Chapter 13: Discharge

Question 1

1 Introduction to Discharge

Answer 1

Every contractual obligation gives rise to a corresponding contractual right. Where the obligation of one party is discharged, the corresponding right of the other party is extinguished. Where all obligations arising under a contract are discharged and all rights thus extinguished, the contract is discharged.

A contract might be discharged in one of the following ways:
(a) Performance;
(b) Expiry;
(c) Agreement;
(d) Breach; or
(e) Frustration.
You will consider each of these in turn.

Question 2

2 Discharge by expiry and by performance

Answer 2

2.1 Discharge 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.

Question 3

2.2 Discharge by performance

Answer 3

2.2.1 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.

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

Question 4

Key case: Cutter v Powell (1796) 6 Term Rep 320

Answer 4

Facts: Cutter agreed to serve on a ship from Jamaica to Liverpool. The defendant, Powell, agreed
in return to pay Cutter 30 guineas (which was four times the going rate) ‘provided he proceeds,
continues and does his duty […] from hence to the port of Liverpool’. Cutter died at sea some
seven weeks into the voyage and nineteen days short of Liverpool. Cutter’s widow brought an
action to recover a proportion of the agreed contract price.

Held: the action failed. The contract was said to be entire. Cutter was obliged to perform the
given duty fully before he could demand payment. As the contract had not been completely
performed the widow was entitled to nothing.

Question 5

2.2.2 Exceptions to the entire obligations rule: Acceptance of partial performance

Answer 5

Where one party has given only partial performance of the contractual obligations, it is possible
that the innocent party, rather than reject the work done, might accept that part of the
performance. However, it should be noted that such an acceptance of partial performance is at
the discretion of the innocent party. If the innocent party voluntarily accepts partial performance,
then the party in default will be entitled to payment on a quantum meruit basis.

Quantum meruit (meaning as much as is deserved) is a remedy whereby the claimant may be able to claim a reasonable sum so that the defendant is not unjustly enriched. The court will assess the value of a
quantum meruit award on an objective basis using the information available to it, for example the
usual market price for goods or services

Question 6

Sumpter v Hedges (1898) 1 QB 673

Answer 6

Sumpter had agreed to build two houses with stables on Hedges’ land, in return for a fixed price. After completing work worth around half of the contract
price, Sumpter told Hedges that he did not have enough money to finish the job, so Hedges did it
for himself.

Since the work had been done on the innocent party’s land, the court felt that the innocent party had no choice but to complete the work. He was in possession of what he could not fail to keep. This was not voluntary acceptance of partial performance as the innocent party did not have the option to take or not to take the benefit of the work done.

If the court had found otherwise, however, the builder would have been entitled to a quantum meruit to compensate him for the value of the work done. In the event, he was entitled to compensation for the value of the materials which he had left on site which had not been incorporated into the
building which the innocent party used to complete the work. This was because the innocent
party had the choice as to whether or not to use these, as they could have been returned.

Question 7

Substantial performance: Defect

Answer 7

Where a contract has been substantially performed, it may be possible for the party who rendered such substantial performance to obtain the contract price subject to a deduction to reflect the cost of remedying the ‘defect’ (ie the aspect which has not been performed).

When considering such a plea, the court considers the nature and extent of the defect, which is done by
measuring the cost of remedying the defect against the contract price. If the defect is too serious,
the party who rendered the defective performance will not be entitled to recover any money.

However, if substantial performance is found to have been rendered, then the party will be entitled
to the contract price subject to a deduction.
In defining what is ‘substantial performance’, the court takes a similar approach to when deciding
whether has been a repudiatory breach of contract: the question is whether the defect goes ‘to
the root of the contract’.

Question 8

Hoenig v Isaacs [1952] 2 ALL ER 176

Answer 8

Hoenig agreed to redecorate completely and refurnish Isaacs’ one bedroom flat. Hoenig finished the work, but the job had some defects which would
require further attention eg the wardrobe he fitted needed a new door, and the built in bookcase
was slightly too short for the space. The total value of the work was around £750, and the repairs
would cost around £55. Hoenig sued for payment but admitted that Isaacs was entitled to reduce
the payment to reflect the cost of repairs. Isaacs said that entire performance was a condition
precedent to any payment, and therefore, following Sumpter, he only had to pay a quantum
meruit (in return for taking the benefit of the work)

Question 9

Hoenig v Isaacs [1952] 2 ALL ER 176 Judgement

Answer 9

The court held in this case, the contract had been substantially performed, and all that was left
were ‘defects and omissions’. These did not go to the root of the contract. Hoenig was therefore
entitled to the contract price, less a deduction for the defects (probably calculated as the cost of
remedying the defects).

