Chapter 2 - Termination of contract

Question 1

What are the three ways a contract can be discharged?

Answer 1

• Performance
• Frustration
• Breach

Question 2

What is discharge by performance?

Answer 2

Performance is the normal method of discharge of a contract: each party fulfils or performs their contractual obligations and the agreement is then ended.

Question 3

Can a contract be discharged for partial or susbtantial performance

Answer 3

• For substantial performance the contract is considered discharged but damages may be payable for the parts incomplete
• For partial performance the contract is only considered discharged if the contract is severable

Question 4

If one party prevents performance of another, what can the other party do?

Answer 4

If one party prevents performance, the offer of performance by the other party is sufficient discharge of his obligations and he will be entitled to sue for damages for breach of contract, or alternatively bring a quantum meruit (literally ‘as much as he deserved’) action to claim for the amount of work already completed.

Question 5

What is discharge by frustration?

Answer 5

Where it becomes impossible to perform a contract through no fault of either party the contract will be discharged by frustration

Question 6

What main conditions must be met for a contract to be considered frustrated?

Answer 6

• The contract must have been possible when it was entered into.
• There does not exist another mode of performance possible, even if that way is more expensive and/or more difficult.

Question 7

Give examples of events or changes in circumstances where contracts have been frustrated (4)

Answer 7

1. Destruction of the subject matter
2. Personal incapacity to perform a contract of personal service
3. Government intervention
4. Non-occurrence of an event which is the sole purpose of the contract

Question 8

What are the consequences of frustration? (4)

Answer 8

1. Any money paid under the contract before the frustrating event is to be repaid.
2. Any sums due for payment under the contract cease to be payable.
3. Expenses incurred in the performance of the contract and before the contract was frustrated may be retained or recovered.
4. If either party has obtained a valuable non-monetary benefit under the contract before it was discharged, they may be required to pay to the other party all or part of that value, as appropriate.

Question 9

Define breach of contract.

Answer 9

Where a party does not perform their contractual obligation sufficiently, they are said to be in breach of contract, unless the contract has been discharged by frustration or they have some other lawful excuse.

Question 10

In which circumstances may a lawful excuse apply? (3)

Answer 10

1. Where they have tendered performance but this has been rejected.
2. Where the other party has made it impossible for them to perform
3. Where the parties have by agreement permitted non-performance

Question 11

What are the types of breach of contract? Define each (2)

Answer 11

• Repudiatory breach - a breach of a fundamental term of the contract by one party
• Anticipatory breach - where one party renounces contractual obligations explicitly or implicitly in advance by showing that they have no intention of performing them

Question 12

For repudiatory breaches what may the non-breaching party choose to do?

Answer 12

Treat the contract as discharged immediately and sue for damages

Question 13

For anticipatory breaches what may the non-breaching party choose to do?

Answer 13

• Treat the contract as discharged immediately and sue for damages
• Allow the contract to continue until there is an actual breach and take action at that time.

Question 14

What is important to remember about anticipatory breaches with regards to the non-breaching party allowing the contract to continue until there is an actual breach?

Answer 14

If the non-breaching party allows the contract to continue until there is an actual breach then the non-breaching party must still excercise their duty within the contract otherwise the othe party could sue for breach of contract

Question 15

In case of breach of contract, if the innocent party elects to treat the contract as discharged, what five things apply?

Answer 15

1. They are not discharged from the contractual obligations which were due at the time of termination, but they are discharged from their future or continuing contractual obligations and cannot be sued on them.
2. They need not accept nor pay for further performance.
3. They may be able to refuse to pay for partial or defective performance already received unless the contract is severable.
4. They can reclaim money already paid in respect of defective performance.
5. They can still claim damages from the defaulter.

Question 16

What is a ‘severable’ contract?

Answer 16

While partial performance cannot discharge the contract as a whole, most contracts are treated as ‘severable’ which means that they consist of a number of obligations and can be ‘severed’ or discharged through the performance of only part of those obligations, leaving the remaining obligations to be performed.

Question 17

What is the purpose of damages awarded for breaches of contract?

Answer 17

The purpose of damages is to put the parties in the position they would be in if the contract had been correctly performed

Question 18

What tests must be satisfied in order to claim damages for breach of contract?

Answer 18

• Remoteness of damage
• Measure of damages

Question 19

Regarding ‘remoteness of damage’, damages may only be awarded in respect of which losses?

Answer 19

1. Losses arising naturally (ie, according to the usual course of things) from such breach of contract.
2. such as may reasonably be supposed to have been in the contemplation of both parties, at the time of making the contract, as the probable result of the breach.

Question 20

In case of breach of contract, if the losses are exceptional or abnormal and not reasonably foreseeable, in which circumstance will the defendant be liable?

Answer 20

If the losses are exceptional or abnormal and not reasonably foreseeable, the defendant will be liable only if they knew (at the time of the contract) of the special circumstances from which the abnormal consequence of breach could arise.

Question 21

What are the main remedies for breach of contract

Answer 21

• damages
• specific performance
• injunction

Question 22

What are damages? Are you entitled to damages?

Answer 22

Damages are a common law remedy where a sum of money is awarded by a court to compensate a claimant

Under common law the non-breaching party is entitled to damages

Question 23

What are the two ways damages can be awarded?

Answer 23

• expectation interest
• reliance interest

Question 24

What is expectation interest?

Answer 24

It is how much money (what ‘measure of damages’) is needed to put the claimant in the position they would have achieved if the contract had been performed.

