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A Comparative Analysis of the Ethos, Role and Function of Implied Obligations in Shipping Law and General Law of Contract

Cite as Ndi G. & Alawneh, T., "A Comparative Analysis of the Ethos, Role and Function of Implied Obligations in Shipping Law and General Law of Contract", (2015) 21(2) EJoCLI.

George Ndi [1]

Tariq Alawneh [2]

Abstract

The law governing the international carriage of goods by sea is deeply rooted in the doctrine of freedom of contract. The historical origins of the shipping industry itself can be traced to the era of 'laissez faire' in which contractual practice, based on negotiated terms and conditions, was free from the regulatory constraints of the state. It is for this reason that to this day modern shipping law is still rooted in the common law and customary trade usages with very limited statutory influences. Nonetheless, a review of the key elements of the law governing the international carriage of goods by sea reveals an array of terms and conditions implied by law which owe their origins not to the free will of parties or to trade usages, but to implication by the courts or through statutory enactments and international conventions. We find these developments enigmatic, given the 'laissez faire' background which originally informed early shipping industry practice. Even more surprising is the fact that this aspect of the development of shipping law does not seem to have attracted the attention of scholars, as the literature review clearly indicates that very little if any research has been conducted in this area. It is for this reason that we believe that this area of law deserves closer and critical scrutiny. This paper has the following main aims and objectives: (1) a comparative and critical overview of the various categories of implied terms in general contract law and in shipping law; (2) a critical appraisal of the judicial approach to the implication and classification of terms in selected shipping industry cases; and (3) a critical assessment of the philosophical basis for the implication and classification terms set against the historical background and modern context of international shipping industry practice.

1. Introduction

Shipping law, more generally known as the law governing the international carriage of goods by sea, is deeply rooted in the doctrine of freedom of contract. [3] The origins of the shipping industry itself evolved during the era of 'laissez faire' in which contractual practice was free from the regulatory constraints of the state, with cargo owners and carriers negotiating and concluding terms of carriage with little or no interference from the authorities. It is for this reason that to this day modern shipping law is still rooted in the common law and customary trade usages with very limited statutory influences. Nonetheless, a review of the key elements of the law governing the international carriage of goods by sea reveals an array of terms and conditions implied by law which owe their origins not to the free will of parties or to trade usages, but to implication by the courts. Over the course of time some of these implied terms have also found their way into various international conventions and legislative enactments. We find these developments enigmatic, given the 'laissez faire' background which originally informed early shipping industry practice. Even more surprising is the fact that this aspect of the development of shipping law does not seem to have attracted the attention of scholars, as the literature review clearly indicates that very little if any research has been conducted on this seeming paradox whereby an industry practice which appears on the face of it to be so reliant on negotiated settlements seems to have over the years become predisposed to a wide range of terms and conditions which are imposed by law and are therefore independent of the parties' free will. It is for this reason that we believe that this area of law deserves closer and critical scrutiny.

In order to understand the role, function and ethos of implied terms in shipping contracts (and in voyage charterparties [4] in particular) one must examine not only the rules and principles of maritime law, but also those pertaining to the general law of contract. The rules of law and guiding principles which inform the implication of term by the courts are as applicable to contracts for the international carriage of goods by sea as they are to other types of contracts. In many contracts one would expect the primary obligations to be explicitly stated or included as part of the express terms; however, it is also to be expected that the parties will not always have expressly stated all of the key obligations nor will they always be able to provide for every eventuality. The obvious rationale for implying terms is thus to supplement a contractual agreement in the interest of making the contract more effective for the purpose of performance and to fill in any gaps which may be present in the contract terms. This can be the case with non-negotiated standard form contracts such as modern charterparties for the international carriage goods by sea where the contract terms are pre-drafted by one of the parties to the contract (i.e. the carrier) and presented to the counterpart (the charterer or cargo owner) for adhesion. The ultimate effect of such a standard form adhesion format of contracting is that the contract is bound to spell out in great and minute detail the rights of the drafter (i.e. carrier) without outlining their obligations; on the other hand, the contract will equally spell out in great detail the obligations of the other party (i.e. the charterer) without outlining what their rights are in the event of a breach by the carrier. However, it is worth noting that this traditional approach has since been the subject of considerable attention from shipping institutions such as the Baltic and International Maritime Council (BIMCO) and the Association of Ship Brokers & Agents (ASBA) which have striven to ensure a fairer and more balanced approach to the conception and drafting of the terms of shipping contracts. To this effect, important players in the international shipping market such multinational oil and mineral companies have also exerted a significant influence in ensuring the protection of charterer's contractual interests through their involvement as charterers in the oil tanker hire business.

The gap(s) in the terms which could transpire from the traditional approach stated above relates to the limited scope of provisions spelling out the carrier's obligations on the one hand, and the charterer's rights on the other - hence, the primary purpose and rationale for implying terms such as deviation, seaworthiness and warranties relating to care and preservation of the cargo is to address this perceived imbalance in the express terms. It could further be argued that the underlying philosophy for the implication of terms go much deeper in that the process ultimately seeks to address the inequality of bargaining power between the two parties. Viewed from this perspective, it could even be posited that the jurisprudential basis for implying terms in grounded on the natural law theory as opposed to legal positivism. In other words, judges when applying the law in such cases aim to reach judgments which are based not only on justice (legal positivism or 'law as it is'); they go much further by seeking solutions and outcomes based on concepts of morality and what is deemed to be fair. Viewed from this perspective, it could thus be argued that the practice of implying terms is justified - and particularly so in the context of evolutionary trends in the shipping industry which have witnessed the increasing transition from negotiated contracts to standard form adhesion contracts.

We would nonetheless maintain that the implication of terms into contracts for the international carriage of goods by sea is a judicial practice which is clearly at odds with the 'laissez faire' ethos of the international shipping industry which has historically relied on negotiated terms and conditions based on the principle of freedom of contract. As part of constructing this argument, this paper has as its key aims and objectives the following: (a) a comparative and critical overview of the various categories of implied terms in general contract law and in shipping law; (b) a critical appraisal of the judicial approach to the implication and classification of terms in selected shipping industry cases; and (c) a critical assessment of the philosophical basis for implying and classifying terms set against the historical background and modern context of international shipping industry practice.