Question 10

Bolton v Mahadeva [1972] 1
WLR 1009

Answer 10

The claimant undertook to install a central heating system in the defendant’s house at
a cost of £560. The system did not work, and the defendant refused to pay any money. The cost
of remedying the defects would have been £174. The court had to determine whether the claimant
was entitled to recover any payment under the contract.

Question 11

Bolton v Mahadeva [1972] 1
WLR 1009 Judgement

Answer 11

It was held that whether or not the contract had been substantially performed should be viewed
with regard to the purpose of the contract and the circumstances as a whole. The purpose of the
contract in this case was to install a central heating system to heat a house. If that system did not
function adequately and moreover produced harmful fumes, then it was not possible to say that the contract had been substantially performed. Accordingly, the claimant was not entitled to
recover any of the contract price but, had he offered to remedy the defects, and had then done
so, he would be justified in claiming the contract price.

Question 12

Divisible obligations

Answer 12

Some contracts are clearly intended to be divided into parts, eg the payment of a salary under a
fixed contract of employment. If this is the case, then the performing party is entitled to payment
for each part which is performed. However, the question as to whether a contract is divisible or
entire depends upon the intention of the parties.

Question 13

Wrongful prevention of performance

Answer 13

Where one party performs part of the agreed obligation, and is then prevented from completing
the rest by some fault of the other party, they will be entitled to payment despite not having
completed the rest of the obligation (Planche v Colborn (1831) 131 ER 305). The innocent party has
two options:
(a) To sue for damages for breach of contract; or
(b) To claim a quantum meruit.

Question 14

2.2.3 Defences to allegations of failure to perform

Tender of performance:

Answer 14

In an action for breach of contract for failing to perform an obligation, it is a good defence for the
defendant to show that they ‘tendered performance’. In order for a plea of tender to be successful, the promisor must show that they unconditionally offered to perform their obligations in accordance with the terms of the contract, but that the promisee refused to accept such performance.

For instance, if the seller delivered goods but the purchaser refused to accept delivery, the seller would be relieved of liability for failing to deliver. In relation to payment of a debt, a plea of tender does not discharge the debt. However, it would prevent the creditor from claiming interest or damages on that debt subsequent to the tender of performance.

Question 15

2.3 Summary

Answer 15

• A contract will expire when it is completed according to its own terms. Contract expiration is
  often by date but a contract can also expire based on the occurrence of an event.
• Generally, an obligation is discharged by complete performance of the obligation. Until the
  obligation is completely performed, the performing party is not entitled to payment. There are
  four key exceptions:
• If one party accepts partial performance, the other party is entitled to payment for the
  partial performance on a ‘quantum meruit’ (as much as is deserved) basis;
• If one party has substantially performed the contract, they may be entitled to the contract
  price subject to a deduction for the cost of remedying the defect;
• Some contracts are divisible, and a party is entitled to payment for each part. This turns on
  the intention of the parties;
• Where a party is prevented from completing performance by the other party’s default, they
  can sue for damages for breach of contract or claim a quantum meruit.

Question 16

3 Discharge by agreement

Answer 16

3.1 Introduction
On the basis that something may be destroyed in the same manner by which it was created, a
contractual obligation may be discharged by agreement. This may occur in one of two ways:
(a) By a subsequent binding contract between the parties; or
(b) Alternatively, by operation of a term of the original contract.

Question 17

3.2 Discharge by subsequent binding contract

Answer 17

The essence of this concept is the formation of a new contract, and this may occur in several
ways.

1) New Contract to Waive Rights of old Contract: For instance, where both parties have obligations which remain unperformed, the contract may
be discharged by mutual waiver. This is a new contract by which each party agrees to waive their
rights under the old contract in consideration for being released from their obligations under the
old contract.

Also known as Termination Agreement: This type of arrangement is very common in commercial situations where parties wish to end an existing contract and achieve commercial certainty. They will often agree the terms of a termination agreement to release and settle any liabilities under the original contract so that they can be sure that they will have no further liabilities or obligations arising from it in the future.

Question 18

Accord & Satisfaction

Answer 18

Accord (A agrees to release B from its obligations
under the old contract.)

Satisfaction (B agrees to release A from its obligations
under the old contract)

For this discharge to be effective, two elements must be present, sometimes called ‘accord and
satisfaction’: there must be agreement that the obligation will be released (‘accord’), and there
must be consideration for the promise to release a party from the obligation (‘satisfaction’).

