4. Termination Flashcards
What are the 2 main circumstances where the future performance of the contract can be terminated (in terms of a breach)?
- Where there is a breach of condition
2. Very serious breach of an innominate term
What are the 3 terms that can be breached in a contract? What are the consequences of a breach in these situations?
- Condition. Breach of a condition can result in damages OR contract discharged or affirmed and damages
- Warranty. Breach of a warranty can result in damages
- Innominate term. A breach that isn’t serious can result in damages. A serious breach can result in damages OR contract discharged or affirmed and damages
What are the two pathways for non-performance of a contract?
Breach or frustration
What is the doctrine of frustration?
When the law excuses a party for non-performance of a contract due to an unforeseen event. The contract is automatically ended, both parties are excused from future performance and the law determines how any losses should be borne. I.e. something out-of-the-ordinary has frustrated the intentions of the parties
What doctrine is the doctrine of frustration an exception to?
Doctrine of complete performance
Frustration operates in limited circumstances. The event must:
- Make performance of the contract impossible (or radically different)
- Be something beyond the ordinary risks that the parties can be treated as having taken on board when entering into their contract (i.e. something unexpected)
- Be something that was beyond the control of either party
Most of the cases that have considered frustration have been placed into which convenient categories of circumstances that render performance of the contract radically different?
- Government intervention
- Unavailability of a specific person crucial to the contract
- Illegality
- Destruction of the subject matter
- Non-occurrence of a fundamental event
In all cases it will be a question of degree
Is delay more likely to frustrate or breach a contract?
Breach
What are some relevant factors to consider when deciding if delay frustrates a contract?
- Whether there are contract provisions for the consequences of delay
- The likely length of delay relative to the duration of the contract
- Any time set in the contract for the obligations to be performed
- Whether the performance resumed is radically different from the contract
What case illustrates delay that frustrated a contract?
Metropolitan Water Board v Dick Kerr [1918] AC 119. There was a clause in the contract to build a reservoir dealing with the possibility of an extension of time, in case of delay. However, the court decided that the wording of the clause was meant to cover temporary delays and not an interruption of such character and duration that it fundamentally changed the conditions of the contract. The interruption was the WWI (not a temporary delay). Such an interruption could not have been in the contemplation of the parties at the time the contract was made. As a matter of construction, the delay clause did not cover the situation that had arisen. They delay was such that the contract, if resumed, would be radically different from the contract the parties had originally made. The court held that the contract had been frustrated
To avoid something expected (and a frustrated contract), most commercial contract make provision for what?
They make provision for the unexpected. They want to know what the risks are, which helps to cut down on cost and litigation risk
What is a force majeure clause?
Force majeure clauses are contractual clauses which alter parties’ obligations and/or liabilities under a contract when an extraordinary event or circumstance beyond their control prevents one or all of them from fulfilling those obligations, resulting in no need for the doctrine of frustration
What case illustrates that, in order for a contract to be frustrated, the event needs to be beyond the control of either party?
The Super Servant Two [1990] 1 Lloyd’s Rep 1. The defendant agreed to transport the claimants’ drilling rig from Japan to Rotterdam. The contract said the rig was to be carried using a ‘transportation unit’ defined as meaning Super Servant One or Two. They intended to use Super Servant Two but it sank before the date due for delivery. The defendants had entered other contracts that they could only perform using Super Servant One, so informed the claimants that they would not be able to transport the rig.
The Court of Appeal decided that the contract had not been frustrated. What had happened was ‘self-induced’. It was their decision to use Super Servant One for other contracts. The impossibility of performance resulted from their own act and the choice they had made
What happens to the contract as a consequence of frustration?
Terminated automatically as a matter of law. The non-defaulting party does not have a choice
What Act lays down a complex set of rules governing the consequences of frustrating events for many types of contract (insofar as they relate to acts carried out, expenses incurred and obligations performed)?
The Law Reform (Frustrated Contracts) Act (LR(FC)A) 1943
What does section 1(2) of the LR(FC)A 1943 contain?
- Money paid before the event can be recovered
- Money that should have been paid before the event need not be paid
- At the court’s discretion, expenses incurred by the payee can be recovered out of the total sums paid/payable before the event
There is a very wide discretion afforded to the court to allow a payee to recover expenses out of the total money paid and payable before the frustrating event. If the expenses incurred are less than total pot, then they can only recover the amount of expenses incurred
What does section 1(3) of the LR(FC)A 1943 contain?
If one party has conferred a valuable benefit on the other party before the frustrating event, then the court may order a just sum to be paid by the recipient for that benefit.
What is a just sum will depend on all the circumstances including the effect the frustrating even may have had on the benefit and any sum forfeited by the benefitting party under s 1(2) of the Act.
Explain the different pathways for non-performance of a contract
Non-performance can lead to a breach (which results in a discharge or damages) or a frustration event (which results in either a breach (if self-induced/foreseen; see previous), discharge or the LR(FC)A
What are the 3 main ways (not just by breach of contract) a contract can be terminated?
- Breach of a condition/innominate term
- Frustration
- Discharge by performance
What is the doctrine of complete performance?
The general rule is that performance of contractual obligations must be precise and exact for payment to be made. This means when a party completely and perfectly completes all his promises under the contract, then his obligation under the contract come to an end
What are the 4 exceptions to the doctrine of complete performance?
- Divisible obligations
- Substantial performance
- Wrongful prevention
- Voluntary acceptance of part performance
What does divisible obligations mean (as an exception to the doctrine of complete performance)?
Contractual obligations are divisible if the parties have agreed specific payments for each distinct part or stage of the contract. Once each part has been completed, the contractor is entitled to be paid in full for that part
What does substantial performance mean (as an exception to the doctrine of complete performance)?
If a contractor has completed the agreed work but it is slightly defective they may not be entitled to the price, but they will be entitled to the price less the cost of putting right the defect. What constitutes work being slightly defective? As a general rule, as long as the cost of rectifying the problem is not more than 1/14 of the contract price, the court is likely to accept that the work has been substantially performed
What does wrongful prevention mean (as an exception to the doctrine of complete performance)?
If a party is wrongfully prevented from completing their obligations they will be entitled to either damages or a reasonable sum in restitution. Remember that there are only very limited circumstances that a non-defaulting party may be justified in terminating the future performance of a contract (when there has been a repudiatory breach)
The term implied by s 13 of the SGSA 1982 into business-to-business contracts that service/work will be carried out with reasonable care and skill is an innominate term. It is in relation to breach of this term that problems may arise. How bad does the work have to be before the employer is justified in terminating the contract? If an employer terminates in circumstances falling short of a serious enough breach, then that will be wrongful prevention and a repudiatory breach by the employer
What does voluntary acceptance of part performance (as an exception to the doctrine of complete performance)?
Where a party partly performs his contractual obligations and the other party voluntarily accepts the partial performance than the supplier is entitled to a reasonable sum for what he has done. The non-defaulting party must have a genuine choice whether, or not, to accept the part performance (if he has no choice because the supplier built something on the non-defaulting party’s land and then abandoned the job, it doesn’t count)
What case illustrates the voluntary acceptance of part performance (as an exception to the doctrine of complete performance)?
Sumpter v Hedges [1898] 1 QB 673. A builder agreed to construct 2 houses and a stable on the defendant’s land for £565. However, he abandoned the project after completing £333 worth of work. The defendant had to complete the work himself using materials left behind by the builder. The builder claimed a reasonable sum for work done and materials supplied. The claim for the work failed as the defendant had no choice but to accept what had been done. However, the defendant did have a choice whether, or not, to use the materials that had been left behind and so was ordered to pay a reasonable sum for those
