L Schuler AG v Wickman Machine Tools Ltd [1973] UKHL 2 (04 April 1973)

A contract termed it a 'condition' that a distributor make weekly sales visits. After some were missed, the manufacturer tried to terminate. The House of Lords held that calling a term a 'condition' is not conclusive and found it was a warranty.

Facts

L Schuler AG, a German manufacturer, entered into a distribution agreement with Wickman Machine Tools Ltd, an English company, for the sale of Schuler’s panel presses in the United Kingdom. The contract was for a term of four and a half years. A key clause, Clause 7(b), stated: ‘It shall be a condition of this agreement that… [Wickman] shall send its representatives to visit the six firms whose names are listed in the Schedule hereto at least once in every week for the purpose of soliciting orders for panel presses’. In total, this would require approximately 1,400 visits over the contract’s duration. Wickman committed some minor breaches of this clause by failing to make all the required weekly visits at the beginning of the contract. Schuler claimed that because Clause 7(b) was labelled a ‘condition’, any breach, however small, entitled them to repudiate the contract.

Issues

The central legal issue was the construction of the word ‘condition’ in Clause 7(b) of the agreement. The House of Lords had to determine whether the parties’ use of this specific legal term was conclusive, meaning that any breach of the visiting obligation would automatically grant the right to terminate the contract. The alternative was for the court to interpret the term in the context of the whole contract and decide if it was indeed a condition in the strict legal sense, or merely a warranty or innominate term.

Judgment

The House of Lords, by a 4-1 majority, allowed Wickman’s appeal, finding that Schuler was not entitled to repudiate the contract. The majority held that the use of the word ‘condition’ was not decisive.

Majority Reasoning (Lord Reid)

Lord Reid, delivering the leading judgment, acknowledged that ‘condition’ has a technical legal meaning, a breach of which allows the innocent party to terminate. However, he argued that it can also be used in a more popular, non-legal sense to mean simply ‘a term of the contract’. He reasoned that the court must consider the consequences of interpreting the term in its technical sense. He famously stated:

The fact that a particular construction leads to a very unreasonable result must be a relevant consideration. The more unreasonable the result the more unlikely it is that the parties can have intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear.

In this case, interpreting Clause 7(b) as a condition would mean that a single missed visit out of 1,400 would allow Schuler to end a valuable long-term distributorship agreement. The majority found this result so commercially absurd and unreasonable that it could not have been the parties’ intention, despite their use of the word. Therefore, the term was construed as a warranty, meaning a breach would only entitle Schuler to claim damages, not to repudiate the contract.

Dissenting Opinion (Lord Wilberforce)

Lord Wilberforce delivered a powerful dissent based on the principle of freedom of contract. He argued that when sophisticated commercial parties use a well-known technical legal term, the court should respect their choice and enforce the agreement as written. He stated:

I think that clause 7(b) is a condition of the contract: this is the meaning of the language they have used… This contention is, in my opinion, well-founded. It is that the parties have used the word ‘condition’, and that they have used it, not in some popular or loose sense, but in the sense of a term of the contract a breach of which, by one party, entitles the other to treat the contract as at an end.

In his view, the court was overstepping its role by rewriting the contract to achieve what it perceived to be a more reasonable commercial outcome, thereby undermining contractual certainty.

Implications

This case is a landmark authority on contractual interpretation. It establishes that a court is not bound by the labels used by the contracting parties. If the parties describe a term as a ‘condition’, it creates a rebuttable presumption that it is a condition in the technical legal sense. However, if interpreting it as such would lead to a very unreasonable or absurd commercial result, the court may conclude that it was not the parties’ true intention. The decision highlights the tension between upholding the certainty of a contract as written and ensuring commercial common sense. It serves as a caution that to make a term a condition in the strict sense, especially where a minor breach can have drastic consequences, the contract must use exceptionally clear and unambiguous language to that effect.

Verdict: The House of Lords allowed the appeal, holding that Schuler was not entitled to repudiate the contract on the basis of Wickman’s breach of Clause 7(b).

Source: L Schuler AG v Wickman Machine Tools Ltd [1973] UKHL 2 (04 April 1973)