Hong Kong Fir v. Kawasaki Kisen Kaisha Ltd.

"Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha", [1962] 2 QB 26, 1 All ER 474, known as the Hong Kong Fir case, is a leading English case on contract law. The Court created a third class of contractual term outside of warranties and conditions known as innominate term, which are determined by the consequences of the breach of the contract. This case represented a significant change in the standard of determining types of terms, which were normally determined by looking at the contract at the time it was formed.

Background

Kawasaki contracted with Hong Kong Fir to charter a vessel for a period of 24 months. A provision in the terms warranted that the vessel was "fitted in every way for ordinary cargo service" and that the owners would "maintain her in a thoroughly efficient state ... during service". Soon after beginning the voyage it was discovered that the vessel was in need of many repairs.

Initially, Hong Kong Fir spent five weeks fixing the vessel, but more damage was found and so more repairs were needed totaling 15 weeks before it was seaworthy. Once the vessel was made seaworthy, it was still available to the charterers for a period of 17 months.

Kawasaki wrote to the owners repudiating the Charter. Hong Kong Fir brought an action for wrongful repudiation.

Opinion of the Court

At trial, it was held that Hong Kong Fir was in breach of the contract in delivering a seaworthy vessel, and also that it negligently failed to maintain the vessel in an efficient state. However, the trial judge found that this breach was not substantial enough to entitle the charterer to repudiation of the contract. On Appeal, this was found to be correct.

Lord Diplock, writing for the Court, held that the term regarding the seaworthiness of the vessel was neither a warranty or condition, but an innominate term.

The type of term can be determined by examining the consequences of the breach. A breach that deprives an innocent party of "substantially the whole benefit" would mean the term is a condition.

Here, Diplock found that Kawasaki was not deprived of "substantially the whole benefit" as they still had most of the rental period available to use the vessel.

Diplock considered that certain terms are impossible to determine without looking at the extent and circumstances of the breach. Consequently, where the legal consequences depend on the nature of the breach and does not fall within a reasonably expected classes of breach then the terms are innominate and will be determined to be a warranty or condition based on the extent of the breach.

Here, it was held that the meaning of the term "seaworthiness" has a very broad meaning ranging from trivial defects like a missing life preserver or a major flaw that would sink the ship. Accordingly, it is impossible to determine ahead of time what type of term it is. Thus, the type of breach must be determined on the consequences.

"Seaworthiness" is defined both by common law and by statute. In McFadden v Blue Star Lines [1905] 1KB 607 it was stated that, to be seaworthy, a vessel must have the degree of fitness that an ordinarily careful and prudent shipowner would require his vessel to have at the commencement of a voyage, having regard to all possible circumstances. And the Marine Insurance Act 1906, s. 39(4) provides that "a ship is deemed to be seaworthy when she is reasonably fit in all respects to encounter the ordinary perils of the adventure insured."

In the Hong Kong case, the issue was not whether the unseaworthiness was "serious" or "minor"; rather the question was whether the undoubtedly serious unseaworthiness had had an effect sufficiently grave to allow the charterer to repudiate. On the facts, given that the charterer had had the "substantial benefit" of the contract for some 80% of the time period, the court held that the breach was adequately remedied by damages.

The Hong Kong Fir decision was met with some alarm in the shipping world, where certainty is crucial. The problem was the delay element; one had to "wait and see" the effect of the breach. The enormous costs involved in chartering mean that parties cannot afford to leisurely loiter, whilst pondering the consequences of the breach. Soon after, in The Mihailis Angelos [1971] 1 QB 164, it was held the impossibility of the shipowner to meet the "expected ready to load" date, ipso facto entitled the charterer to repudiate for anticipatory breach of condition. (The charterer was relieved to be able to cancel, as his proposed cargo of apatite had not materialised!)

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