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Contents of the contract: terms — SQE1 Contract question

A worked single-best-answer question on contents of the contract: terms, with why each wrong option is wrong — the way SQE1 traps candidates.

Contents of the contract: terms

Granite Developments Ltd hired a tower crane from Liftco Ltd for 18 months for use on a building site. The written contract provided: 'Liftco shall keep the crane in good working order throughout the hire period.' Nothing in the contract described this obligation as a condition or stated the consequences of breach. Four months into the hire, the crane broke down because of poor maintenance by Liftco and was out of action for four days while it was repaired. Granite wishes to terminate the contract and hire a crane elsewhere.

Which of the following best describes Granite's position?

  1. AThe maintenance obligation is a condition, so any breach of it entitles Granite to terminate.
  2. BThe maintenance obligation is a warranty, so Granite can never terminate for its breach however serious the consequences.
  3. CGranite may terminate, because in a commercial contract any breach that causes financial loss is repudiatory.
  4. DGranite may terminate, because time is always of the essence in commercial hire contracts.
  5. EThe maintenance obligation is an innominate term and, as the breach has not deprived Granite of substantially the whole benefit of the contract, Granite may claim damages but may not terminate.
Show answer and reasoning
E is the best answer. Where a term is not classified by statute or the parties and can be broken in ways ranging from trivial to serious, it is innominate. The right to terminate depends on whether the breach deprived the innocent party of substantially the whole benefit it was intended to obtain (Hong Kong Fir). A four-day breakdown in an 18-month hire does not do so, so Granite is limited to damages.

Rule: Breach of an innominate term justifies termination only if it deprives the innocent party of substantially the whole benefit of the contract; otherwise the remedy is damages.

  • A Nothing indicates the parties intended a condition, and an obligation capable of trivial or serious breach is typically innominate. (wrong rule)
  • B The term is innominate, so a breach with sufficiently serious consequences could justify termination. (wrong rule)
  • C Only breach of a condition or a sufficiently serious breach of an innominate term is repudiatory. (wrong rule)
  • D Time is not automatically of the essence, and the issue here is the seriousness of the breach, not timing. (wrong rule)

Source: Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26

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