Partner Singapore
"A condition is a contractual term that is so essential to the agreement that its breach would fundamentally undermine the contract’s purpose."
This article provides clarity in relation to the classification of contractual terms, and consequently the remedies available to an innocent party in the event of a breach of a contractual term. We examine, in particular detail, the English High Court decision of Galtrade Ltd v BP Oil International [2021] EWHC 1796 (Comm) regarding commodity sale and purchase contracts.
Conditions
A condition is a contractual term that is so essential to the agreement that its breach would fundamentally undermine the contract’s purpose. When a condition is breached, the innocent party is entitled to avail itself of the following legal remedies:
- right to terminate: the innocent party can immediately terminate the contract. If terminated, the contract will be treated as if it never existed – future obligations will be discharged, and the parties will be released from their duties under the contract;
- right to claim damages: in addition to termination, the innocent party can claim damages to compensate them for any losses arising from the breach of condition. The purpose of these damages would be to put the innocent party in the position they would have been in if the contract had been performed as agreed; and
- affirmation: instead of terminating, the innocent party can choose to continue to perform its contractual obligations and concurrently sue for damages.
In a commodity trading contract, an example of a condition would be the requirement that the buyer pays the seller for the goods. This is a term which is so fundamental that it underpins the entire agreement, as a seller cannot be expected to provide goods without payment.
Warranties
A warranty is a contractual promise made by one party to another regarding the existence of certain facts or conditions, often relating to the quality or functionality of the subject matter of the contract. Warranties serve as secondary obligations, offering assurances on specific matters that support the contract’s primary objectives. However, unlike a condition, a breach of warranty does not typically undermine the entire contractual relationship.
When a warranty is breached, the legal remedies available to the innocent party are more limited than those that are available for a breach of a condition:
Key contacts
"In a commodity trading contract, an example of a warranty would be the buyer’s obligation to pay the seller with certain secondary obligations."
- right to claim damages: the innocent party can claim damages as compensation for the breach. These damages are intended to cover any loss resulting from the breach of warranty, but not the termination of the contract; and
- no right to terminate: unlike a breach of condition, a breach of warranty does not entitle the innocent party to terminate the contract. If they did choose to terminate the contract, the innocent party could find themselves being sued for repudiatory breach. Accordingly, it is important to be very cautious when deciding whether to terminate a contract.
In a commodity trading contract, an example of a warranty would be the buyer’s obligation to pay the seller with certain secondary obligations. For instance, the buyer could be required to “make payment within thirty (30) days of the date of the Seller’s delivery of Commodities conforming to the Contract and receipt of the Contractor’s invoice, whichever is later”.
Innominate terms
Innominate terms are contractual terms which do not fit into the categories of conditions or warranties. Unlike conditions, whose breach allows for the termination of the contract and warranties, whose breach only allows for damages, innominate terms require a more nuanced approach.
The remedies for breaching an innominate term depend on the severity of the breach and its impact on the contract. For the breach of a term which deprives the innocent party of substantially the whole benefit of the contract, the breach may be treated as if it were a breach of condition (i.e., the innocent party may terminate the contract and claim damages for any resulting losses). If the breach is less impactful and does not significantly affect the overall performance of the contract, it will be treated as a breach of warranty (i.e. the innocent party can only claim damages for any resulting losses).
Galtrade Ltd v BP Oil International
The case of Galtrade Ltd v BP Oil International [2021] 1796 (Comm) highlights the complexities and issues surrounding the use of innominate terms in commercial contracts.
The case concerned a contract for the sale and purchase of four parcels of low sulphur straight run fuel oil on a FOB basis. The contract contained specifications as to the sulphur content of the fuel oil (the “Specification Clause”). BP (the “Seller”) attempted to deliver a parcel of off-specification fuel oil to Galtrade (the “Buyer”), who rejected the cargo and returned it to the Seller (effectively terminating the contract). The Buyer sued the Seller for breach of contract and claimed damages for the wasted expenditure in transporting and handling the cargo. The Seller conversely claimed that the Buyer wrongfully repudiated the contract and therefore caused its own losses.
In this case, the court classified the Specification Clause as an innominate term rather than a condition, meaning that the Buyer was not entitled to terminate the contract, but was entitled to make a claim for damages. The Court cited the following reasons for its assessment:
"The off-specification fuel was still substantially the same product, and it could still be used for the original purpose."
- terms regarding quality specifications are to be construed as innominate terms unless they are described as conditions, or the right to reject is stipulated in the contract;
- there would be an imbalance in the commercial risk and power between the parties if a buyer was able to reject a cargo of a naturally occurring product due to any deviation from (even) guaranteed levels; and
- the parties had previously negotiated a discount for a separate off-specification parcel, which indicates that deviations in the specification were economically remediable.
The Court separately held that the breach was not sufficiently serious to entitle the Buyer to reject the cargo, as they had not substantially been denied the whole benefit of the contract. This conclusion was reached on the following grounds:
- the off-specification fuel was still substantially the same product, and it could still be used for the original purpose (albeit at a discounted price);
- the Buyer could be sufficiently compensated for the financial impact of the breach; and
- it is an expectation that traders are able to mitigate small deviations from contractual specifications, and this was previously done by the Buyer.
Overall, Galtrade highlights the importance of describing a term as a condition if the buyer wishes to have a right to reject off-specification goods. Without such wording, the Court will interpret the contract and any specifications by reference to several factors, including product characteristics, market practices and the general course of dealings between the parties.
This approach is consistent with the Court’s general desire to avoid interfering in commercial matters; if traders were permitted to terminate contracts for quality and quantity disputes, this would have major repercussions on international trading because there would be no surety of performance.
Conclusion
It is imperative that parties to a contract be mindful of whether a term they are agreeing to is a condition, warranty, or innominate term as in the event of a default, the category of term which has been breached will ultimately determine what recourse the non-defaulting party possesses against the defaulting party.
Singapore Trainee Lorraine Mintah also contributed to this article.
Key contacts
Partner Singapore
Associate Singapore
Associate Singapore
