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Commercial law foundations 1 essay 2004

Commercial Law Foundations 1 Essay 2004/2005

Although the principles of commercial law can be drawn from many different areas of jurisprudence, primarily the facilitation of the law concerning the transactions of the supply and financing of goods and services is governed by the law of contract. In any commercial contract the concept of certainty and risk are predominantly of essence. Certainty is essential in an environment of commerce subject to fluctuating markets as any disagreements require speedy resolution as to not be affected by such fluctuations. Any delays caused by uncertainty may have negative repercussions on the original contract as alterations in market climates may affect the desired intentions of the parties involved. The parties would have contracted on the basis of an established rule and been secure in the knowledge that the application of that rule was certain. If the rule is then changed, their expectations of the contract may not be satisfied and thus lead to dispute. The requirement for solutions to be clear cut and predictable also enables potentially time consuming litigation to be avoided as if parties are able to predict an out come, there will be limited achievements gained from litigation. However, if litigation is necessary, the principle of certainty allows the law of commerce to be applied in a predictable manner ensuring disputes are dealt with speedily. The concept of risk however, can be defined as the uncertainty in a contract where either party may be responsible for bearing the loss resulting from frustration or breach of contract. If the contract is fundamentally based on the degree of certainty in the transaction the concept of risk will be considerably lessened. The notion of certainty and risk therefore adversely balance both sides of the equation. Through the depiction of the evolution of commercial law from previously decided cases this essay will demonstrate the response to certainty by the English courts and it’s relevance in concurrence with risk allocation.

Developments to English commercial law were eminently reinforced with the appointment of Lord Mansfield as Chief Justice to the King’s Bench in 1756. His judgement in the case of Vallejo and another v Wheeler[1] was significantly instrumental to the concept of certainty. In this case the definition of the word ‘barratry’ was ambiguous and thus debateable; however it was this hesitation that gave rise to Lord Mansfield’s recognition for the necessity of certainty in commercial transactions. In his judgement he noted that there were only three previous cases relating to the issue of barratry, none of which afforded any precise definition of the term and thus it had not been thoroughly judicially considered. Forthwith he stated that:

"In all mercantile transactions the great object should be certainty; and

therefore, it is of more consequence that a rule should be certain, than

whether the rule is established one way or the other. Because

speculators in trade then know what ground to go upon."

It is therefore evident that certainty is inherent in all commercial transactions and following this statement, it has been the fundamental principle in commercial law religiously observed by the courts. This can be illustrated by the more recent cases of Hong Kong Fir Shipping Co., Ltd v Kawasaki Kisen Kaisha, Ltd [2] and Sea and Land Securities, Limited v William Dickinson and Company, limited [3] where response to certainty by the courts is clearly demonstrated.

The avoidance of risk can be significantly affected by the incorporation in the contract of provisions for the circumstances in which the goods involved in the transaction are either deteriorated, damaged or lost before the buyer has acquired both possession and property. If the parties have expressly agreed who should bear the loss in such circumstances then certainty within the transaction would have been promoted, however, this clause is frequently neglected within the terms of the contract. It is then left for the law to determine the question of risk and frustration within the transaction. The general principle here is Res Perit Domino, meaning that the loss or damage of goods falls on their owner, as embodied in the Sales of Goods Act 1979. It applies the principle that the risk passes from seller to buyer together with property:

‘Unless otherwise agreed, the goods remain at the seller’s risk until the

property in them is transferred to the buyer, but when the property

in them is transferred to the buyer the goods are at the buyer’s

risk whether delivery has been made or not.’ [4]

Should a transaction encounter a negative impact from frustration through loss or damage of goods, the certainty of risk allocation is necessary to resolve disputes as smoothly as possible.

The case of Hong Kong Fir Shipping Co., Ltd v Kawasaki Kisen Kaisha, Ltd illustrates how the relationship between risk and frustration do not necessarily affect the certainty of the contract. In this case the defendants had chartered a vessel from the plaintiffs for a period of 24 months, however within the charterparty it was provided ‘she being fitted in every way for ordinary cargo service’ [5] It soon emerged that the engine room staff were incompetent and that old engines had not been sufficiently maintained resulting in a period of five weeks of necessary repairs mid voyage. The vessel spent less than nine weeks of the first seven months of the charter at sea due to breakdowns and consequent repairs required to make her seaworthy. The defendants attempted to repudiate the charterparty claiming that the term as to seaworthiness was a condition of the contract, and any breach of which entitled them to do so; however, it was certain that the extent of their frustration would only be limited by the fact that there were still 20 months remaining on the charterparty to run, so the benefits of the contract would still be substantially received.

This case was in fact held that the clause stating that the vessel will be ‘in every way fitted for ordinary cargo service’ [6] was neither a condition or warranty determining whether the defendants could repudiate the contract and therefore only damages could be recovered. Lord Justice Upjohn agreed with this judgement and justified the decision in his statement questioning the constitution of seaworthiness.

‘Why is this apparently basic and underlying condition of seaworthiness

not, in fact, treated as a condition? It is for the simple reason that the

seaworthiness clause is breached by the slightest failure to be fitted

‘in every way’ for service. Thus, to take examples from the judgements

in some of the cases I have mentioned about, if a nail is missing from

one of the timbers from a wooden vessel, or if proper medical

supplies or two anchors are not on board at the time of sailing, the owners are in breach of seaworthiness stipulation. It is contrary to common sense to suppose tha, in such circumstances, the parties contemplated that the charterer should at once be entitled to treat the contract as at an end for such trifling breaches.’