2. A Comparative Analysis of Implied Terms: contract law vs shipping law

Generally speaking implied terms can be divided into three categories. The first consists of terms implied in fact. This generally applies (but is not limited) to cases in which a contract was agreed by conduct rather than by use of explicit words. In terms implied as a matter fact, the parties must have intended to include the term and they presumably intended this through their tacit understanding, as inferred from their conduct and other relevant circumstances. [5] The second category consists of terms implied in law. Some conditions, warranties and promises implied in law are based on judicial decisions (i.e. terms implied by common law). [6] Others owe their origin to either statutes such as the Sale of Goods Act 1979 (as amended) or in the case of carriage of goods the Carriage of Goods by Sea Act 1971. Terms implied in law usually have nothing to do with the intention of the parties, [7] but rather are implied on the basis of established rules of law as laid down by legislation or binding precedents. [8] The third category consists of terms implied by custom or trade usage on the basis of a common custom which is generally accepted in a particular industry. Given the antecedents and history of the international shipping industry and its close associations with the 'laissez faire' doctrine and freedom of contract, it could be argued that the third category provides a much more justifiable philosophical foundation for the implication of terms into shipping contracts - much less so for the first two categories. Before examining this aspect in more depth, it is proposed first of all to undertake a comparative overview of the judicial basis for the implication of terms in general contract law and in the law governing the international carriage of goods by sea.

3. The Factual Basis for Implying Terms: a review of judicial practice

The common law recognizes terms 'implied in fact' as being ones which are recognised and accepted by the courts as being necessary in order to complement the express terms of a particular contract. This would be in circumstances where it is so obvious that the relevance of the implied term to the contract goes "without saying." [9] The ultimate objective of this judicial exercise (i.e. of implying a term as a matter of fact) is to give such a contract 'business efficacy', thereby (it is argued) giving effect to the unstated intention of the parties [10]. To arrive at this outcome the judicial exercise involves two key tests. The first test used for implying a term implied as a matter of fact is the 'officious bystander' test. Although the precise relation between the two tests remains to be clarified, many writers are of the view that the two tests go hand-in-hand and that both must be satisfies. [11] The nature and scope of this test was elucidated in Shirlaw v Southern Foundries (1926) Ltd, by Lord MacKinnon, where the learned judge opined:

"If I may quote from an essay which I wrote some years ago, l then said: 'Prima facie that which is any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that, if, while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement they would testily suppress him with a common 'Oh, of course!' [12]"

A further illustrative case law example is Gardner v Coutts & Co, [13] where a vendor of land undertook that, if he later sold certain adjoining land, he would give the purchaser the first refusal of it. A term was implied to prevent the seller from defeating the purchaser's expectation by disposing of the land to a third party by way of gift.

As stated above, a second test for the implication of a term in fact is 'business efficacy.' This test is in effect founded on an economic rationale - to wit, it is necessary for the courts to imply such a term in order for the contract or the transaction to be workable and economically efficient as a business proposition. In Luxor (Eastbourne) Ltd v Cooper, [14] Lord Wright explained such a term as one "of which it can be predicated that it goes without saying, some term not expressed but necessary to give the transaction such business efficacy as the parties must have intended" . The 'business efficacy' test was first laid down in the case of The Moorcock. [15] The facts of the case were that the claimant moored his ship at the defendant's wharf on the Thames. The Thames is a tidal river and at times when the tide went out the ship would come into contact with the river bed. Consequently, the ship became damaged due to uneven surfaces and rocks on the river bed at low tide. The claimant sought damages from the defendant and the latter argued that there was no provision in the contract warranting the condition of the river bed. The court implied a term in fact, to the effect that the river bed would be safe for mooring. In so doing the court introduced the business efficacy test - i.e. the term must be necessary in order to give the contract business efficacy. If the contract makes business sense without the term, the courts will not imply the term. In the dictum of Bowen LJ:

"Now, an implied warranty, or, as it is called, a covenant in law, as distinguished from an express warranty , really is in all cases founded on the presumed intention of the parties, and upon reason. The implication which the law draws from what must obviously have been the intention of the parties, the law draws with the object of giving efficacy to the transaction and preventing such a failure of consideration as cannot have been within the contemplation of either side ... In business transactions ... what the law desires to effect by the implication is to give such business efficacy to the transaction as must have been intended at all events by both parties who are business men. [16] "

In addition to the above case it was held in Trollope & Colls Ltd. v North West Metropolitan Hospital Board [17] that a contractual term could only be implied if the court found that the parties must have intended that term to form part of their contract.

It can thus be surmised from the above cases that the main effect of the 'officious bystander' test is to place a restriction on the power of the courts to imply terms at common law. The rationale for this restrictive approach is to ensure that judges do not substitute themselves for the parties by re-writing the contract terms. Their judicial role is thus limited to recognising and implementing the true but unstated intention of the parties in order to fulfil the parties' contractual expectations and to make the contract workable through a combination of the officious bystander and the business efficacy tests.

The Judicial Committee of the Privy Council has further developed the both 'business efficacy' and 'officious bystander' tests (albeit in the Australian context) in BP Refinery (Westernport) Pty Ltd. v President Councillors and Ratepayers of the Shire of Hastings. [18] In this case the court outlined the criteria which have to be satisfied for a term to be implied as follows. Thus, a term to be implied, it must be: [19]

1. Reasonable and equitable;
2. Necessary to give "business efficacy" to the agreement of the parties;
3. So evident that it "goes without saying;"
4. Capable of clear expression; and
5. Not be out of harmony with any express term of the agreement.