Question 19

Difficulties relating to necessities

Answer 19

Accord (A agrees to release B from its obligations
under the old contract)

Satisfaction (Arguably there is no satisfaction. B cannot meaningfully agree to release A from its
obligations under the old contract, because A
has already performed those obligations)

Where one party has performed its obligations in their entirety but something remains to be done by the other party.

Question 20

Agreement Under Deed

Answer 20

One way of resolving this issue is that the party to whom the obligation is owed may release the
other party by a subsequent agreement under deed. This avoids the need for consideration
altogether, because a gratuitous promise (one without any consideration) is enforceable if made
in a contract in the form of a deed.

There is no need for accord and satisfaction when a party is released from an obligation by
deed.

Question 21

Accepting something different in place of former obligations

Answer 21

Accord (A agrees to release B from its obligations
under the old contract)

Satisfaction (B agrees to accept a new and different
obligation to the existing obligation – such as
paying instalments earlier)

Alternatively, the party to whom the obligation is owed may provide consideration by agreeing
with the other party to accept something different in place of the former obligation, for example
the accelerated payment of a sum payable in instalments:

Question 22

Key point on accord & satisfaction

Answer 22

Where there has been accord and satisfaction, the former obligation is discharged. The essential
point is that, unless there is a new consideration, there can be no satisfaction, ie there can be no
discharge of the previous agreement and no formation of an agreement on new terms.

Question 23

3.3 Discharge by the operation of a term in the contract

Answer 23

There is no reason why a contract should not contain a term providing for the discharge of
obligations arising from the contract. Such a term may be either a condition precedent or a
condition subsequent.

Question 24

3.3.1 Condition precedent

Answer 24

A condition precedent is a condition which must be satisfied before any rights come into existence. Where the coming into existence of a contract is subject to the occurrence of a specific event, the contract is said to be subject to a condition precedent. The contract is suspended until
the condition is satisfied. Where a condition precedent is not fulfilled, there is no true discharge
because the rights and obligations under the contract were contingent upon an event which did not occur, ie the rights and obligations never came into existence in the first place.

Question 25

Example of condition precedent

Answer 25

Certain companies are required by law to obtain approval from shareholders before carrying out
high value contracts. When agreeing the high value contract, the company could include a clause
stipulating that it is a ‘condition precedent’ of the contract that approval is provided by the shareholders. Until that approval is provided, the remaining rights and obligations in the contract
are not binding. If the shareholders refuse to provide the approval, then the contract never becomes binding, and the company does not infringe the law which prevents the high-value contract.

Question 26

3.3.2 Condition subsequent

Answer 26

A condition is subsequent is a term providing for the termination of the contract and the discharge
of obligations outstanding under the contract, in the event of a specified occurrence. Condition subsequent: A condition which, if satisfied, releases a party from binding obligations.

Question 27

3.4 Summary

Answer 27

• The parties can discharge a contract by agreeing to do so in a subsequent binding contract.
• For this to happen, the new contract needs to be supported by consideration (unless it is
  effected by deed). Particular care needs to be taken where one party has performed the
  old contract in full, in which case being released from it will not be good consideration.
• A contract can include terms providing its own discharge:
• A ‘condition precedent’ is a condition that must be satisfied before any rights come into
  existence. This is not discharging a contract in the strict sense, it is preventing it from
  becoming binding in the first place.
• A ‘condition subsequent’ is a term providing for the termination of the contract and the
  discharge of obligations outstanding under the contract upon the happening of a specific
  event.

Question 28

4 Discharge by breach

Answer 28

4.1 Repudiatory breach of contract at common law: The usual remedy for breach of contract is an award of compensatory damages, ie monetary compensation. Such a remedy is in principle available for any breach of contract, but a party does not always acquire a right to terminate the contract as a result of a breach of contract.

However, in certain circumstances, the innocent party may, in addition, treat the contract as having been terminated for repudiatory breach. This is where one party has breached a term of the contract which is either a condition or an innominate term which is to be treated as a condition. The distinction between conditions and innominate terms is not addressed in this section.

Question 29

The consequences of a breach of contract

Answer 29

1. Identify breach and categorise the term breach
2. Breach of warranty (or innmominate term treated as such) = Damages only
3. Breach of condition (or innominate term treated as such) = Damages plus right of election

Termination for repudiatory breach is therefore one way in which a contract may come to an end. Generally, where there has been a repudiatory breach, a party has a choice as to whether to
terminate the contract or to affirm it (keep it in place). The choice is not entirely unrestricted. We
will consider the effect of termination before considering this choice

Question 30

4.2 Anticipatory breach

Answer 30

It is important to note at this stage a particular type of breach of contract known as ‘anticipatory
breach’. This is where a party indicates they will not perform their contractual obligations in advance of the date for performance. A party who, by words or conduct, leads a reasonable person to conclude that they do not intend to perform their part of the contract, is said to have ‘renounced’ the contract. The innocent party has an immediate right to ‘accept’ the renunciation and to treat the contract as terminated (Hochster v De la Tour (1853) 2 E&B 678).

