1.4.1 Contract Termination - Performance, Agreement and Breach

Question 1

When is a contract said to be discharged?

Answer 1

When all obligations under the contract have been carried out, and thus all rights have been extinguished. A contract may be discharged by: (P.A.B.F)

• Performance
• Agreement
• Breach
• Frustration

Question 2

How can a contract be discharged by performance?

Answer 2

The performance of the contract is precise and exact. If not, the party is not discharged from liability, the other party cannot demand performance and payment cannot be enforced.

The contract is an entire obligation requiring precise performance.

Question 3

What happens if one party does not act entirely in accordance with the terms of the contract?

Answer 3

The other can claim damages or repudiate the contract.

Repudiation of a contract occurs when one party to the contract demonstrates that it is unwilling or unable to fulfill its obligations under that contract.

Question 4

How are contract terms judged to specify precise and exact performance?

Answer 4

By looking at the whole contract - the terms may mean that the whole contract must be performed.

Substantial performance is sufficient in most cases.

(Look out for terms of the contract specifying precise and exact performance - a minimal deviation may lead to rejection of performance)

Question 5

What is a divisible contract?

Answer 5

A contract is said to be a divisible contract when it consists of a number of severable obligations, instead of one entire obligation.

Will depend on the intention of the parties. Usually expressly provided for in the contract

Question 6

What are some examples of divisible contracts?

Answer 6

e.g. delivery of goods by instalment, payment due on delivery of each installment, partial performance gives rise to an obligation to pay part of the consideration.

Question 7

What is meant by substantial performance of a contract?

Answer 7

Substantial performance is a question of degree. The doctrine allows a party to recover a substantial part of his fee if he has substantially completed his performance, albeit with defects under an entire obligations agreement.

If the contract has been performed but not exactly, then the innocent party has to pay for what they have received but does have the right to claim for damages for breach of warranty.

Question 8

What is meant by ‘part performance’?

Answer 8

Partial performance describes a party’s efforts to perform their obligations under the contract - they are so poor that it cannot be taken to be substantial performance.

Question 9

Can a party recover any amount of money for part performance?

Answer 9

Acceptance by the innocent party of partial performance is key!

They are not entitled to recover anything unless the injured party accepts the partial performance.

Also, the innocent party must have a genuine choice either to accept or reject partial performance.

Question 10

What happens if partial performance is accepted?

Answer 10

The partial performance will have a claim on a “quantum meruit” basis (reasonable sum for work done).

Question 11

Explain the concept of seeking reasonable remuneration on a “quantum meruit” basis for work already done.

Answer 11

Reasonable sum in respect of the benefit conferred by the partial performance.

The injured party has accepted the other’s partial performance and by implication the parties have released one another from the original contract - they have agreed to a new contract to pay for the work done or the goods supplied.

Question 12

What is the rule behind late performance?

Answer 12

Late performance (performance after the fixed date) is good unless time is of the essence of the contract.

If time is of the essence, a failure to perform within the time limit stipulated will give rise to the right to repudiate. Otherwise, there is only a right to damages.

Question 13

Can a contract be discharged by agreement?

Answer 13

Yes. A contract may be discharged or varied by agreement. However, unless the release is executed by deed, consideration is required.

Two forms of discharge by agreement - bilateral and unilateral.

Question 14

What is bilateral discharge by agreement?

Answer 14

This occurs where neither of the parties have completed their obligations. In this case, they may mutually release one another from those obligations.

Consideration raises no difficulty - each party surrenders something of value by agreeing to release their rights under the contract.

Question 15

What is unilateral discharge by agreement?

Answer 15

One party has performed their obligations and agrees to release the other from their obligations.

Consideration is required - the latter must provide consideration or the release must be executed by deed, otherwise the former will not be bound.

Question 16

Can a contract be discharged by expiry of other specified event?

Answer 16

Yes. A contract may be discharged by the occurrence or non-occurrence of a specified event (specified in the contract) or “condition precedent” - something beyond the control of either party, such as the rate of inflation reaching a certain level.

Question 17

Can a waiver be introduced into a contract?

Answer 17

It is possible for a contractual term to be waived by one party at the request of the other. However, there must be consideration to support this variation.

Question 18

What happens if a contract is discharged by breach?

Answer 18

Breach of contract: A failure by a party to perform his obligations under a contract.

Where a party is in breach of contract (fails to perform their side of the contract), the other will have a right to damages.

If there is a breach of a condition or a breach of an innominate term giving rise to serious consequences, there will also be a right to repudiate.

Question 19

Explain the consequences of actual breach.

Answer 19

The innocent party can treat themselves as discharged from further obligations under the contract if the contract has been repudiated or if there has been a fundamental breach or a breach of condition.

Question 20

What is meant by ‘anticipatory breach’?

Answer 20

Breach before the performance becomes due.

Repudiation of the contract: The party makes it clear beyond reasonable doubt (either expressly or by implication) that they do not intend to perform their obligations under the contract - they repudiate.

Question 21

How can the innocent party respond to an anticipatory breach?

Answer 21

The innocent party can choose whether to:

1) accept the breach and immediately sue for breach of contract or;
2) refuse to accept the breach (reject repudiation) and wait until the due date for performance in the hope that the other will change their mind.

If they do 2), they must continue to perform their own obligations under the contract. It is possible to rectify the breach and continue the contract.

Question 22

When does the option to affirm or discharge a contract arise?

Answer 22

In cases such as anticipatory breach. If the claimant has a choice to continue, it is their right to continue no matter how unreasonable. There is no duty to mitigate in the circumstances.

HOWEVER - this can only happen where no co-operation for performance is required from the other side.

If the party has no legitimate interest in performing the contract other than to claim damages, they ought not to be entitled to perform.

Question 23

Performance - what are the key points to note?

Answer 23

1) Performance must be precise and exact.
2) Late performance is still good unless time is of the essence.
3) Be aware of a situation where substantial performance is really part performance.

Question 24

Agreement - what are the key points to note?

Answer 24

1) Is there genuine agreement?
2) Bilateral or unilateral?
3) Is there accord and satisfaction?

Question 25

Breach - what are the key points to note?

Answer 25

1) Is there actual breach or is it anticipatory?
2) Can the breach be rectified?
3) Is it a breach of condition or warranty?
4) What are the remedies?

Question 26

Explain the four ways in which a contract can be terminated.

Answer 26

Performance

Agreement

Breach

Frustration

Question 27

What is meant by a repudiatory breach?

Answer 27

Repudiatory breach: Breach of a major term of a contract that goes to the root of the contract and deprives the non-breaching party of substantially the whole benefit of the contract.

IMPORTANT: Repudiation gives the non-breaching party the right to choose whether to…
a) discharge the contract (which will release both parties from their outstanding obligations under the contract) or to
b) affirm it (which means that both parties continue to be bound by their remaining contractual obligations)

Question 28

What should be remembered for a repudiatory breach?

Answer 28

A repudiatory breach does not automatically discharge a contract. It gives the non-breaching party the choice to either discharge the contract, which releases both parties from their outstanding obligations, or to affirm the contract, which requires both parties to continue to perform their obligations under it

Question 29

What is the entire obligations rule and exceptions?

Answer 29

Party A must perform all of his obligations under a contract before Party B is required to pay Party A.

Such agreements are called entire obligation agreements.

Exceptions - the entire obligations rule can be mitigated as follows:
a) Severable contracts;
b) The acceptance of the performance by the other party;
c) The doctrine of substantial performance

Question 30

What are the implications of b) The acceptance of the performance by the other party for mitigating the entire obligations rule?

Answer 30

If the non-breaching party chooses to accept the performance of the party in breach, the party in breach can claim for the benefit of the work he has carried out on a quantum meruit basis.

Question 31

What should be remembered about a quantum meruit claim?

Answer 31

Quantum meruit is a remedy that allows a party to claim a reasonable amount for the benefit conferred to the other party under a contract (partial performance)

N.B: Quantum meruit claim can only be made if the non-breaching party can choose whether or not to accept performance (e.g using work materials - accepting part of the performance)

Question 32

What is the difference between frustration and a repudiatory breach?

Answer 32

Frustration automatically discharges both parties from their outstanding obligations under a contract.

This contrasts with the effect of a repudiatory breach, which gives the non-breaching party the choice to discharge the contract or to affirm it.

Question 33

Frustration - what are the key points to note?

Answer 33

Frustration automatically discharges both parties from their future obligations under a contract.

Frustration takes effect as a result of events that make the future performance of a contract:
- Impossible;
- Illegal, or
- Where the main purpose of both parties of the contract is lost

Question 34

What is the test to determine whether a breach is repudiatory?

Answer 34

The breach should go to the root of the contract and deprive the non-breaching party of substantially the whole benefit of the contract.

The repudiatory breach will then give the non-breaching party the choice to affirm or discharge the contract.