The area of shipping law has not been isolated from these contract law developments relating the judicial practice of implying terms as a matter of fact. It could be argued that implied terms included in charterparties such as proper stowage, [20] and care and preservation of the cargo, [21] may owe their origin to the implication of terms as a matter of fact by the courts. The implied duty on the carrier in this case (exercisable through his agents, servants of employees) would include the watering and feeding of live animals, [22] airing or cooling of perishable cargos, [23] and heating of oil cargos in winter months. [24]

One of the problematic aspects when reviewing this area of shipping has been the absence of prior research on the precise legal character of these implied terms. It is the generally accepted view in general contract law that terms implied as a matter of fact have no precedential value - i.e. the decisions do not bind the courts in any future cases with similar facts which come before them. [25] However, while the examples from shipping law which have been cited above may appear at first sight to belong to the category of terms implied as a matter of fact, they are nonetheless arguably endowed with precedential value. Hence the question: to which of the two categories of implied terms do they appropriately belong? This is a question which to our knowledge has not been addressed in previous research. We nonetheless argue that these particular types of terms implied into contracts for the international carriage of goods seem to transcend or straddle the boundary between terms implied as a matter of fact and those implied as a matter of law by the courts. Initially implied on grounds of business efficacy (i.e. as a matter of fact) it could be argued that terms such as proper stowage and care and preservation of the cargo now form part and parcel of every contract for the international sale of goods (terms implied in law). It may further be submitted that in view of this dichotomous character, this particular breed of implied terms belong to a sui generis category which is unique to international shipping law.

4. Implication of Terms through Statutes and Precedents: A critical analysis

As mentioned above, the implication of this category of terms is irrespective of the parties' intentions, the objective being to secure contractual protection for one of the contracting parties. Unlike the term implied in fact (which is based on the inference that the parties intended to incorporate the term into the contract), no such inference is necessary for the implication of a term in law. [26] There are two sub-categories of terms implied in law: i.e. terms implied through legislation and terms implied by the courts at common law. The key difference between the latter and terms implied in fact is that a binding precedent is often the product of a term implied by the courts at common law.

5. Terms Implied by Law (Common Law, Statute and Conventions)

Unlike the terms implied in fact, cases involving terms implied in law are often decided at common law exclusively on the basis of judicial precedents. Furthermore, the implication is based on a rule of law and not to ascertain or give effect to the intention of the parties. In Malik and Mahmud v Bank of Credit and Commerce International SA [27], for example, the employees claimed damages for breach of employment, arguing that the way in which their employer had behaved during their employment had led to continuing losses. On this basis they claimed 'stigma damages' after the termination of their contract of employment. The House of Lords unanimously held that a provision of mutual trust and confidence would be implied into the contract as a necessary incident of the employment relationship. It is however important to note that the implication of the term in the Malik case was a very fact specific judicial exercise with no intention of establishing a general precedent or rule relating to trust. Another example of a term implied in law is the case of Liverpool City Council v Irwin [28], where the House of Lords found it to be an implied term of a tenancy agreement that the lessor was to be responsible for repairing and lighting the common parts of the building of which the premises formed part. The rule of law which formed the basis of the implication of the term in this case was based on the requirement to ensure that the contract was not too one-sided and reflected the rights and obligations of both of the parties (i.e. the tenant as well as the landlord). Had the court tried to imply the term on the basis of giving effect to the unexpressed intention of the parties this would undoubtedly have led to uncertainty as it would have been difficult to establish with clarity what the parties' intention were in relation to whose duty it was to maintain the common areas of the apartment.

An example of a term implied at common law into shipping contracts includes the obligation placed on the carrier not to deviate from the proper course - i.e. the agreed contractual route in a voyage charterparty; or in the absence of an agreed route, then the direct geographical route; or if there are more than one geographical, then the customary route for the particular shipping line of the trade involved. [29] It is however important to note that the obligation placed on the carrier at common law not to deviate is not absolute as there may exist justifiable reasons for the deviating. [30] Such reasons include to save lives at sea [31] or to avoid physical or maritime hazards. [32] Other examples include the implied obligation at common law placed on the carrier to provide a ship which is both seaworthy for the voyage and suitable for the particular type of cargo in question (i.e. cargoworthy vessel). [33]

As with general contract law, the basis for implying these terms at common law into shipping contracts is completely independent of the parties' intention. The underlying philosophy and rationale for the implication of such terms has more to do with ensuring that the terms of contract of carriage are not too one-sided with the express terms tilted heavily in favour of the carrier who drafted them in the first place. In other words the charterer who is put in a position whereby they adhere to the standard terms of the charterparty without negotiating them in detail requires some measure of protection from the law. It is therefore to be submitted that the implication of such terms at common law goes some way towards addressing the perception of imbalance in the (express) terms of the contract of carriage by sea.

Many terms which are implied in law have now been placed on a statutory footing. For instance, a number of significant terms implied into contracts for the sale of goods are enshrined in section 12 to 15 of the Sale of Goods Act 1979. Similar terms have been extended to all contracts of hire purchase, [34] and the new comprehensive provisions prohibit or limit the power of the seller (owner) to exclude these implied obligations. Generally, terms implied in law can be excluded by express contrary provisions. However, the power to exclude terms implied in law is, to a certain extent, restricted by the Unfair Contract Terms Act 1977. [35]

From a comparative point of view, the implications of terms through statutes (i.e. conventions) into contracts for the international carriage of goods may be distinguished from the general contract law aspect on the basis that the former relates only to contracts for services (i.e. shipping), not the sale of goods. It is for this reason that most of the terms implied by law into shipping contracts relate to the conduct of the carrier as opposed to the tangible aspect or nature of the subject matter of the contract. Examples include: (a) the implied obligation on the part of the carrier not to deviate unjustifiably from the proper course; [36] (b) to ensure that the ship proceeds with due despatch from its location at the time the contract is agreed to the port of loading; [37] or (c) to ensure that the ship is in a seaworthy and cargoworthy condition throughout the course of the voyage. [38]

6. The Role of Custom or Trade Usage

Any contract (whether written or not) may be deemed to incorporate any relevant custom of the market, trade or locality in which it is made - unless such a custom would be inconsistent with an express or implied term, or with the inherent or essential nature of the contract itself. In Hutton v Warren, [39] for example, the court implied a term into an agricultural lease that tenants were entitled to an allowance for seed and labour. This was done on the basis of a custom that the court recognised is incorporated into all such contracts. But for a custom to be implied it must meet the requirements of certainty, and it must be reasonable [40] and 'notorious' - i.e. must be so readily ascertainable that the parties can be taken to have assented to it. [41] It must also have been in practice from time immemorial.

