9 - Discharge Flashcards
What rights does an innocent party have when there has been a breach of contract, particularly regarding termination?
An innocent party may have the right to terminate the future performance of the contract under two main circumstances:
- Breach of Condition: A breach of a particularly important term of the contract.
- Very Serious Breach of Innominate Term: A serious breach of a term classified as innominate.
These are called repudiatory breaches—breaches allowing the non-defaulting party to treat the breach as having brought the contract to an end.
The innocent party can choose to:
- Affirm the contract: Treat the contract as ongoing.
- Discharge the contract: Treat it as terminated.
- (This even in the case of a repudiatory breach).
Breach does not automatically terminate the contract; the innocent party decides whether to end it.
If the party affirms the contract, they cannot later change their mind; affirmation is a bar to termination.
Example: If Attwal breaches a condition of Stage 3 in building a house for Barot, Barot can choose to terminate or affirm the contract. If she terminates, both parties are discharged from future performance and she can sue for damages if there is loss.
What are the ways in which a contract might be discharged?
A contract might be discharged in one of the following ways:
(a) Performance;
(b) Expiry
(c) Agreement;
(d) Breach; or
(e) Frustration.
When can a contract be discharged by expiry?
- A contract will expire when it is completed according to its own terms.
- Contract expiration is often by date ie the parties incorporate a term in the contract which stipulates when the contract comes to an end.
For example, the contract provides that the contract will expire 12 months after the commencement date.
A contract can also expire based on the occurrence of an event. For example, a contract may include a term that the supplier is to deliver goods to the buyer within a given time frame and upon delivery the contract comes to an end.
Under what circumstances can a party be excused from non-performance of a contract due to frustration?
The doctrine of frustration applies when:
- An unforeseen event occurs that makes performance impossible or radically different.
- The event must be beyond the ordinary risks that the parties could have anticipated when entering the contract.
- It must be something beyond the control of either party.
Thus, when an unforeseen event renders performance very different or impossible, the contract will be terminated by frustration.
Frustration serves as a defence against allegations of breach of contract.
Example: If a fire destroys a community centre hired for an event, the contract is frustrated as the subject matter is destroyed.
What are some categories of circumstances that can render a contract’s performance ‘radically different’?
Government Intervention: Actions taken by the government that affect performance.
Unavailability of a Specific Person: When a crucial person to the contract is unavailable.
Illegality: When the subject matter of the contract becomes illegal.
Destruction of the Subject Matter: If the object of the contract is destroyed.
Non-occurrence of a Fundamental Event: Failure of an event that is crucial to the contract.
In all cases, it is a question of degree.
How does delay relate to the doctrine of frustration?
Delay is not a category of frustrating event itself. Generally:
- Not every case of delay will frustrate a contract; delay often indicates a breach.
Relevant factors in determining if delay frustrates the contract include:
- Whether there are contract provisions for consequences of delay.
- The length of the delay relative to the contract duration.
- Any specified time for obligations to be performed.
- Whether resuming performance is radically different from the original contract.
Example: In Metropolitan Water Board v Dick Kerr [1918], an interruption caused by World War I was deemed a frustrating event due to its unprecedented nature.
How does the foreseeability of an event impact a party’s ability to successfully invoke the doctrine of frustration in contract law?
A party will not be able to plead the doctrine of frustration if the event causing their inability to perform the contract was foreseeable.
- If the reason for non-performance is due to a predictable common event, such as a road closure preventing the timely delivery of machine parts, the defence is generally not available.
- This principle emphasises the importance of considering potential risks when entering into a contract.
- This also helps to cut down on cost and litigation risks.
Parties are often advised to explicitly include provisions for unexpected events in their contracts to reduce risks and clarify obligations in exceptional circumstances.
When a contract contains a ‘force majeure’ clause, it governs the situation, eliminating the need for the doctrine of frustration. This is because from this point on it ceases to be something unexpected that is radically different from what was undertaken by the contract, rather it becomes governed by the contract.
Key points to note:
- Illegality can never be provided for in the contract.
- Force majeure clauses must satisfy the reasonableness test under s 3 of the UCTA 1977 and must satisfy the reasonableness test in order to be upheld as they effectively excuse a party from non-performance in the specified circumstancs.
Why is the concept of ‘something beyond the control of either party’ critical when determining whether the doctrine of frustration can be applied in a contractual dispute?
For the doctrine of frustration to apply, the event causing non-performance must be beyond the control of either party.
- If the frustrating event arises due to the fault or choice of the party alleging frustration, that party cannot successfully defend against a claim of breach of contract.