Question 25

What is reliance interest?

Answer 25

This refers to the position they would have been in had they not relied on the contract. In such cases, they are claiming for wasted expenditure and the onus is on the defendant to show that the expenditure would not have been recovered if the contract had been performed.

Question 26

What types of damages can be awarded?

Answer 26

Damages will be awarded for actual financial loss.

Mental distress and damages for loss of enjoyment may be recoverable where the principal purpose of the contract is the provision of enjoyment.

Question 27

What is the rule regarding ‘mitigation of loss’?

Answer 27

In assessing the amount of damages, it is assumed that the claimant will take all reasonable steps to reduce or mitigate their loss - claimant must take all reasonable steps to reduce or mitigate his loss

The burden of proof is on the defendant to show that the claimant failed to take a reasonable opportunity of mitigation

Question 28

What two types of clauses written into contracts for set amounts to be paid out by the defaulting party will we look at?

Answer 28

• liquidated damages clauses
• penalty clauses

Question 29

What is a liquidated damages clause?

Answer 29

A liquidated damages clause is a contract clause that specifies a sum of money to be paid by a defaulting party to the non-defaulting party - A genuine pre estimate of potental damages written into the contract

Question 30

What is a penalty clause?

Answer 30

A penalty clause is a contractual term that imposes a punishment on a party for breaking the terms of an agreement

Question 31

Explain the difference between a liquidated damages clause and a penalty clause

Answer 31

A liquidated damages clause specifies a sum of money that is considered to be a genuine pre estimate of potental damages and not penal in nature whereas a penalty clasue specifies an arbitary amount that is considered to be excessive.

Liquidated damages clauses are considered enforceable whereas penalty clauses are not

It is up to the courts to determine if a clause is considered a penalty clause, and therefore unenforceable, or a liquidated damages clause and therefore enforceable

Question 32

What is a specific performance remedy?

Answer 32

This is an equitable remedy which orders the defendant to perform their part of the contract instead of letting them ‘buy themselves out of it’ by paying damages for breach.

Question 33

When would a court order specific performance?

Answer 33

It will only be awarded where damages are not an adequate remedy.

Specific performance will not be granted if it would require supervision of the performance (i.e. building contract) or if it is a contract for personal service (i.e. employment contract).

Question 34

What is an injunction rememdy?

Answer 34

This is an equitable remedy which requires or prevents the defendant from doing something

Question 35

What are the different types of injunction? Define each (3)

Answer 35

• A mandatory injunction – directs the defendant to take positive steps to undo something he has already done in breach of contract,
• A prohibitory injunction – requires the defendant to observe a negative promise in a contract
• An asset-freezing injunction - prevents the defendant from disposing of their assets

Question 36

What is an exclusion clause in a contract?

Answer 36

An exclusion clause in a contract is one which purports to restrict or exclude liability for breach of contract or negligence.

Question 37

What condition should be satisfied in order for an exclusion clause to be a properly incorporated term of the contract?

Answer 37

In order to be a properly incorporated term of the contract, the clause or document containing the exclusion of liability must be an integral part of the contract.

Question 38

If the exclusion clause is effective, what two rules apply?

Answer 38

1. If the document is signed, it will be regarded as binding.
2. If the document is not signed, then it must be shown that the person whose rights it restricts was made sufficiently aware of it at the time of making the contract. In particular, onerous (involving heavy obligations) terms must be sufficiently highlighted.

Question 39

How will the courts interpret any ambiguity in an incorporated exclusion clause?

Answer 39

Once an exclusion clause can be shown to be an incorporated term, the courts will interpret any ambiguity in the clause against the person who relies on the exclusion.

Question 40

What is the Unfair Contract Terms Act (UCTA)?

Answer 40

The Unfair Contract Terms Act 1977 (UCTA) makes legislative provision for exclusion clauses in certain contracts, sometimes rendering them void altogether and sometimes rendering them void if they fail to satisfy a test of reasonableness.

UCTA is concerned with business to business dealings only

Question 41

What B2B dealings does the UCTA not cover?

Answer 41

It does not apply to insurance contracts or contracts to transfer land

Question 42

What are the three main provisions of the UCTA?

Answer 42

1. Any clause or notice that attempts to exclude or restrict liability for death or personal injury arising from negligence is void.
2. Any clause that attempts to restrict liability for other loss or damage arising from negligence is void unless it can be shown to be reasonable.
3. In contracts of sale or hire purchase, a clause that excludes or limits liability for breach of obligations regarding title of the seller or owner, implied by the Sale of Goods Act 1979, is void.

Question 43

In order to prove an exclusion clause is reasonable to exclude or restrict liability for death or personal injury arising from negligence is void, what must be considered and who bears the burden of proof?

Answer 43

• The relative strength of the parties’ bargaining positions
• Whether any inducement was offered
• Whether the innocent party knew or should have known of the term
• Whether insurance was in place or available to the party relying on the clause
• Whether any misrepresentations were made.

The burden of proving reasonableness lies on the person seeking to rely on the clause.

Question 44

What is the Consumer Rights Act 2015?

Answer 44

The Consumer Rights Act (CRA) 2015 provides statutory control in respect of consumer contracts and consumer notices (such as signs in car parks).

It provides that terms in contracts between a business and a consumer will only be binding on the consumer if they are ‘fair’.

Question 45

What is deamed an unfair clause by the Consumer Rights Act 2015?

Answer 45

A term is unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer