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

Schuler, a German machine tool manufacturer, granted Wickman sole selling rights under a distributorship agreement requiring weekly visits to six motor manufacturers. When Wickman failed to make all required visits, Schuler purported to terminate the agreement. The House of Lords held that the term 'condition' did not automatically entitle Schuler to rescind for any breach.

Facts

L. Schuler AG, a German machine tool manufacturer, entered into a distributorship agreement dated 1st May 1963 with Wickman Machine Tool Sales Ltd, granting Wickman the sole right to sell Schuler products in the United Kingdom. Clause 7(b) of the agreement stated that ‘It shall be a condition of this Agreement’ that Wickman’s representatives visit six named motor manufacturing firms at least once every week to solicit orders for panel presses. Wickman failed to make all the required visits. After some negotiations and waiver of earlier breaches, Schuler wrote to Wickman in October 1964 purporting to terminate the agreement on the ground that the failure to make weekly visits entitled them to treat the contract as at an end.

Issues

Primary Issue

Whether the use of the word ‘condition’ in clause 7(b) meant that any breach of the visiting obligation, however minor, entitled Schuler to terminate the contract forthwith.

Secondary Issue

Whether clause 11 of the agreement, which provided for termination following material breach and a 60-day remedy period, governed the consequences of breaches under clause 7(b).

Additional Issue

Whether subsequent conduct of the parties could be used as an aid to construction of the contract.

Judgment

The House of Lords, by a majority of four to one, dismissed the appeal and held that Schuler was not entitled to terminate the agreement. Lord Reid, delivering the leading judgment, held that while the word ‘condition’ was a strong indication of the parties’ intention to treat the term as fundamental, it was not conclusive. The construction contended for by Schuler would lead to unreasonable results, as any single missed visit out of approximately 1,400 required visits would entitle Schuler to terminate the entire agreement. Reading clause 7(b) with clause 11, the court concluded that a breach of clause 7(b) would make it a material breach requiring notice under clause 11(a)(i), giving Wickman 60 days to remedy the breach.

Lord Wilberforce dissented, holding that the word ‘condition’ should be given its technical legal meaning and that any breach entitled Schuler to rescind.

On the question of subsequent conduct, the majority held that this was not admissible as an aid to construction, following Whitworth Street Estates v James Miller [1970] AC 583.

Key Legal Principles

Construction of ‘Condition’

The use of the word ‘condition’ in a contract is an indication, even a strong indication, of an intention that any breach should entitle the innocent party to terminate, but it is not conclusive. The court must look at the contract as a whole and consider whether the proposed construction leads to reasonable results.

Unreasonable Results

The more unreasonable the result of a particular construction, the more unlikely it is that the parties intended it, and if they did intend it, the more necessary it is that they make that intention abundantly clear.

Subsequent Conduct

It is not legitimate to use as an aid in the construction of a contract anything which the parties said or did after it was made, unless it evidences a new agreement or is the basis of an estoppel.

Implications

This case is a leading authority on the construction of contractual terms and the meaning of ‘condition’ in commercial contracts. It establishes that courts will not automatically give effect to the technical legal meaning of ‘condition’ where doing so would produce unreasonable results inconsistent with commercial sense. The case also confirms the inadmissibility of subsequent conduct as an aid to contractual interpretation. The decision has significant implications for the drafting of commercial agreements, emphasising the need for clear and unambiguous language when parties intend particular consequences to follow from breach.

Verdict: Appeal dismissed. Schuler was not entitled to terminate the distributorship agreement based on Wickman’s breaches of clause 7(b).

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