Contract Law - Discharge of the Contract - Week 6 Flashcards
Discharge by Performance
General rule is that the complete performance is required
For example;
Fred agrees to sell his car to Bert in exchange for a cash price
When fred has given the car to Bert and Bert has paid Fred, the contract is at an end as they have completed their obligations → performed the contract
Sometimes things go wrong → Fred could give the car to Bert and Bert may refuse to pay the cash
If a party fails to complete their side of the bargain, they may be in breach of contract
In the event of a breach, the other party may be entitled to withhold payment
What’s the general rule?
A contract can only be discharged through complete performance → all the obligations under the contract.
This is the ideal method of discharge as everyone has done what they’ve agreed
If the parties have fulfilled their obligation, the contract has come to an end by performance → the parties have completed all their obligations under the contract
It would be said that they have the exact and complete performance of the obligations in the contract
Cutter v Powell
The rule on complete performance can create an unfair result
The case of Cutter v Powell shows the unfairness of the rule
Cutter v Powell:
Cutter was a crew member on a ship with wages due on competition of a voyage. He died 19 days before the journey ended and his widow was refused the unpaid wages as he hadn’t fully performed the contract
What are the exceptions?
1) Divisible Contracts
2) Prevention of Performance by Other Party
3) Acceptance of Part Performance
4) Substantial Performance
Exception 1 - Divisible Contracts
Cutter is an example of the entire contract
Nothing short of complete performance would do
It would’ve been better for the widow if the contract was divisible → payment made every week or at specific points on the journey
In that case she would’ve been entitled to some of her husband’s wages
Contracts of employment are an example of divisible contracts
Ritchie v Atkinson (1808)
A contract stated that goods would be shipped at a cost of £5 per tonne.
Only part of the agreed cargo was shipped and the wonder claimed that as the contract hadn’t been fully performed, they were released from payment
It was held that the contact was divisible.
The contract could be divided into separate parts as the agreement was to pay per tonne
Payment owed for each tonne of the cargo that had been carried
Extra Info
Some contracts are divisible into parts and payment becomes due at various stages of performance
Contracts of employment are an example of divisible contracts
Employees are paid weekly or monthly as opposed to when they leave their employment even when they have entered into a fixed term contract of employment
Whether a contract is an entire contract or a divisible contract depends on the intentions of the parties and the express and implied terms of the contract
Exception 2 - Prevention of Performance by Other Party
A party will be in breach if they prevent the other party from fulfilling their contractual obligations
Planche v Colburn (1831)
The claimant was asked to write a book by the defendant with payment due on completion
The claimant wrote half the book when the defendant changed his mind and asked him to stop
The claimant was entitled to part payment for partly performing his contract
Exception 3 - Acceptance of Part Performance
Where a contract isn’t divisible and is an entire contact, it may be possible to show that the other party has voluntarily accepted partial performance
A party can choose to accept a party performed contract
If a party chooses to accept part performance, they’ll pay for the part of the contract completed
For example, if the contract was 50% performed than 50% payment would be due
You order 10 cartons of orange juice but only 5 arrive → you reject all 5 or keep 5 and pay for just 5
The party accepting part performance → accepting the 5 cartons → must have a genuine choice over whether to accept or reject the part performance
Sumpter v Hedges (1898)
Claimant contracted to build a barn for the defendant but then abandoned the project half way through
Held the defendant didn’t have to pay for part performance as the defendant didn’t have a choice but to accept part performance
Defendant only had to pay fo materials the claimant had left behind and used by the defendant to complete the building (he did have a choice whether to use materials left behind so had to pay a reasonable sum for them)
Exception 4 - Substantial Performance
Occurs when someone substantially performs their contract → have done the bulk of what they’ve agreed to do but some minor parts remain undone
Injured party had to pay what is due under the contract with a minor discount to cover the incomplete performance
The court must decide if there’s been substantial performance and this will change with the facts of eac case
Bolton v Mahadeva (1972)
The claimant entered into a contract with the defendant to install a central heating system for £560
Central heating was defective and required substantial work to repair the defects, costing £174
Held that the cost to repair the central heating was too great a proportion of the original cost to accept the contract had been substantially performed
Claimant couldn’t recover any payment for the work he’d done
Hoenig v Isaacs (1952)
Contract to decorate and furnish a flat was held to be substantially performed as full performance only lacked repairs to a bookcase and replacement of a wardrobe door
The total contract cost was £750 and it was held a reduction of £55 to be made to cover the bookcase and wardrobe door
Discharge by Agreement
Occurs where parties agree not to perform the contract
New legally binding agreement so will need all the elements of a valid contract
Agreement to end a contract before it’s completed is a second contract between the parties and the second contract is binding on the parties provided all the necessary elements of a contract are present.