Terms may equally be implied by trade usage; however, the relevant market usage must be "universal and acknowledged." [42] In British Crane Hire Group Ltd v Ipswich Plant Hire Ltd, [43] for instance, the Court of Appeal held that the contract was subject to terms not made available to the offeree before or at the time of contracting. These terms were a version of the "Contractors Plant Association" terms that were customarily used in the particular trade and with which both parties would have been familiar, since they were both in the plant hire business.

In comparison to general contract law practice where terms implied through custom and trade usage are used very sparingly, the law and practice of carriage of goods by sea is deeply rooted in maritime customs and usages. Most aspects of the law merchant from which mercantile and shipping principles were evolved are based on customary law. For example, a general duty is placed on the carrier following the reception of the goods from the charterer to "trim, load and stow the goods in the customary manner." [44] Failure to comply with this time honoured custom or trade usage would amount to a breach of the contract of carriage by the carrier. The ascertainment of what is a 'proper course' for the purpose of determining the legality of a deviation is equally steeped in customary and trade usage practices. In the case of Reardon Smith Line v Baltic & Black Sea Insurance, [45] for example, a deviation was held to be justifiable on the basis that the backward sailing of the ship for bunkering purposes was justified on grounds of customary practice and trade usage. This was because it was common practice for vessels loading at Black sea ports to proceed with their cargo to the port of Constanza to obtain cheap coal before embarking on their main contractual voyage.

7. The Judicial Approach to the Classification of Terms in Shipping Cases: A critical commentary

Before the 1962 Court of Appeal decision in Hong Kong Fir Shipping Co. Ltd v Kawasaki Kisen Kaisha Ltd [46], English law had traditionally recognised a distinction between two contractual terms: conditions and warranties. A warranty is a term with reference to goods which are the subject of a contract of sale, but collateral to the main purpose of such contract. Its breach gives rise to a claim for damages - but not to a right to reject the goods and treat the contract as repudiated. [47] A warranty may be defined, as per the dictum of Lord Abinger, as "an express or implied statement of something which the party undertakes shall be part of the contract, and, though part of the contract, collateral to the express object of it." [48] A condition, on the other hand, refers to a contractual term which gives the innocent party who is the victim of a breach the right to rescind the contract and treat it as at end. It is on the basis of this distinction that an attempt to exclude liability for breach of 'warranty' has traditionally not been perceived as extending the protective cover of such a clause to a breach of condition. [49] Where there is a breach of condition the injured party nevertheless can, if they prefer, elect to maintain the contract in existence and content themselves with proceedings for damages in respect of the loss suffered. The reason for the rule that termination depends on the injured party's right of election is that the party in breach should not be allowed to rely on his own wrong so as to obtain a benefit under the contract - or to excuse his own failure of further performance, or to prejudice the injured party's legal position under the contract. [50]

A clause in a contract of carriage by sea may be expressly classified by the contract as a 'condition' or it may expressly provide for an option to the innocent party to terminate the contract in the event of certain specified breaches. In these situations, any breach of such a clause, however trivial, will in principle give the innocent party a right to treat the contract as at an end. However, the courts may still interpret the situation differently based on the facts of the case. A critical review of the case law would seem to suggest that the courts are not averse to re-classifying a term on the basis of the consequences of the breach. In the 1962 case of Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd, [51] Hong Kong Fir Shipping hired out their vessel under a two-year time charterparty to Kawasaki Kisen Kaisha. It was to sail from Liverpool to collect a cargo at Newport News, Virginia, and then to proceed via Panama to Osaka. A term in the charterparty required the vessel to be seaworthy and to be in every way fitted for ordinary cargo service. However the crew was insufficient and incompetent to deal with her old fashioned machinery. On the voyage from Liverpool to Osaka the engine suffered several breakdowns and the ship was off-hire for a total of five weeks, undergoing repairs. On arrival at Osaka, a further fifteen weeks of repairs were needed before the ship was seaworthy again. By this time only seventeen months of the two-year time-charter remained. Once in Osaka freight rates started falling and Kawasaki terminated the contract on grounds of Hong Kong Fir Shipping's breach. Hong Kong Fir Shipping responded that Kawasaki were now the party in breach for wrongfully repudiating the contract.

The Court of Appeal held that the 'seaworthiness' term was not breached in a sufficiently serious way to entitle the charterer to terminate. In the court's view it was an "innominate term." In the dictum of Diplock, LJ:

"The test whether an event has this effect (entitling the innocent party to elect to terminate the contract) has been stated in a number of metaphors all of which I think amount to the same thing: does the occurrence of the event deprive the party who has further undertakings still to perform of substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing those undertaking" [52]

The Hong Kong Fir Shipping case illustrates that the right of the innocent party to repudiate the contract and treat it as at an end depends on an independent judicial assessment of the seriousness of the consequences of the breach. For this reason, it is doubtful whether ordinary contractual principles would justify the termination of the contract of carriage by a charterer after, for example, an unjustified deviation by the carrier. Even though it is considered in law to be a very serious breach of the contract of carriage (in particular in voyage charterparties where the subject matter of the contract is the contractually agreed or stipulated route), an unjustified deviation may have no serious practical consequences whatsoever if no loss or damage to the cargo is caused. [53] Accordingly, it could be argued that deviation should not automatically entitle the innocent party (a charterer, a bill of lading holder, or a cargo owner) to repudiate the contract and treat it as at an end. The court ought first of all to assess the consequences of the unjustified deviation before deciding whether the particular departure from the contractual route is serious enough to give the innocent party the right to repudiate the contract of carriage. In doing this the court could take into account the impact of the unjustified deviation on the cargo and the marine insurance policy - i.e. whether the unlawful deviation exposed the cargo to much greater risks than was envisaged by the parties, and its negative impact on the coverage offered by the policy of insurance.