This statement suggests that not all flaws in the condition of the vessel constitute a breach in seaworthiness and of those that are considered to be a breach, not all are serious enough to allow the termination of the contract. It would be unreasonable to allow such minor insignificant breaches to qualify for a repudiation of the contract. The courts will however take into account the nature of the breach, and assess the extent to which the innocent party has been deprived of the benefits expected to receive under the original contract before deciding the remedies available.

In this case the charterer assumed the risk by expecting the vessel to ‘being fit in every way for ordinary cargo service.’ [7] The failing expectation of it not to break down and require repairs so frequently would have frustrated the charterer as the delays in shipment would have been an inconvenience to his business. However, despite this frustration, the Court of Appeal held that this was insufficient justification to terminate the contract. He was however, able to claim damages from the ship owner for the periods in which his coal was unable to be shipped on a regular basis against a declining market. Thus, in essence, the risk is allocated to the owner who has to compensate and bear the loss for the cost of repair and delays from the inefficiency of the vessel. The certainty referred to by Lord Mansfield is demonstrated through the Court of Appeal’s standing to the contract thus ensuring the charterer’s original interests were satisfied.

The following case of Sea and Land Securities, Limited v William Dickinson and Company, Limited [8] demonstrates how the inclusive terms of a contract can be relied upon for certainty when there is a dispute following a transaction. In this case, the charterers, William Dickinson & Co, Ltd, hired a steam ship belonging to Sea and Land Securities, Ltd on a time charter for a period of six months commencing at the time of delivery of the ship. During this time, whilst the ship was docked for the purpose of lading, the owners capitalized on the time and had the ship fitted with degaussing apparatus as a protection against mines. Despite degaussing not being compulsory, it was strongly recommended by the government,[9] this however, was done at the suggestion of the charterers. Having had their suggestion adequately dealt with, the charterers then claimed that during the degaussing period the ship was off hire. They argued that there was an interruption of the contract as the vessel had been withdrawn from their use during that period by the owners. They deducted ten days from the charter as this was the period the ship was occupied by the owners in which they could have earned freight. The owners contended that the hire was payable throughout the entire contract period as there was no clause in the charter that provided for the cease of hire in the events that took place. It was held that there had been no breach of contract by the ship owners because the process of degaussing had been done at the charterer’s suggestion and consent.

In this case Lord Justice Makinnon’s judgement promotes certainty by stating that the rights and obligations of the parties should be based on the written terms agreed on. He concludes:

‘The charterer’s continuous liability under the charterparty to pay hire would only be interrupted if there were a provision in the contract by which it was agreed that in certain events there should be no such payment and such an event had happened.’ [10]

The certainty in this case was therefore achieved by observing the terms of the predetermined contract and holding the charterers responsible for its breach. It is a fair assumption that the parties desired certainty, evident from the fact that they wished to deal with the situation according to the terms of their agreed written contract.[11] Certainty is promoted by ensuring that parties who have reduced a contract to writing should be bound by the writing and the writing alone.[12]

It can therefore be concluded that in the absence of a clearly defined contract for all eventualities certainty will be depicted with greater difficulty, this doesn’t however suggest that its relevance is any less fundamental to all commercial transactions. Certainty insists that all contracts are performed according to their original terms and thus sets limitations on unexpected occurrences. It minimizes the risk of loss fuelling predictability and confidence in all commercial settings

[1] Vallejo and another v Wheeler (1774) All ER Rep 411, also reported 1 Cowp 143; Lofft 631; 98 ER 1012

[2] Hong Kong Fir Shipping Co., Ltd. v Kawasaki Kisen Kaisha, Ltd (1961) 2 All ER 257, (1961) 2 WLR 716, (1961) 1 Lloyd’s Rep 159

(1962) 2 QB 26, (1962) 1 All ER 474, (1962) 2 WLR 474, (1961) 2 Lloyd’s Rep 478

[3] Sea and Land Securities, Limited v William Dickinson and Company, Limited (1942) 1 KB 286 (1942) 2 KB 65

[4] Sale of Goods Act 1979 s20 Goode, R, Commercial Law, 3rd edition, London WC2R ORL, Penguin Books, 2004, pg 244.

[5] Hong Kong Shipping Co., Ltd v Kawasaki Kisen Kaisha , Ltd (1962) 2 QB 26 (CA)

[6] Poole, J, Contract Law, 7th Edition, Oxford University Press, 2004, pg 256

[7] poole, J, Contract Law, 7th Edition, Oxford University Press, 2004, pg 255

[8] Sea and Land Securities, Limited v William Dickinson and Company, Limited (1942) 1 KB 286 (1942) 2 KB 65

[9] Sea and Land Securities, Limited v William Dickinson and Company, Limited (1942) 1 KB 286

[10] Sea and Land Securities, Limited v William Dickinson and Company, Limited (1942) 2 KB 65

[11] Dabbs David, New Law jaournal, 10th January 2003, Reed Elsever (UK) Ltd 2003

[12] http:// /

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