Discharge by Frustration
A contract becomes frustrated when somewhere between agreement and performance something outside the control of the parties makes performance impossible or futile
Therefore, contract has been discharged by frustration
Party can’t perform their side of the bargain through no fault of their own
Who has the onus of proof?
The onus is on the person claiming frustration to prove the event has prevented performance and frustrated the contract
Frustrating Events:
- Destruction or unavailability of the subject matter
- Death or illness of one of the parties
- Supervening illegality
- Government intervention
- The event to which the contract is based fails to occur
- Delay in performance
Destruction or Unavailability of the Subject Matter
A contract will be frustrated where the object of the contract becomes impossible because the subject matter of the contract has been destroyed or it isn’t possible to use it
Taylor v Caldwell (1863)
Caldwell agreed to rent a music hall for a series of concerts over four days from Taylor. After the contract was agreed but before the concerts had taken place, the music hall was destroyed by fire
It was held that performance of the contract was impossible → the contract was frustrated and both parties were released from their obligations
Gamerco SA v ICM/Fair Warning (Agency) Ltd (1995)
A contract was frustrated when a stadium hired for a rock concert became unsafe and it wasn’t possible to find an alternative venue in time
Death or Illness of one of the Contracting Parties
This is relevant in contract which can only be performed by a specified person
If that person becomes ill or passes away it might be that the contract is frustrated
In cases of illness, whether frustration exists depends on the length of the illness and the terms of the contract.
Contract for a one off solo performance is more likely to be frustrated than a long running play where the main actor is ill for one night
The length of the illness relative to the length of the contract is important and whether the essence of the contract is destroyed/threatened.
Condor v Barron Knights (1966)
A drummer was advised by his doctor to limit any performances to four nights a week
The contract was frustrated as the ability to only work for four nights was incompatible with the nature of the work → he may be required for weeks at a time for some events
Atwal v Rochester (2010)
Rochester, a builder, agreed to carry out building works for Atwal
Rochester was prevented from working due to surgery
Atwal had chose Rochester to do the work because of his low price and that he was known to the family
As Rochester could no longer carry out the work due to ill health the contract was frustrated
Supervening Illegality
A contract can be frustrated due to a change in the law
This occurs when a contract is legal when it’s made but since its formation changes in the law make performance of the contract illegal
Fibrosa Spolka v Fairbairn Lawson Combe Harbour (1843)
A contract was formed between an english firm and a polish firm for the sale of machinery which became frustrated due to war
Government Intervention
During national emergencies and times of war, the government may, acting in the public interest, requisition goods or property
If this happens then relevant contracts relating to the goods or property will be frustrated
Morgan v Manser (1947)
Where a comedian’s contract was frustrated due to being called up to fight in a war
The Event on which the contract is based fails to occur
Sometimes contracts are made which reply on another event happening
When that event doesn’t occur, the contract may be discharged by frustration as the purpose of the contract can no longer be achieved
This only applies where the cancelled event was the sole purpose of the contract
The parties must have made the contract on the understanding that an event will happen and the cancellation of the event must make the contract radically different from what the parties contemplated
Non occurrence of the event must be the fault of neither of the parties
Krell v Henry (1903)
Defendant hired a flat to watch King Edward VII’s coronation
Coronation was postponed due to illness and defendant no longer needed the flat
Held the contract was frustrated as the purpose of the contract was to watch the coronation, not to use the room for any other purpose
However, if the contract is divisible into parts then it may not be frustrated if part can still be performed
Contrast - Herne Bay Steam Boat v Hutton (1903)
Defendant hired out claimants steamship for two reason
To view the naval review which was part of King Edwards VII’s coronation and to have a day of cruising for the passengers
Naval review was cancelled due to postponement of the coronation
Defendant argued the contract had become frustrated due to the cancellation of the naval review
Held the contract wasn’t frustrated
The contract was for two purposes and only one of them couldn’t go ahead
Would’ve been different if the naval review was the sole purpose of the contract
Delayed Performance
Parties can be prevented from completing their side of the bargain on time due to an event outside of their control
A delay may frustrated the contract if it turns the contract into something very different to what was agreed
Davis Contractors v Fareham District Council (1956)
Davis agreed to build 78 houses for Fareham Council
Bad weather and shortage of labour and materials, the houses took much longer to build than anticipated and cost more than at first thought
Held the contract wasn’t frustrated, it had only become more costly and difficult to perform, neither of which were frustrating events
Contract could still be performed and wasn’t radically different from what was originally agreed
Info
From the cases above, the courts will only release parties from their contractual obligations with good reason
Inconvenience, delays or a contract being more expensive than anticipated won’t frustrate a contract