Question 31

Performance of contractual obligations

Answer 31

An indication by a party that he will not perform their contractual obligations in only a minor regard will not give rise to the right to terminate. If a party wants to rely on an anticipatory repudiatory breach to terminate the contract then it will need to demonstrate that if the breach occurred at the time performance was due it would have been repudiatory.

Repudiatory breach: Where one party has breached a term of the contract which is either a
condition, or an innominate term which is treated as a condition, entitling the other party (in
principle) to treat the contract as terminated.

Anticipatory breach: Where a party indicates they will not perform their contractual
obligations in advance of the date for performance.

Question 32

4.3 What is the effect of terminating a contract for repudiatory breach?

Answer 32

Claim of damages: Where the contract is terminated following a repudiatory breach this puts an end to all primary obligations of both parties remaining unperformed. Furthermore, the innocent party can claim damages not only arising from the specific breach but also the loss of the contract caused by the
termination of the contract as a whole.

Question 33

Prospective Rights & Obligations

Answer 33

The discharge from remaining rights and obligations is ‘prospective’ only - any rights and
obligations which have accrued before termination remain enforceable. For example, if a
customer owes fees for services provided prior to termination then it would still be obliged to pay
them. However, it would no longer be obliged to accept and pay for services going forward.

Question 34

4.3.1 The risks of wrongful termination

Answer 34

Repudiatory breach often involves a high degree of risk for the client, in particular with regard to the risks of wrongful termination. repudiatory breach often
involves a high degree of risk for the client, in particular with regard to the risks of wrongful
termination.

Imagine that a party (A) gives notice to terminate its contract with another party (B) on the grounds of a breach by B which it believes to be a breach of a condition and therefore repudiatory.

Question 35

Renunciation of Future Performance

Answer 35

If a court later finds that the breach was of a warranty, then A had no right to terminate and its notice to do so was wrongful. In this context, A’s wrongful notice will be regarded as a ‘renunciation’ of future performance of the contract and/or a serious breach of contract and may be accepted by the other party, B (the original contract breaker), as repudiating the contract.

Question 36

Risks of Terminating Party

Answer 36

This can be disastrous commercially and the risks for the terminating party are exacerbated by the fact that unless the term which has been breached has been defined as a condition then the categorisation of the term will depend on the application of the Hong Kong Fir test. This is a high bar and can be a difficult point to establish. It is generally no excuse for the aggrieved party, A, to plead that they acted in good faith, believing that B’s breach justified the remedial action that
was taken

This uncertainty of the Hong Kong Fir test combined with the risks described above often leads commercial parties to inject certainty into their contracts by explicitly agreeing a list of breaches which will give rise to a right to terminate.

Question 37

4.4 The right of election

Answer 37

Where there has been a repudiatory breach of contract, the contract is terminated only if the
aggrieved party makes the election (meaning choice) to treat the breach as repudiating the
contract, ie putting an end to all unperformed primary obligations. The innocent party must make their decision to terminate the contract known to the party in default (Vitol SA v Norelf Ltd, The Santa Clara [1996] 3 All ER 193).
The innocent party is allowed a period of time in order to decide between these two alternatives.

Question 38

4.4.1 The benefits of affirmation

Answer 38

If the innocent party elects to affirm the contract, the contract survives and the rights of the innocent party are preserved. There may be many commercial reasons why this might be a better option for the innocent party than termination. The precise rationale will depend on the circumstances. For example, the contract may relate to a major project whereby affirming and continuing with the project and allowing the contractor to finish is a better option than abandoning it altogether and having to sue for damages and find another contractor

Question 39

Contractual Charges

Answer 39

In the alternative, the innocent party may calculate that if the contract can be performed such that a right to charge the contractual charges as a debt will arise, then it will put itself in a better and more certain financial position than if it terminates the contract and brings a claim for unliquidated damages. This is because the value of a damages claim is uncertain (you will study damages claims in a later chapter). However, if the contract is affirmed and can be performed,
the right to the contractual charges is relatively clear and certain.