The decision of the Court of Appeal in the Hong Kong Fir Shipping case is noteworthy in another respect. In ruling that a breach of the implied obligation relating to seaworthiness of the vessel does not automatically entitle the innocent party to treat the contract as terminated, the judgment raises an important question of law. This is in view of the fact that a breach of the implied obligation relating to seaworthiness has the potential to impact far more seriously on the performance of the contract of carriage than an unjustified deviation. These potential impacts on performance include both the commercial and practical effects which the unseaworthiness of a vessel may have on the cargo and it value. This notwithstanding, the law governing the international carriage of goods by sea continues to treat unjustified deviation as a far more serious breach than unseaworthiness, even though in most cases the impact of unjustified deviation on the adventure could well be minimal. This clearly raises an important question as to the prioritisation of the norms in this area of the law as well as the basis for the implication of terms and obligations governing contracts of affreightment.

From a critical perspective the Hong Kong Fir Shipping case is illustrative of the tension between a term-based approach to the classification of terms (by the parties), and a breach-based judicial exercise in classification. This tension arises in part from attempts by parties to a charterparties to expressly incorporate into the contract (and the classify), an implied term such as seaworthiness. The Hong Kong Fir Shipping case serves as an example of the judicial rejection of the term-based approach to classification. However, we believe that the decision in the Hong Kong Fir Shipping case could have serious implications for the freedom of contract doctrine within the context of the laissez faire doctrine to which the law governing the international carriage of goods by sea owes much of its origins. In the light of this judgment it could be argued that by overriding the expressly stated intention of the parties that a breach should terminate the contract, the court had in effect re-written the contract terms for the parties. This is a practice which in turn could be perceived as an unwarranted judicial interference with contractual freedom in view of the potentially erosive impact of the judgment on the parties' contractually expressed intentions. Such a tendency, if unchecked, could ultimately lead to legal and contractual uncertainty if parties to a contract do not have the confidence in knowing that their duly negotiated and agreed terms will be given effect to by the courts.

8. A Hybrid Category?

The innominate or intermediate term is thus a relatively recent addition to the category of contractual terms which gives the injured party a right to rescind the contract if the breach is sufficiently serious; otherwise they will be entitled to a claim for damages only. [54] The traditional and somewhat rigid distinction between conditions and warranties offered categories which were neither suitable nor appropriate to the concept of seaworthiness in shipping law. This was in view of the very wide and potentially diverse range of events and situations which could all count towards a claim of unseaworthiness against a particular vessel. Such situations could range from a gaping hole in the side or superstructure of a ship to a minor and easily repairable leakage. It is in view of this that a rigid compartmentalisation of such situations into the discreet or exclusive category of either a condition or a warranty was deemed to yield unsuitable results for the contract of carriage - hence, the advent of the more flexible concept of an innominate or intermediate term to apply to such diverse and sometimes hybrid situations. The underlying philosophy and rationale for the innominate or intermediate term revolves around the idea that the effect of the breach should depend on the consequences of the breach. [55] In other words, a breach which is so serious as to undermine the foundations or the commercial purpose of the contract of carriage ought to discharge the parties from further performance of the contract and should thus be treated as a repudiatory breach. Otherwise, the injured party ought to only claim damages and continue with the performance of the contract as envisaged by the parties.

It may thus be argued that the Hong Kong Fir Shipping case has made an invaluable contribution to the development not just of shipping law, but also of general contract law in the area of the classification of terms. Through the concept of the innominate or intermediate term it has introduced some measure of required flexibility into what was previously a somewhat rigid conceptual framework for the judicial classification of contract terms with reference to the consequences of a breach.

9. Repudiatory Breach: Right of Election?

Assuming that the innocent party elected to repudiate the contract, how does that affect the relationship between the contracting parties? Are they discharged from their obligations under the contract from the moment of the election? Or are they discharged from their liability from the moment of the breach?

After repudiation, the injured party is no longer bound to accept or pay for further performance, and is thus entitled to refuse to make payments which had not yet fallen due at the time of repudiation. [56] However, he remains liable to perform obligations which had accrued before the repudiation [57]. For instance, where freight under a charterparty is deemed to have been earned on loading (i.e. pre-paid freight), the charterer remains liable to pay it even if he later justifiably rescinds the contract due to a repudiatory breach by the carrier. An illustrative case in point is Bank of Boston Connecticut v. European Grain and Shipping Ltd (The Dominique). [58] The respondents were charterers under an amended version of the Gencon dry-cargo voyage charterparty. This provided that: " Freight shall be prepaid within five days of signing and surrender of final bills of lading, full freight deemed to be earned on signing bills of lading, discountless and non-returnable, vessel and/or cargo lost or not lost. " Bills of lading were signed for a bulk dry cargo of agricultural products and the vessel sailed. Freight had therefore been earned under the terms of the above clause, but before it was paid, the vessel (Dominique) called at Colombo en route and was arrested. It became clear that no funds would become available to procure her release. Accordingly the charterers treated the carrier's conduct as a repudiation of the charterparty and justifiably elected to terminate it, the cargo being transshipped on to another vessel. The appellants were a bank to whom the carriers had assigned all their rights. As assignees of the owners they claimed advance freight from the charterers. The then House of Lords held that they were entitled to it.

