Chapter 2 - Termination of contract

Question 1

What is the normal method of discharge of a contract?

Answer 1

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 2

When does discharge by frustration occur?

Answer 2

Events may take place which make performance of the contract impossible or meaningless, thereby discharging the contract by frustration.

In the absence of frustration (or other lawful excuse), non-performance will constitute breach of the contract.

Question 3

Give four examples of events or changes in circumstances where contracts have been frustrated.

Answer 3

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 4

What are four consequences of frustration?

Answer 4

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 5

Define breach of contract.

Answer 5

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 6

In which three circumstances may a lawful excuse apply?

Answer 6

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 7

In which circumstances does a serious (repudiatory) breach occur?

Answer 7

1. Where the breach is of a term which the parties regard as a fundamentally important term or where the breach has the effect of depriving the injured party of substantially the whole benefit of the contract.
2. Where one party renounces their contractual obligations explicitly or implicitly in advance by showing that they have no intention of performing them. This kind of breach before performance is due is also known as ‘anticipatory breach’.

Question 8

Where the breach is sufficiently serious, what may the injured party chosse to do?

Answer 8

1. treat the contract as discharged immediately and sue for damages; or
2. allow the contract to continue until there is an actual breach and take action at that time.

Question 9

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

Answer 9

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 10

What is a ‘severable’ contract?

Answer 10

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 11

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

Answer 11

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 12

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 12

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 13

What is expectation interest?

Answer 13

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 14

What is reliance interest?

Answer 14

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 15

What is the rule regarding ‘Mitigation of loss’?

Answer 15

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

Question 16

When will a clause determining the damages payable for breach (liquidated damage) be enforceable?

Answer 16

Such a clause will be effective provided it is not considered to be penal in nature.

If the sum does not protect the legitimate interest of the innocent party and is excessive, it may be construed as a penalty clause and will not be enforceable.

Question 17

What is specific performance?

Answer 17

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.

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 or if it is a contract for personal service.

Question 18

What are the three types of injuction (an authoritative warning or order) that can be granted at the court’s discretion?

Answer 18

1. Mandatory injuction - Restorative in its effect. It directs the defendant to take positive steps to undo something they have already done in breach of contract.
2. Prohibitory injuction - Requires the defendant to observe a negative promise in a contract.
3. Asset-freezing injuction - Prevents the defendant from dealing with assets where the claimant can convince the court that they have a good case and that there is a danger of the defendant’s assets being exported or dissipated.

Question 19

What is an exclusion clause in a contract?

Answer 19

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

Question 20

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

Answer 20

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 21

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

Answer 21

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 22

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

Answer 22

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 23

What is the Unfair Contract Terms Act (UCTA)?

Answer 23

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 liability only and does not apply to contract between private persons, who may restrict liability as much as they wish.

Question 24

What are the three main provisions of the UCTA?

Answer 24

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 25

What is the Consumer Rights Act 2015?

Answer 25

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 26

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

Answer 26

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

Question 27

Name five types of Alternative Dispute Resolutions?

Answer 27

1. Negotiation
2. Mediation
3. Arbitration
4. Adjudication
5. Expert determination