Question 40

White and Carter (Councils) Ltd v McGregor [1962] AC 413

Answer 40

Where a party has indicated an intention not to perform its obligations (ie has renounced the contract – see earlier in this section), the innocent party can still affirm the contract, perform its own obligations and claim the sum due under the contract in a debt action

If a party does affirm a contract, it is important to note that the innocent party will retain a claim for damages arising from the breach but cannot terminate as a result of it (so the damages would not include compensation for loss of performance of the contract as a whole). The election is between accepting the contract as discharged or continuing. The election is not a waiver of damages from the relevant breach.

Question 41

4.4.2 How a contract is affirmed

Answer 41

There must be evidence of a very clear and unequivocal commitment to continuing with the contract.

Question 42

4.4.3 Limits on affirmation of a contract

Answer 42

There are two important limitations on the innocent party’s right to affirm the contract in response to a repudiatory breach. These are:
(a) The co-operation of the breaching party is required for continued performance of the
contract (Hounslow London Borough Council v Twickenham Garden Developments Ltd [1970]
3 WLR 538); or

This qualification should be uncontroversial - if the innocent party requires the
co-operation of the other contracting party in order to fulfil their obligations under the contract, this will prevent the innocent party claiming the contract price.

Question 43

4.4.3 Limits on affirmation of a contract

Answer 43

(b) The innocent party has no ‘legitimate interest, financial or otherwise’ in affirming the contract and continuing with performance (Ocean Marine Navigation Ltd v Koch Carbon Inc (The Dynamic) [2003] EWHC 1936 (Comm)).

It is only in extreme cases that the innocent party will not have a legitimate interest in affirmation and will only operate if the defendant can show that i) damages would be an adequate remedy for the claimant and ii) an election to keep the contract alive would be
unreasonable.

Question 44

5 Discharge by frustration

Answer 44

The modern definition of frustration is provided by Lord Radcliffe: [F]rustration occurs whenever the law recognises that, without default of either party, a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. […] It was not this that I promised to do.

Question 45

4.5 Summary

Answer 45

• Any breach entitles a party to damages in principle, but a breach of a condition (or an
  innominate term treated as a condition) – a repudiatory breach - also entitles a party to
  terminate the contract.
• A party is not obliged to terminate upon a repudiatory breach – it has a choice to affirm or to terminate.
• The innocent party has a period to make this choice. A decision to terminate must be communicated. Affirmation requires an unequivocal commitment to continue with the contract.
• If a party terminates, it can seek damages not only arising from the specific breach but also the loss of the contract caused by the termination of the contract as a whole.
• If a party affirms, the parties’ obligations under the contract remain in place. For example, if the party in breach is obliged to make further payments under the contract in the future, this obligation will remain in force.

Question 46

Frustration ends contracts immediately

Answer 46

From this we can understand that frustration is about events that are beyond the control of either party, occur after the formation of the contract and which render performance radically different from that which was agreed to at the time the contract was formed.

Question 47

Effect of frustration

Answer 47

The effect of frustration is broadly to relieve a party from further obligations under the contract, so they do not have to meet these radically different obligations. If a contract is frustrated, it is brought to an end automatically: the parties have no choice in the matter. Frustration may be raised as a defence to an action for breach of contract.

Question 48

5.1 What might render performance radically different?

Answer 48

Performance may be radically different for a number of reasons, three of which will be considered
in this section:
(a) Performance is impossible;
(b) Performance is illegal; or
(c) The common purpose of the contract is frustrated.

It is important to note that this list of categories is not exhaustive, nor will all frustrating events fit neatly into one category or another. Indeed, a frustrating event may fit into more than one category. The whole factual matrix of the situation needs to be considered. These categories do, however, provide helpful guidance as to when performance will be considered by the court to be radically different. When considering whether a contract might be frustrated, you should use the categories as broad guidance to assist in applying the overarching principle.

Question 49

5.1.1 Impossibility and Unavailability

Answer 49

Case law shows that the doctrine of frustration may be invoked in circumstances where the
contract becomes impossible to perform due to the total or partial destruction of some object necessary to the performance of the contract.

Question 50

Key case: Taylor v Caldwell (1863) 3 B & S 826

Answer 50

In Taylor v Caldwell (1863) 3 B & S 826 the defendants granted the claimants a licence to use its music hall at a cost of £100 per concert. After the contract had been entered into but before the first performance, the music hall was destroyed. No provision had been made for this risk in the contract. The court held that the contract was frustrated due to the destruction of the music hall rendering it impossible to continue with the contract.

Question 51

Key case: Taylor v Caldwell (1863) 3 B & S 826

Answer 51

In Taylor v Caldwell the subject matter of the contract, ie the music hall, was destroyed.
Frustration may also operate where the event destroys an asset that does not form the subject matter of the contract in question, but rather is essential for the performance of the contract. For example, in Appleby v Myers (1867) LR 2 CP 651 a contract to install and maintain machinery in a factory was frustrated when the factory was destroyed by fire.