Discharge by Breach
Actual Breach
Occurs in one of two ways:
1) A failure to perform at all
1) A party does perform the contract but the performance is below that expected
Broken Terms of Contract
Where a term of a contract is broken, the breach will only discharge the contract if the term is a condition of the contract or an innominate term where the breach deprives the party not in default of substantially the whole benefit of the contract
If the term is a warranty, the contract isn’t discharged
Breach of Warranty
Innocent party is only entitled to claim damages if he/she has suffered a loss
With a breach of warranty, the contract survives → doesn’t come to an end
Breach of Condition
Innocent party is entitled to repudiate (bring the contract to an end)
Innocent party may keep the contract alive despite the breach
If a party chooses to repudiate, they can recover any property transferred under the contract and claim damages
Breach of Innominate Term
Where a term is worded broadly to cover a number of potential breaches, it may not be possible to decide whether a breach of the term would have important or trivial consequences
These types of terms are called innominate
An injured party will be entitled to damages for a breach of an innominate term and if he’s been deprived of substantially the whole benefit of the contract, he can treat the contract at an end
What are the remedies for breach
- Damages
- Remoteness of Damages
- Usual Damage
- Special Damage
- Quantum of Damages
Damages
Purpose of damages is to provide the injured party with financial compensation for any loss they’ve suffered
The loss suffered must be due to breach
Under the Limitation Act 1980, there;s a 6 year limitation period for initiating a claim for breach of contract
The period begins to run when the breach of contract occurred, irrespective of whether any damages had been suffered or whether the innocent party had been aware of the breach at that time
Aim of damages is to put the innocent party into the position they would’ve been if the contract was performed.
In doing this the court will assess the damage and decide if it’s too remote as it may be unfair to compensate a party for damages which fall too far from the breach
Court will decide which losses are attributable to the breach and then decide how much compensation should be paid
Remoteness of Damages
When a contract has been breached, the innocent party may not be able to claim for every loss that he’s incurred because of the breach
The court will decide how far the liability of the defendant extends
Claims for damages are restricted to the recovery of losses that aren’t too remote
Innocent parties may not be able to claim all losses
Test for determining remoteness of damages is in two parts and is laid down to this case
Hadley v Baxendale (1854)
Defendant contracted to carry the claimants mill shaft to London where it was to be used as a pattern to construct a new one
Due to the fault of the defendant, there was a delay in returning to the shaft
Claimant claimed damages for loss profits due to the mill being out of action
Defendant wasn’t liable for the loss as it was too remote
Carriers weren’t liable because they weren’t aware of the importance of the delivery of the shaft.
In Hadley, the court distinguished between 2 types of damages
For losses that arise naturally as a normal consequence of the breach of contract
This was an objective test and it means losses that a reasonable person would expect to arise from the breach of contract → usual damage
For losses which both parties may have reasonably contemplated when the contract was made as being a probable result of its breach
Subjective test and demons on the actual or implied knowledge of the parties at the time the contract was made → special damage
It was held that it wasn’t a natural consequence of the delay in delivering the shaft that the mill should be out of action
The mill might have had a spare shaft, so the first part of the rule as stated before did not apply
Baxendale was unaware that the mill would be out of action during the day so the second part of the rule didn’t apply either
Baxendale, liable for the breach of contract, wasn’t liable for the loss of profit caused by the delay
Held that loss of £16 per week was receivable within the first rule in Hadley v Baxendale
Usual Damage
Covers damage that anyone would see arises from the breach
Special Damage
Covers any damage which won’t be known to the other party unless these are drawn specifically or impliedly to the other party’s attention before the contract is made
Heads of damage (usual and special) can be seen in Victoria Laundry v Newman Industries (1949)
Defendant agreed to sell second hand boiler to the claimants, a company of launderers and dyers
At the time of the contract, the defendants knew that claimants wanted the boiler for immediate use
The defendants breached the contract by delivering the boiler 20 weeks late
Claimants claimed £16 a week, representing the increased ordinary profit, which they could’ve made with the boiler which the defendants were to supply
They also claimed £262 a week, representing the value of a lucrative contract to dye army uniforms
Unavailability of the new boiler had caused the claimant to lose the contract
Loss of £262 was neither the first or second rule and wasn’t recoverable
If the claimants had told the defendants about the lucrative dyeing contract and the boiler which the defendants were to supply would be needed in time or the dyeing contract would be lost then the £262 a week would’ve been recoverable under the second rule
Quantum of Damages
Loss must be financially quantifiable
This means the loss must be capable of being assessed financially
The court will award a party damages for the decrease in value of a product, instead of repair
Ruxley Electronics & Construction Ltd v Forsyth (1995)
The defendant agreed to build a swimming pool for the claimant’s garden
