of the Sale of Goods Act 1893 can now be seen to be no more than a statutory guide to the use of the terms “condition” and “warranty” in that Act. It is not to be treated as an indication that the law knows no terms ofter than conditions and warranties. This fallacy was exposed in the Hongkong Fir case [1962] 2 Q.B. 26. To read the subsection as a guide to a comprehensive classification of contractual terms is to convert it into a will-o’-the-wisp leading the unwary away from the true path of the law.

The difficulty in the present case is, as Mr. Buckley’s excellent argument for the appellants revealed, to determine what is the true construction of the completed clause 7 of GAFTA form 119, which the parties incorporated in their contract. After some hesitation, I have concluded that the clause was intended as a term, the buyer’s performance of which was the necessary condition to performance by the sellerof his obligations. The contract, when made, was, to use the idiom of Diplock L.J. [1962] 2 Q.B. 26, 65 and Demosthenes (Oratt. Attici, Reiske 867.11), “synallagmatic,” i.e. a contract of mutual engagements to be prformed in the future, or, in the more familiar English/Latin idiom, an “executory” contract.

The seller needed sufficient notice to enable him to choose the loading port: the parties were agreed that the notice to be given him was 15 days: this was a mercantile contract in which the parties required to know where they stood not merely later with hindsight but at once as events occurred. Because it makes commercial sense to treat the clause in the context and circumstances of this contract as a condition to be performed before the seller takes his steps to comply with the bargain, I would hold it to be not an innominate term but a condition.

Resources

See Also

• Common Venture
• Seaworthiness
• Charterparty
• Unseaworthiness
• Bills of Lading
• Exculpatory Clauses
• Negligence
• Contractual Provisions
• Contract Condition
• Contract warranty
• Mercantile contract
• Sale of Goods (f.o.b.)
• Damages
• Construction of Contract
• F.o.b. Contract