The factory was not the subject matter of the contract, but was nevertheless essential to its performance. Impossibility might be extended to situations of death or illness of one of the parties in a personal contract, especially where a specified individual is engaged to render a particular service.

Question 52

Condor v The Barron Knights Ltd [1966] 1 WLR 87

Answer 52

In Condor v The Barron Knights Ltd [1966] 1 WLR 87, the drummer in a music group was taken ill and only capable of working three or four nights a week, whereas the group had engagements for seven nights a week, such that the contract was frustrated because the drummer was not capable of performing the contract in the way intended

Question 53

The concept of unavailability

Answer 53

The concept of unavailability is common in shipping contracts. Even temporary unavailability may discharge a contract if the interruption is such as to make performance substantially different from what was originally undertaken. Thus, where a ship was requisitioned for a period of five months out of a year’s charterparty, the contract was frustrated: Bank Line v Arthur Capel & Co
[1919] AC 435.

Question 54

Tamplin SS Co Ltd v Anglo-Mexican Petroleum Co [1916] 2 AC 397

Answer 54

The court had to decide whether the requisitioning of a ship (for the purposes of war) in February 1915 frustrated a five-year charterparty which was to last until December 1917. The court held that it did not, on the basis that the war would soon be over and thus a considerable proportion of the charterparty would remain. In the circumstances, this was overly optimistic, but it nevertheless demonstrates
the problems facing a court in reaching satisfactory conclusions.

Question 55

Edwinton Commercial Corporation v Tsavliris Russ (Worldwide Salvage & Towage) Ltd, The Sea Angel [2007] EWCA Civ 547

Answer 55

The court made clear that the amount of time left to run in the contract is the starting point only in establishing frustration. A multifactorial approach should be adopted when assessing whether unavailability was sufficient to amount to frustration. The factors to be considered included:

Question 56

5.1.2 Supervening illegality

Answer 56

Frustration may also occur where a change in the law or state intervention renders performance illegal.

Question 57

Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943]
AC 32

Answer 57

Facts: a contract for the sale of machinery provided for it to be shipped to a port in Poland. That port was then occupied by the enemy during the Second World War.
Held: the contract was frustrated – the parties could not be obliged to perform a contract when to do so would be illegal.

Question 58

5.1.3 Frustration of purpose

Answer 58

Where the common purpose for which the contract was entered into can no longer be carried out because of some supervening event, the contract may be frustrated despite the fact that it is still physically possible to carry out the contract. It is important to remember that it must be the joint purpose of the parties. It is not enough that it is the purpose of just one party.

Question 59

Krell v Henry [1903] 2 KB 740

Answer 59

The defendant agreed, by a written contract, to hire a room in a flat on Pall Mall from the plaintiff for two days. The purpose in hiring the room was to view the coronation procession that was to pass along the street below on those days. However, no express mention was made of this in the contract. King Edward VII fell ill and the processions did not go ahead as planned

Question 60

Court of Appeal

Answer 60

The Court of Appeal held that the common foundation of the contract was that the room was hired to view the king’s procession and this purpose had been frustrated. This is a highly unusual case. The rooms were hired out for the day only and both parties understood that the only purpose in hiring the rooms was to have a view of the procession.

Question 61

Herne Bay Steamboat Co Ltd v Hutton [1903] 2 KB 683

Answer 61

The plaintiff hired their steamboat to
the defendant ‘for the purpose of viewing the Naval Review and for a day’s cruise round the fleet’. The naval review was cancelled but the cruise could still go ahead. The contract was not frustrated. Viewing the naval fleet might have been the principal motivation for the defendant but it was not the common foundation of the contract.

Question 62

Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch)

Answer 62

The European Medicines Agency (EMA) argued that its lease of its headquarters premises in Canary Wharf was frustrated when it was forced to move its headquarters to Amsterdam following Brexit. Mr Justice Smith found that there was no common purpose which had been frustrated and that the parties had divergent purposes when they entered into the bargain set out in the lease. From the above, Krell v Henry can be seen as a very narrow decision which has been distinguished
rather than followed.

Question 63

5.2 Limitations on the doctrine of frustration

Answer 63

The doctrine of frustration, as Viscount Simonds stated in Tsakiroglou Co Ltd v Noblee Thorl GmbH [1962] AC 93, ‘must be applied within very narrow limits’. While in Pioneer Shipping Ltd and others v BTP Tioxide Ltd, The Nema [1981] 2 All ER 1030, Lord Roskill remarked that ‘the doctrine is not lightly to be invoked to relieve contracting parties of the normal consequences of imprudent
commercial bargains’. It is unsurprising, therefore, that the law has developed a number of limitations on the doctrine.