In the case of Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd (The Good Luck), [59] a vessel (Good Luck) which owned by the Good Faith Group was insured with the defendant P&I Club under a war risk policy. The policy included provision which specified that should the vessel enter an 'additional premium area', the insurers should be given prompt notice, and failure to give notice of entering into a prohibited area would result in the rejection of all claims. The insurers had signed a letter of understanding that it would at all times inform the bank (the claimants) should the insurance cover cease. Later, the insurers failed to inform the bank that the vessel had entered prohibited area in the Persian Gulf where it was struck by an Iraqi missile and was deemed to be a total loss. The insurers refused any indemnity and they contended that they had been given no notification of the vessel's entry into an additional premium area. The bank on the other hand brought an action against the insurers for damages for failing to inform them that the vessel became uninsured. The then House of Lords held that the insurers had failed in their duty to inform the bank that the insurance cover had ceased due to the breach of the warranty.

In insurance law the use of the term 'warranty' equates to a condition in general contract law. There is, however, no requirement in insurance law that an insurer who is the victim of a breach of 'warranty' must take any steps to exercise a right of election. The court in 'The Good Luck' was willing to apply the principle of deviation within the context of the general contract law rules vis-à-vis the effect of the breach on the insurance policy. As with unjustified deviation in shipping law, the effect of breach of a 'warranty' under an insurance policy is an automatic discharge rather than dependent on any right of election. This position was explained by Lord Goff in 'The Good Luck' when he stated that "fulfilment of the warranty is a condition precedent …" [60] Furthermore, Section 33 of Marine Insurance Act 1906 which deals with breach of warranty stipulates that discharge of the insurer from liability is automatic and is not dependent upon any decision by the insurer to treat the contract or the insurance as at an end. Section 33(3) states as follows:

"A warranty … is a condition which must be exactly complied with, whether it be material to the risk or not. If it be not so complied with, then, subject to any express provision in the policy, the insurer is discharged from liability as from the date of the breach of warranty, but without prejudice to any liability incurred by him before that date."

Evident in this provision is the difference between the common law approach and the statutory position on the effect of a repudiatory on the contract vis-à-vis the rights of the innocent party.

Similarly, Section 46 of the Marine Insurance Act 1906 deals with the effect of unjustified deviation on a contract of insurance. It stipulates that where a ship, without lawful excuse, deviates from the voyage contemplated by the policy the insurer is discharged from liability as from the moment of the deviation, and it is immaterial that the ship may have regained her route before any loss occurred. However, as per the dicta of the court in 'The Good Luck' case, the ship owner remained covered after entry into the restricted area until the insurers turned down the insurance claim, and once the insurers had turned down the claim, the contract was avoided from the moment of breach. In other words, the discharge was not automatic but depended on the right of election. It would thus appear that the court in this case adopted a general contract law approach under which the right of election must be exercised before the termination of the contract can come into effect. It may be argued that this approach is out of step with the provisions of Sections 33 and 46 of the Marine Insurance Act 1906 which make no provision for the right of election.

In the case of State Trading Corp of India Ltd v M Golodetz Ltd (The Sara D) [61] a dispute arose out of a contract for the sale by Golodetz to STC of 12,600 tons of South Korean sugar in December 1985 C&F to an Indian port at a price of $201.95 per ton. The buyers' obligation was to open a letter of credit within 7 days of the contract before the 18^th of December 1985. The sellers, on the other hand, undertook to open a counter-trade guarantee within 7 days of the contract date. On 18^th of December 1985 the vessel caught fire in Hong Kong while she was changing crew and became a total loss. Neither the buyers nor the sellers had fulfilled these obligations by the time of the loss. The sellers subsequently claimed damages for the buyers' breach in failing to open the letter of credit. The buyers, on the other hand, claimed that the sellers' duty to open a countertrade guarantee was a condition precedent; hence failure to do so in their view amounted to a breach of condition which entitled the buyers to repudiate the contract and bring it to an end - thus they were not bound to fulfil their obligation by providing a letter of credit. The Court of Appeal held that the buyers could not argue that once they had elected to end the contract, the election related retrospectively to the moment of breach and so excluded them from fulfilling their obligation by not opening a letter of credit (on the basis that at the time of the breach by the sellers the buyers duty had not yet arisen). Even if the provision of the guarantee had been a condition the buyers (had they elected to end the contract) would still have been in breach of their obligation to open the letter of credit, which obligation had arisen before the termination of the contract.

Accordingly, it could be argued that a bill of lading holder would not be obliged to fulfil his duties under a bill of lading by paying freight or demurrage at a port of destination after a deviation (i.e. under a 'freight to collect' as opposed to a 'freight pre-paid' agreement). This is because payment obligations would not have arisen before the automatic discharge of the contract by the act of unjustified deviation.

It is however important to point out that in the Golodetz case, Kerr, LJ, did not accept that deviation and insurance cases could be used to develop principles applicable to the general law of contract. He also commented on the inconsistency between the Hain SS [62] case and the general law of contract as follows:

"It may be that it would be safer and better to treat the jurisprudence in both these fields (insurance and deviation) as divorced from the general law concerning the termination of contracts by the acceptance of breaches as wrongful repudiations. As in other problem areas, the correct analysis may lie in a new approach to the contracts in question. Thus, the correct analysis of a breach of warranty in an insurance contract may be that upon the true construction of the contract, the consequence of the breach is that the cover ceases to be applicable unless the insurer subsequently affirms the contract, rather than to treat the occurrence as a breach of contract by the insured which the insurer subsequently accepts as a wrongful repudiation. The same analysis, mutatis mutandis, may explain the law on deviation. However, these are obviously not concluded views; the subject is highly complex and was barely touched upon in argument. [63]"

Lloyd LJ. On the contrary, suggested that the deviation cases should be assimilated to the general contract law. He stated in his judgment as follows:

"The origin and justification for the rule in deviation cases has always been said to be the need to protect the cargo owner against loss of his insurance cover. So the ship owner assumes the mantle of the insurer, subject only to the exceptions of a common carrier. But with the advent of the held cover clause, this rational has lost all or much of its force...... so I remain of the view that the deviation cases should now be assimilated to the ordinary law of contract. But if not I am attracted by the suggestion at the end of Kerr LJ judgment that the correct analysis of the deviation cases may lie in a new approach to construction. [64]"

Given the peculiarities of the shipping industry with its norms and principles which have evolved under mercantile law and the law merchant, we would agree with Lord Justice Kerr that shipping law and general contract law ought to be considered as two discreet categories. This is in order to avoid the potential confusion which could arise from the application of the rules and principles of general contract law to contracts for the international carriage of goods by sea. General contract law by its very nature has a domestic inclination and is specifically designed for the national context. Shipping activities on the other hand are transnational in their dimension and therefore require a legal framework which is either international or quasi-international in its character. For these reasons we believe that it would be ill conceived to assimilate general contract law rules to those governing the international carriage of goods by sea. However, this is not to say that shipping law and practice cannot be informed by the rules of general contract law and vice versa. On the contrary, it is to be expected that there will be an ongoing process of cross-pollination between the two systems of law.

10. The 'Fundamental Breach' Concept in Shipping Contract: Quo Vadis?

If, as argued above, the law governing the international carriage of goods is by sea is a separate legal category from general contract law, then it goes without saying that there will be some concepts and principles which are unique to shipping law. Is the concept of the so-called 'fundamental term' (i.e. a term which goes to the very roots or foundation of the international contract of carriage) one such concept? The 'fundamental term' would be considered in this context to be a provision which is narrower than a condition of the contract as the breach of such a term has the devastating effect of turning the performance something completely different from that which was envisaged by the parties to the contract. In other words, a breach of such a term renders performance something completely different from the promise - hence the label 'fundamental breach' of contract. For instance, a seller of a new car would be considered to be in breach of a fundamental term if he delivered a second hand car. [65] A similar illustrative example of the fundamental term is where a person who had contracted to sell peas instead delivers beans. The possibility of the existence of such a term, ranked in status over and above a condition, has effectively been eliminated from the realms of general contract law. [66] But does the remnant of such a term subsist in shipping law?

In contracts for the international carriage of goods by sea, and in voyage charterparties in particular, stipulations relating to the agreed or contractual route are often regarded and treated as if they amount to a fundamental term of the contract - hence the strictness of the rule against unjustified deviation. From both a conceptual and legal perspective the devastating impact of deviation on the performance of the contract of carriage is such that even benefit of an exclusion clause is normally lost by a carrier who has unlawfully departed from the route without justification. [67] Interestingly, there is judicial authority to the effect that the same scenario would apply where a houseman stored the goods in place other than that agreed by the parties [68].

The main difference between the fundamental term and a condition is that the former is subject to a narrower construction than a condition. Admittedly, the two concepts are identical for the purpose of the rule that breaches of both give rise to a right to rescind. However, it could be argued that from a conceptual point of view the breach of a fundamental term does not allow for the possibility of a right of election. In other words, the contract is automatically discharged. A condition on the other hand allows for the possibility of a right of election by the victim of the breach. [69] When viewed from this perspective it could be further argued that the approach adopted by the courts in 'The Good Luck' and the Golodetz cases seem to align more with the concept of a fundamental term or fundamental breach than a breach of condition.

However, there is a great deal of uncertainty as to whether the concept of 'fundamental breach' (which previously seemed to have been applied to deviation) survived the case of Photo Production v Securicor. [70] This state of uncertainty, it should be observed, applies only to the legal framework governing the international carriage of goods by sea. The position of general contract law on the question on fundamental breach was authoritatively settled in the Photo Production case in the negative - i.e. there is no place in contract law for such a doctrine. The confusion thus relates mainly to the relationship between unjustified deviation and the concept of 'fundamental breach.' The vast majority of judgments relating to unjustified deviation as a rule prescribe automatic discharge of the contract without the right as a remedy - an approach which arguably assimilates unjustified deviation to a fundamental term of the contract. However, there are nonetheless a small number of decisions which fall outside his general rule. The case of The Antares [71] is an illustrative example. In this case it was held that the carrying of cargo on deck rather than in the holds of the ship as stipulated in the contract - which technically amounts to deviation - was not a fundamental breach of contract, and therefore did not suspend the operation of the Hague-Visby Rules provisions vis-à-vis a time bar. Lloyd LJ's view was that the doctrine of fundamental breach is no longer an applicable rule of law, and that in dealing with exclusion clauses in any case of breach of contract the question was merely one of construction. [72] However, it is important to point out that the judicial views stated in The Antares (and also in the Suisse Atlantique) [73] cases relate to what may be termed 'quasi-deviations' rather than geographical deviations per se. The Kaptian Petko Voivoda [74] is another case which has further cast doubts on the question and shows that the English courts are willing to prevent the rule against unjustified deviation from applying to cases involving quasi-deviation or non-geographical deviation.

11. The Position of the Scottish Courts

Scottish courts have adopted a different judicial approach to cases relating to unjustified deviation. Under Scottish law the right of the innocent party to repudiate the contract and treat it as at an end depends on whether a deviation was a condition precedent of the contract, or only a collateral agreement or warranty. The right to repudiate thus has to be determined as a question of intention depending largely on the construction of the contract and on the language used by the parties [75] - but also perhaps ultimately on the consideration whether the deviation had the effect of frustrating the whole object of the adventure.

In Allison & Co v Jacobsen & Co, [76] for instance, ship owners in West Hartlepool brought an action against certain merchants (the charterers) in Edinburgh, who chartered one of the plaintiff's vessels to bring home a cargo of phosphate from Algeria to Liverpool. The object of the action was to recover damages from the defendants for refusing to load. The defendants (the charterers) argued that while the vessel was on her outward voyage, it intimated and carried out a deviation which was a breach of condition - and that therefore they were entitled to refuse to load the cargo and rescind the contract of carriage. The charterparty expressly provided that the charterers could cancel the charter if the ship did not arrive at the port of loading before the 15^th of January 1903. In breach of this provision, the vessel arrived before that date. In this case the Outer House held that the charterers were not entitled to rescind the contract of carriage, as the ship owners by the deviation had committed no breach of any essential condition of the contract. In the words of Lord Kyllachy:

"Having considered the terms of the charter, and done so in the light of the very full citation of English authorities with which I was favored, I have come to the conclusion that there was here no breach of a condition precedent, that is to say, no breach of any essential condition of the contract. [77] "

Under Scottish law, the party who seeks to use deviation as an excuse to repudiate the contract must also prove that the commencement of such deviation frustrated the main object of the adventure. In M'Andrew v Chapple, [78] the question was whether a delay in bringing the vessel directly to Alexandria amounted to a deviation and entitled the charterers (defendants) to refuse to load and to rescind the contract. In this case the ship called at the Port of London which was on its route, as the vessel had to pass by the mouth of the Thames. While in London the vessel took on board cargo for Malta, Syra, Constantinople, Smyrna, and Alexandria. The charterers argued that proceeding to Constantinople was an unjustified deviation and thus they were entitled to refuse to load the cargo. The court, however, held that the charterers were not entitled to do so. The object for which the ship was chartered was not frustrated. Therefore the charterers were not relieved, either by deviation or delay, of their obligation to load a cargo. Furthermore, the court held that a stipulation that the vessel should proceed directly to Alexandria with all convenient speed was not a condition. In addressing this point, Montague Smith J stated as follows:

"Here the one question is, whether the stipulation to proceed with all convenient speed direct to Alexandria is a condition precedent or not. I am clearly of that opinion that it is not, and that if we held that it was we should frustrate the intention of the parties. The loss does not go to the whole consideration, but may be compensated in damages, and the question as to what would have been the case if the object of the voyage had been frustrated does not arise." [79]

A review of the Scottish cases leads us to the conclusion that the Scottish position on the question of the effect of unjustified deviation on the contract of carriage seems to be much clearer than the English position, although it is important to point out that these cases related to the preliminary voyage to the port of loading - and not to the main contract voyage itself. To being with, there is no concept of a fundamental term or fundamental breach under Scottish law in relation to unjustified deviation. It would appear to be the case, based on the case law, that deviation under Scottish law amounts to a warranty rather than a condition - or at best an innominate or intermediate term. A great deal seems to depend on judicial construction of the intention of the parties and the language of the contract.

12. Conclusions

The key objective of this paper was to undertake a comparative and critical analysis of the rationale and underlying philosophy which inform the judicial approach to implying terms in general contract law and in the law governing the international carriage of goods by sea. This comparative endeavour was extended to include an examination of judicial practice relating to the classification of terms in general contract law and in shipping law. In pursuit of the latter exercise, the traditional categories of conditions and warranties were reviewed and analysed together with the relatively newer concept of the innominate or intermediate term.

The key findings which emerge from this study are thus based on a critical review of the jurisprudence of English (and Scottish) courts in the area under study. The three main findings of the research can be summarised as follows:

(a) Judicial practice in relation to the implication of terms have as a general rule has tended to treat general contract law and shipping law as two separate categories, although jurisprudential practice in the two areas of law have traditionally informed each other.

(b) The key contribution of shipping law to the classification of terms has been through the introduction of the hybrid concept of the innominate or intermediate term (through the judgment in the case of Hong Kong Fir Shipping v Kawasaki Kaisen Kaisha). This arguably represents an invaluable contribution in view of the fact that the concept of the innominate or intermediate term has now become an indelible feature of general contract law. However, there remains a key concern which revolves around the potentially erosive impact of this judicial conception on the doctrine of the freedom of contract.

(c) On the question raised earlier in this paper as to whether implied shipping terms such as 'proper stowage' and 'care and preservation of the cargo' belong to the category of a condition or a warranty, we would submit that in the absence of judicial authority on this particular question such terms ought to be treated with some degree of flexibility and thus assimilated to the category of the innominate or intermediate term.

(d) In reviewing the judicial practice in relation to the legal effect of unjustified deviation on the contract of carriage, the question persists as to whether or not the concept of the fundamental term (or breach) remains a part of shipping law even though its existence has been categorically rejected in general contract law. The judicial renderings in cases such as 'The Good Luck' and 'Golodetz' would seem to suggest the lingering existence of the concept, if not in principle, then at least in the judicial practice relating to shipping cases. This is in view of the absence of the right of election by the victim of a breach in cases involving unjustified deviation.

It has to be acknowledged that the trend towards judicial activism which has emerged over the years in this area of the law is hardly surprising, dictated as it is by the evolutionary and regulatory environment in which shipping law and practice has to operate. If anything it was to be expected that with the passage of time such judicial and legislative constraints to the unfettered freedom of parties to contract as they wish were bound to appear given that the shipping industry (like any other industry) cannot remain isolated from economic, social and technological developments taking place in the wider society. Like any other industry (and given its global span) shipping is subject not only to the influences of judicial practice, but also to historical changes in attitudes taking place in the world. Such changes in attitudes and the social values which they inculcate clearly transcend the narrow interests of ship owners, and the narrow confines of the shipping industry, to include the interests of society as a whole. Hence it was always to be expected that the development of shipping law was never going to be isolated from the emergence of new and socially accepted standards and values such as, for example, the protection of the marine environment.

It is thus in this light that concepts such as the implied obligation regarding seaworthiness can be said to transcend the contractual boundaries of the charterparty to include a duty towards the preservation and conservation of the marine environment. By way of example, legislation such as the Oil Pollution Act 1990 (OPA 90) and regulations such as Tanker Management Self Assessment 2 (TMSA2) have had a significant impact on the duties and obligations of contracting parties in the oil tanker transport industry through the prescription of very high standards of safety and protection of the marine environment.

In summing up, we would submit that there are a great deal of similarities to the judicial approaches to the implication and classification of terms in general contract law and in shipping cases. The key difference, however, lies in the way shipping law and practice have traditionally viewed the concept of deviation. Unjustified deviation, with its potentially devastating impact on the contract of carriage (which includes the automatic discharge of all rights and obligations as well as the ousting of the marine insurance policy) could indeed be argued as representing a shadowy remnant of the concept of the fundamental term (or breach) in all its attributes and ramifications.