The contract stated the pool should be 7 feet and 6 inches at its maximum depth
When the work was completed, the claimant found the maximum depth to be 6 feet and 9 inches
Court awarded the defendant damages of £2500 for loss of amenity
When goods are damaged as the damage is the cost of replacement goods or in the case of defective building work the damages will be the amount it costs to correct the work
General principe = compensate for actual financial loss
Until recently, the courts have been reluctant to award damages for mental distress, hurt feelings and disappointment
Jarvis v Swan Tours (1973)
Claimant was able to claim for mental distress
Claimant booked a skiing holiday and was promised various facilities
Facilities turned out to be inferior to those advertised
Claimant sued for a breach of contract
Court of appeal decided that Jarvis was entitled to recover not just the financial loss he suffered but also damages for loss of entertainment and enjoyment
This confirmed that damages could be recovered for mental distress in appropriate cases
Agreed damages won’t be altered but penalty sums won’t be enforced
This will be payable if the clause is a genuine attempt by the parties to determine a reasonable pre estimate of the loss likely to result from a breach, this is so even if the amount isn’t appropriate level of compensation
If the sum is seen as a penalty, it won’t be enforced
Here the clause will seek to punish the guilty party, rather than be a genuine attempt at compensation
If the court decides a clause is a penalty clause, it will disregard it and award a sum to cover actual loss
Info
Common for contracts to state in a breach event, agreed sum is payable
Common in business contracts for parties to state in advance the amount of damages that will have to be paid in event of breach
Will be payable if aluse is a genuine attempt by parties to determine a reasonable pre estimate of loss from breach, this is so even if the amount isn’t appropriate level of compensation
If it’s less than actual loss suffered, injured party can’t claim more since its agreed in the contract to accept this sum in the event of a breach
If it’s over compensation, the sum payable is more than the actual loss then the injured party doesn’t have to reimburse for the difference
If the sum is seen as a penalty, it won’t be enforced.
The clause will seek to punish the guilty party rather than be a genuine attempt at compensation
The aim of these clauses is to frighten a party into complying with the contract otherwise there’s consequences
Dunlop Pneumatic Tyre Co Ltd v New Garage Motor Co (1915)
Dunlop distributed tyres to retailers for sale.
The contract between Dunlop and New Garage contained a clause preventing New Garage from selling the tyres below list price
In the event of a breach, a sum of £5 would be payable for each tyre sold below the list price
The defendants sold tyres below the list price and the claimant brought an action for damages
The defendant argued the relevant clauses was a penalty clause so it was unenforceable
It was held the clause was liquidated damages clause, not a penalty clause
£5 was a lot of money in 1915 but it was taken as a genuine attempt to assess damages
This shows that a clause won’t be a penalty clause even though the sum stated bears no relationship to the loss attributable to the breach
Injured party has a duty to mitigate any loss
Rule states that an injured party can’t claim for loss which they could’ve avoided. It’s up to the party in breach to prove the loss was avoidable → parties must try limit losses
Brace v Calder (1895)
Claimant was an employee of a partnership on a fixed term contract
Partnership dissolved and claimant lost his job
New partnership was formed and claimant was offered his job back on his old terms of employment
Claimant refused and claimed wages lost due to early termination of his fixed term contract
Was held that a breach of contract had occurred but the claimant should’ve mitigated his loss by accepting the offer of alternative employment
Was only entitled to nominal damages
Contributory negligence may reduce the amount of damages
Occurs where damages are reduced due to the claimants own lack of care which added to losses
Rescission - An Equitable Remedy
Court will set the contract aside and put the parties back in their pre contractual positions
Specific Performance - An Equitable Remedy
This is where a court insists that a party performs their contractual obligations
Rarely used and when it is, it normally relates to specific goods → land/ rare painting
Never used in employment contracts as it would be a restriction of personal liberty to enforce performance → would be unsatisfactory as relations will be strained between parties
Remedy is rarely used as damages are seen as an adequate remedy
Injunction - An Equitable Remedy
An injunction is a court order requiring a person not to do a certain thing or to do something
It isn’t ordered where damages are an adequate remedy
It won’t be used to force one party to employ or work for another as this would amount to forced employment
An injunction can ensure that a person doesn’t break their contract → an injunction could be used to prevent an employee breaching a confidentiality clause in an employment contract
Page One Records Ltd v Britton (1968)
Troggs wanted to replace him after
The manager asked for an injunction to prevent Troggs from employing anyone else as their manager
Injunction couldn’t be granted as this would force them to having to continue employing the manager
Warner Bros v Nelson (1936)
Film star, Bette Davis, contracted with Warner Bros not to act on stage or screen for anyone other than Warner Bros for a year
Bette Davis breached the contract and entered into a contract with a UK company to star in a film
Warner Bros were award an injunction to prevent her working for UK company
Wouldn’t be granted specific performance to force her to work for them but could have an injunction to prevent her working for a UK film company