Question 64

5.2.1 Contracts which become more difficult or expensive to perform Key case: Davis Contractors v Fareham Urban District Council [1956] AC 696

Answer 64

Facts: Davis Contractors agreed to build 78 houses within eight months for Fareham Council. The work took three times as long as it was supposed to, due to a lack of skilled labour, occasional stoppages due to a shortage of materials including bricks, timber and plumbers’ goods, and an exceptionally long frost followed by excessively muddy conditions. Davis Contractors incurred an
additional cost of £17,600 in this time, on top of the £92,400 contract price, and they sought to claim this additional cost from Fareham. As the law stood at that time, if the contract had been frustrated, they would have been entitled to do so.

Held: ‘[W]here, without the default of either party, there has been an unexpected turn of events, which renders the contract more onerous than the parties had contemplated, that is [not] by itself a ground for relieving a party of the obligation he has undertaken.

Question 65

5.2.2 Self-induced frustration

Answer 65

Frustration will not apply where the event was induced by one of the parties, ie because the event was their fault or choice. It is for the party alleging self-induced frustration to prove that it is. If they succeed in showing the frustrating event is self-induced then the defence of frustration fails and the defendant will be in breach of contract

Question 66

J Lauritzen AS v Wijsmuller BV (‘Super Servant Two’) [1990] 1 Lloyd’s Rep 1

Answer 66

The defendants agreed to transport the claimant’s oil rig using one of their barges, either Super Servant One or Super Servant Two. The defendants elected to use Super Servant Two for this contract and before the date of performance entered into other contracts to use Super Servant One. Super Servant Two sank. The defendants could not use Super Servant One as this was needed to perform the other contracts. The court held that it was the defendants choice to allocate Super Servant One to other contracts making it impossible to perform their contract with the claimants. This choice meant the defence of frustration failed – it was self induced.

Question 67

5.2.3 Foreseeable events

Answer 67

The doctrine of frustration is a means of allocating unforeseen risks. In Edwinton Commercial Corporation v Tsavliris Russ (Worldwide Salvage & Towage) Ltd, The Sea Angel [2007] EWCA Civ 547, [2007] 2 All ER (Comm) 634, Rix LJ summarised the relationship of foreseeability to the
doctrine of frustration

Question 68

5.2.3 Foreseeable events

Answer 68

In a sense, most events are to a greater or lesser degree foreseeable. That does not mean that they cannot lead to frustration. Even events which are not merely foreseen but made the subject of express contractual provision may lead to frustration: as occurs when an event such as a strike, or a restraint of princes, lasts for so long as to go beyond the risk assumed under the contract and to render performance radically different from that contracted for. If you could have foreseen an event, but failed to make provision for it in your contract, the doctrine of frustration will be less likely to apply.

Question 69

In Flying Music Company Limited v Theater Entertainment SA [2017] EWHC 3192 (QB)

Answer 69

The negative effect on a contract in Greece of civil unrest and the economic crisis could not amount to frustration because at the time the contract concluded there were already signs of unrest. Although Theater Entertainment had hoped matters would improve there was a risk that they might not and the parties were deemed to have had the opportunity to deal with this risk and allocate responsibility for it in the terms of the contract that was eventually concluded. The Court refused to re-allocate the risks by intervening in the contract and deeming it frustrated

Question 70

Canary Wharf (BP4) T1 Ltd v European Medicines Agency

Answer 70

However, in Canary Wharf (BP4) T1 Ltd v European Medicines Agency Mr Justice Smith found that the key test is whether the event would have informed the manner in which the parties assessed the risk of entering into the contract. Highly theoretical risks which the parties would not have taken into account would not be relevant: There will, no doubt, be many cases where something can be foreseen as a theoretical possibility, but where neither party can be criticised for failing to take it into account.

Question 71

5.2.4 Express contractual provision

Answer 71

The doctrine of frustration cannot override express and unambiguous contractual provision for the frustrating event. Commercial contracts often contain what is known as a force majeure clause, a clause that states what will happen to the contractual relationship between the parties should a particular set of circumstances (which could otherwise amount to frustrating events) materialise.

Force majeure clauses often refer to acts of terrorism, war and ‘Acts of God’. The inclusion of a force majeure clause enables the parties to allocate risks in relation to these events at the outset and may allow for the continuance of the contractual relationship in circumstances that would otherwise amount to frustration of the contract.