- The law operates on the principle that a party should not be excused from consequences stemming from their own actions.
This principle is illustrated by the case The Super Servant Two, where the defendants’ decision to prioritise another contract led to their inability to perform, resulting in a finding that the contract had not been frustrated.
What are the legal consequences that follow when a contract is frustrated, and how does the Law Reform (Frustrated Contracts) Act 1943 influence this process?
Upon frustration, the contract is automatically terminated by law, releasing both parties from all future obligations.
Neither party can claim breach of contract in relation to the frustrating event.
The Law Reform (Frustrated Contracts) Act 1943 outlines the following key points regarding payments:
- Money paid before the event can be recovered.
- Money that should have been paid before the event need not be paid.
- The court has discretion to allow recovery of expenses incurred by the payee out of the total sums paid or payable prior to the event.
For example, if one party paid a deposit and the other incurred expenses, the court may award an amount based on the total payments or the expenses incurred, whichever is lower.
How does the existence of valuable benefits conferred before a frustrating event affect the court’s determination of compensation?
If one party has conferred a valuable benefit on the other prior to the frustrating event, the court may order payment of a ‘just sum’ for that benefit.
- The determination of what constitutes a ‘just sum’ is influenced by various circumstances, including the effect of the frustrating event and any sums forfeited by the benefitting party.
- For instance, if a party incurs expenses for work completed before the frustrating event, the court assesses these expenses against the contract’s context.
- However, if the benefit is entirely negated by the frustrating event, as in the example where a boat was destroyed before use, the ‘just sum’ might be minimal or nil.
Provide a summary of frustration.
If an unforeseen supervening event occurs that was beyond the control of either party and
made performance of the contract impossible, or otherwise radically different, the parties
are discharged from their future obligations and the LR(FC)A 1943 determines how any losses
should be borne by them.
If a supervening event/ change of circumstances falls outside the doctrine of frustration it is
a breach of a contract, and/ or is governed by the contract itself.
As to whether the matter is governed effectively by a force majeure clause is a matter of construction of the contract itself. In the majority of commercial contracts, the parties make express provision for what is to happen and this is mainly why there are so few decided cases that have been brought before the courts under the 1943 Act
What is the doctrine of complete performance in contract law, and what are its implications for payment?
The general rule is that performance of contractual obligations must be precise and exact, known as the doctrine of complete performance.
If one party has to pay only after the other has performed their obligations under the contract, and if that performance is not precise and exact:
- The payer does not have to pay any part of the price.
- They cannot recover money already paid unless there has been a total failure of consideration.
However, there are exceptions to this.
When can a contract be discharged by performance?
The entire obligations rule:
- A contractual obligation is discharged by a complete performance of the obligation.
- The promisee is entitled to the benefit of complete performance exactly according to the promisor’s ‘undertaking’.
- A promisor who only performs part of their obligation is not discharged from that obligation.
Example: Imagine that a contract provides that A will pay B after B has performed its obligations (such as providing a service). B cannot bring a claim for the payment until performance is entirely complete.
Nor, as a general rule, can B bring a claim for half of the payment when it has provided half the service, even if half the service is of value to the other party. B has to entirely complete performance, and then it is entitled to the entire payment.
What are the key exceptions to the doctrine of complete performance that allow for partial recovery?
The doctrine of complete performance could produce unfair results if applied universally; thus, there are exceptions that allow for some payment even when contractual obligations are not performed precisely.
The exceptions are:
Divisible obligations: Contractual obligations are divisible if the parties have agreed on specific payments for each distinct part or stage of the contract.
Substantial performance: If a contractor completes the agreed work but it is slightly defective, they may not be entitled to the full price but will receive payment less the cost of rectifying the defect.
Wrongful prevention: If a party is wrongfully prevented from completing their contractual obligations, they will be entitled to either damages or a reasonable sum in restitution for what has already been done.
Voluntary acceptance of part performance: Where a supplier of goods or services partly performs their contractual obligations and the other party voluntarily accepts this partial performance, the supplier is entitled to a reasonable sum for their work.
How do divisible obligations affect payment entitlement in contract performance?
Contractual obligations are considered divisible if the parties have agreed specific payments for each distinct part or stage of the contract.
Each part or stage is then treated like a separate contract; once it has been completed, the contractor is entitled to be paid in full for it.
For example, Brooks agrees to decorate some rooms in Sarah’s house, with specific payments:
- £200 for painting the kitchen,
- £400 for the dining room,
- £300 for a bedroom.
He paints the kitchen and dining room but abandons the job before completing the bedroom, thus entitled to payment for the kitchen and dining room only.
