NAME AND CITATION:  KARSALES (HARROW)  V  WALLIS (1956) 2 All ER 866

CASE NAME AND CITATION:  KARSALES (HARROW)  V  WALLIS (1956) 2 All ER 866

DATE: 11TH & 12TH OF JUNE 1956

COURT: ENGLISH COURT OF APPEAL

( Denning, Birkett and Parker L.J J)

DEFENDANT APPELLANT: FRANK EARNEST WALLIS

REPRESENTED BY:  J. LLOYD-ELEY

PLAINTIFF RESPONDENT: KARSALES (HARROW)LTD

REPRESENTED BY: M. J ANWYL DAVIES

INTRODUCTION

KARSALES (HARROW) V WALLIS [1956]  is an English case decided by four Justices of the English court of Appeal. The case is a landmark case in contract law and commercial law. It established  the concept of fundamental breach in contract law doctrine. The court per Lord Denning  declared a fundamental breach as that which goes into the root of the contract.

FACTS OF THE CASE

In late 1954, one Mr Stinton came to Mr Wallis, the defendant in this action, to sell him a second- hand Buick motor car.  Mr Wallis inspected the car  and found it an excellent car. The car was worth £600 however the defendant did not have the money to buy the car as at the time. The defendant then agreed to buy it under an hire purchase agreement through a hire purchase finance company if Mr Stinton could make the necessary arrangements. Mr Stinton firstly put forward forms for the North Central Wagon Company as the Hire purchase finance company. However, the company rejected the application. He next suggested Mutual Finance Ltd and got the defendant to sign their forms. The defendant signed them in blank over a sixpenny stamp with no details filled in. Mr Stinton took the forms away and kept the car in his possession. The forms were submitted to Mutual Finance Ltd. However, the forms were not submitted by Mr Stinton himself, he did it through an intermediary called Karsales (Harrow), Ltd. Mutual Finance Ltd accepted the application but the transaction went this way: the intermediary(Karsales Harrow Ltd) bought the car from Mr Stinton and re-sold it to Mutual Finance Ltd. The Mutual Finance Ltd let it out on Hire purchase to the defendant, Mr Wallis on the terms of the forms he signed. Note that no one in the offices of the Mutual Finance inspected the car but someone  filled in the details of the form,giving the registration of the car, the total price, the initial payment and the instalments. They dated the form Feb. 10,1955 and sent a copy to the defendant. The defendant acknowledged the form and stated in the pleadings that it was an agreement between him and Mutual Finance Ltd. The car was still in Mr Stinton  possession when the defendant received the agreement. So the defendant reached out to Mr Stinton requesting for the delivery. Mr Stinton said that he would not deliver it because he had not been paid.(This means he had not been paid by the finance company the sum due for the car).  He told the defendant that he would make inquiries. It would appear  that he was paid soon afterwards because this is what happened next.

About a week later, the vehicle was left, late at night, outside the defendant’s garage and was examined the next morning by the defendant and he found out it was the same Buick car as previously inspected by the defendant. It had the same registration number and features but the car was already badly damaged. It was evidently towed into the garage because there was a rope attached to the front bumper. It was found as the judge described “in a deplorable state”. Almost all the new parts of the car were replaced with old ones. The defendant then said to Mr Stinton “I will not accept the car in this condition”. The car was then towed back to Mr Stinton and never repaired. It would have cost £150 to put it in the condition the defendant had first seen it.

Note that, Mutual Finance Ltd assigned all their rights under the hire purchase agreement to Karsales Harrow Ltd several months later (the intermediary mentioned earlier ). Then, Karsales Ltd sued the defendants for 10 months instalments of payment under the hire purchase agreement.

ISSUES

• Whether there was a hire purchase contract between the defendant and the finance company.
• Whether there was a fundamental breach of a contractual term that existed in the hire purchase agreement between the defendant and the finance company.
• Whether the delivery of the car in a deplorable state by the finance company to the defendant constituted a fundamental breach of the hire purchase contract.
• Whether the finance company was entitled to recover the instalments due under the hire purchase agreement.
• Whether the finance company was entitled to rely on the exempting clause in the hire purchase agreement.

ARGUMENTS

The plaintiff respondents sued the defendants Mr Wallis for 10 months instalment payment in the hire purchase agreement. The defendant appellant claimed that he is not liable for any instalment payment as the plaintiff committed a fundamental breach of the hire purchase agreement. The defendant argued that the description given in December 1955 was not complied with.

However, the plaintiff relied on the exception clause stated in 3(g) of the agreement “No condition or warranty as to its fitness for any purpose”. Therefore the plaintiff claimed that the defendant was liable for the 10 months instalments of payment.

JUDGEMENT

TRIAL JUDGEMENT BY HONOUR JUDGE RAWLINGS IN ALDERSHOT COUNTY COURT: The trial court held judgement in favour of the plaintiff (the finance company) that they are entitled to rely on the exception clause. The defendant was therefore ordered to pay the ten month instalments due to terms of hire purchase agreement between the plaintiffs and the defendant.

THE JUDGEMENT OF THE COURT OF APPEAL ENGLAND:  The court held that:

• There was a fundamental breach of contract, that the car examined by the defendants himself was not the condition of the car when delivered. This fundamental breach disentitled the plaintiffs from relying on the exception clause. The court made reference to the dictum of Delvin J in Smeaton Honacomb &Co Ltd v Sasson I. Setty, Son &Co.
• The court held (per Lord Denning and Lord Parker) that the instalments could not be recovered by the plaintiffs because the delivery of the car had not been accepted and that the only remedy available to the plaintiffs is in an action for damages and any rights to bring such an action. See the case of National Cash Register Co. v Stanley [1921] 3 KB 292
• The court also held that there was an implied obligation on the part of the plaintiff of keeping the car in good condition pending the delivery. The court further supported its ruling with Article 383-385 of the story in bailment.
• The court also held that an exception clause does not overrule a fundamental breach of contract. The court highlighted the enforceability of fundamental terms over exception clauses by citing the case of Alexander v Railway Executive (1951)
• The Court held that delivering goods not in conformity with express terms negate the protection of exception clauses. As held in Andrews Brother Ltd v Singer and Co
• The court held that exception clauses only protect non fundamental breaches of contract. Lord Denning posits that when the hirer, Mr Wallis, already inspected the car physically and is satisfied with the condition, there is an implied obligation by the finance company to deliver the car in the exact condition that the hirer inspected it to him. It will be unfair on the hirer if the court orders him to pay 10 months instalments on a car that was badly damaged upon delivery.

Furthermore, the judgement of the court highlighted that the exception clause is meant for the protection against breaches of non fundamental terms not fundamental terms. Therefore the exclusion clause could exempt the defendant from performing his contractual duty.

Therefore the ratio decendi in  this case is that if an exception clause goes to the root of the contract, it shall have no effect.

THE SIGNIFICANCE OF THIS CASE

It cannot be over emphasised that this case is a landmark case in contract law and commercial. It is a case that has set precedent for fundamental terms  of a contract. Denning LJ established a new precedent by declaring the act of the plaintiff a fundamental breach. It is however important to note that this fundamental breach rule is against the strict construction rule which states that the court will strictly follow whatever the contract says. However in this case Denning did not follow the strict construction rule as it will not amount to fairness and justice which the law stands for. The case also limited the application of exception clauses to ensure balance in contract.

CRITICISM

Some critics have opined that this case has weakened the power of exception clauses and streamlined its application. Also, some critics highlighted that this case has given more power to the judiciary to strongly scrutinise contractual terms of parties.

CONCLUSION

It is crucial to note that this case has established a basic principle in law that is  geared at striking a balance between the breach of fundamental terms and  application of exception clauses. This is to the end that exception clauses will not excuse contractual parties who disregard the fundamental terms of their contract that are the foundational terms of the contract.

CASES CITED IN THE COURSE OF JUDGEMENT (OSCOLA FORMAT)

• Smeaton Honacomb &Co Ltd v Sasson I. Setty, Son& Co
• National Cash Register Co v Stanley
• Alexander v Railway Executive (1951)
• Andrews Brother Ltd & Singer