It is very unlikely that a party would be allowed to rely on the doctrine of frustration in relation to a particular event when the risk has already been provided for by the parties through a force majeure clause.

Question 72

5.3 Summary

Answer 72

• Frustration occurs when the law recognises, that without default of either party, a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it radically different.
• Examples include performance becoming radically different because:
• Performance is impossible;
• Performance is illegal;
• The parties’ common purpose is frustrated.
• A frustrating event is not something:
• Caused by the default of a party;
• Provided for in the contract;
• Which is merely an increase in expense/onerousness; nor
• Which the parties could reasonably have contemplated.

Question 73

6 The consequences of frustration

Answer 73

The Law Reform (Frustrated Contracts) Act 1943 deals with obligations arising prior to the
frustrating event.

The Act does not apply to future obligations. If a frustrating event occurs future obligations are automatically discharged by the common law. The Act deals with obligations arising prior to the frustrating event.
Section 1(2) of the Act makes the following provision:
* Money paid before the frustrating event can be recovered.
* Money that should have been paid before the frustrating event no longer needs to be paid.
* Expenses incurred by the payee (usually the supplier) can be recovered out of the total sum
paid/payable before the event. The recovery of expenses is at the discretion of the court and is
discussed further on the next page

Question 74

S1(2): Retention of Money

Answer 74

S1(2) gives the court a discretionary power to order such retention or recovery of money as it thinks just in all the circumstances to account for expenses incurred by the payee. The expenses incurred by the payee must be directly related to an attempt to perform the contract.

The amount retained or recovered is capped and cannot exceed (i) the actual expenses incurred and (ii) the amount paid or payable prior to the frustrating event. It is for the payee to establish that the expenses were incurred and that it is just for the court to deduct them from the sums paid or payable to them before the frustrating event

Question 75

Key case: Gamerco SA v ICM/Fair Warning (Agency) Ltd [1995] 1 WLR 1226

Answer 75

Mr Justice Garland’s held that burden or proof is on the payee (the party seeking to retain or
recover their expenses from the sum of money paid or payable in advance) to show that it is ‘just’ for him so to do. As to how much, he held that the court has a ‘broad discretion’.

The court therefore has a ‘broad discretion’ when considering whether and how much to allow the payee to retain or recover to account for his expenses under s 1(2) (provided it does not exceed the actual expenses incurred or the sums paid or payable in advance of the frustrating event)

Question 76

Non-monetary benefit, applying Section 1(2)

Answer 76

Where the benefit conferred before the frustrating event occurs is a non-monetary benefit, s 1(3) of the Act may be of some assistance. It provides that a party who has gained a valuable benefit under the contract before the frustrating event may be required to pay a just sum for it.

The task for the court when applying this subsection is, firstly, to identify and value the benefit conferred, and then, secondly, to make an assessment of the just sum that should be awarded. The amount awarded cannot exceed the value of the benefit obtained.

Question 77

BP Exploration Co (Libya) Ltd v Hunt (No.2) [1982] 1 All ER 925

Answer 77

Facts: Hunt owned the right to oil from a Libyan oil field. He could not afford to develop the oil field on his own, so he entered an agreement with BP whereby they would pay the development costs in return for (i) a half stake in the oil field, and (ii) reimbursement of some of the costs out of Hunt’s half, once the oil started pumping. In other words, Hunt would not have to contribute to the high costs of finding and extracting the oil in the field.

A key question was whether the valuable benefit gained by Hunt was the value of the work carried out by BP (ie the value of finding and developing the oilfield) or the value of the end benefit received by Hunt (significantly less, because the oil field was significantly devalued by having been expropriated by the Libyan Government).

Question 78

BP Exploration Co (Libya) Ltd v Hunt (No.2) [1982] 1 All ER 925 Judgement

Answer 78

Held: on the wording of the legislation it was clear that ‘benefit’ meant the end product of the claimant’s services, not the services themselves. So in this case, the lesser of the two options. The practical impact of this is that where the value of the benefit has been reduced to nil by the frustrating event, the provider of the ‘benefit’ has no claim. The defendant’s benefit under s 1(3) is
clearly not necessarily the value of the claimant’s performance.

Question 79

6.2 Summary

Answer 79

• Frustration discharges all future obligations. This happens automatically, irrespective of the
  parties’ wishes.
• Under the Law Reform (Frustrated Contracts) Act 1943: - Section 1(2) provides that money paid before the frustrating event can be recovered even if failure of consideration is only partial. Money payable but not yet paid ceases to be payable. But the court has a discretionary power within specified limits to allow the party returning the money (normally the seller/supplier) to retain a sum for expenses incurred in attempting to perform the contract.