Discharge

Question 1

Which of the following is not a way in which a contract might be discharged?

(a) 
Discharge by frustration

(b) 
Discharge by agreement

(c) 
Discharge by performance

(d) 
Discharge by mistake

Answer 1

(d) 
Discharge by mistake

A contract affected by mistake is either void or voidable depending on the type of mistake. A void contract has no legal effect from the very beginning, so it does not need to be discharged(terminated). A voidable contract can be rescinded by the innocent party and will then be treated as having no effect from the beginning.

Question 2

Which of the following is an exception to the entire obligations rule?

(a) 
Substantial performance
(b) 
Quantum meruit

(c) 
Complete performance

(d) 
Partial performance

Answer 2

a) 
Substantial performance

A contractual obligation is discharged by a complete performance of the obligation. The effect of this is that a party is entitled to payment only after he has completed performance. However, an exception arises where a contract has been substantially performed. The party who rendered substantial performance may be awarded the contract price subject to a deduction to reflect the proportion of the obligation not performed.
The other exceptions to the entire obligations rule are acceptance of partial performance, divisible obligations and wrongful prevention of performance.


Question 3

What is the meaning of the entire obligations rule?


(a) By entering into a contract, the parties commit to performing all the obligations under the contract, and defective performance of an obligation is a breach of the entire contract

(b) 
A valid contract is made up of several obligations that make up the complete agreement and these obligations are binding

(c) 
A contract must clearly state all the obligations that the parties have agreed to undertake in order for the contract to be enforceable

(d) 
An obligation is discharged by complete performance of the obligation. Until the obligation is completely performed, the performing party is not entitled to payment

Answer 3

(d) 
An obligation is discharged by complete performance of the obligation. Until the obligation is completely performed, the performing party is not entitled to payment

This rule was illustrated in the case of Cutter v Powell. Cutter died seven weeks into performance of the contract and nineteen days before its end. His widow sued Cutter’s employer for a proportion of the agreed price. Her action failed as the court found the contract to be entire, and Cutter was obliged to perform his obligations in full before he could be entitled to any payment.

Question 4

Which of the following is a way by which a contract can be discharged by agreement?

(a) 
By a subsequent binding contract between the parties

(b) 
By performance of the contractual obligations

(c) 
By repudiatory breach of contract

(d) 
By operation of statute

Answer 4

(a) 
By a subsequent binding contract between the parties


Question 5

What is the meaning of a condition precedent?

(a) 
It is a condition in a contract that must be fulfilled by the innocent party before he can sue the party who is in breach of contract

(b) 
It is a condition in a contract that must be fulfilled before the contract itself or certain contractual rights or obligations become binding

(c) 
It is a term in the contract providing for the termination of the contract and the discharge of obligations outstanding under the contract

(d) 
It is a term in the contract that sets out the order in which documents take precedence in the event of an inconsistency

Answer 5

(b) 
It is a condition in a contract that must be fulfilled before the contract itself or certain contractual rights or obligations become binding


Question 6

A dress maker agrees to sew a dress for a customer. The customer pays the dress maker a deposit of half the contract price. The dress maker starts sewing, but when she has sewn a third of the dress, she falls down the stairs and breaks both her arms. What is the best way to terminate the contract amicably?

(a) 
The dress maker and customer can enter a new contract in which they waive their rights under the old contract in consideration for being released from their obligations under the old contract
(b) 
The dress maker and customer can bring their contract to an amicable end if the dress maker refunds the deposit to the customer

(c) 
The dress maker and customer can enter a new contract in which the customer agrees to release the dress maker from her obligation to complete sewing the dress

(d) 
There is no amicable way to end the contract. The customer should sue the dress maker for breach of contract

Answer 6

(a) 
The dress maker and customer can enter a new contract in which they waive their rights under the old contract in consideration for being released from their obligations under the old contract

This is known as mutual waiver.
The other options are problematic for various reasons: only one party is released from their obligation, no consideration has been provided in the new contract, and in the case of Jenny suing Cathy for breach of contract, litigation is normally not an amicable means of resolving a problem


Question 7

What is repudiatory breach?

(a) 
This is where one party breaches a term of the contract which is either a condition or an innominate term which is to be treated as a condition

(b) 
This is where one party breaches a term of the contract which is a warranty

(c) 
This is the stipulation of a situation that will cause existing contractual obligations to terminate

(d) 
This is where a party indicates that he will not perform his contractual obligations in advance of the date of performance

Answer 7

(a) 
This is where one party breaches a term of the contract which is either a condition or an innominate term which is to be treated as a condition


Question 8

Which of the following best explains the rights of the innocent party when faced with a repudiatory breach?


(a) The innocent party is entitled to damages for the breach

(b) 
The innocent party is entitled to terminate the contract and claim damages for the breach.

(c) 
The innocent party must first perform their obligations but is then entitled to terminate the contract and claim damages for the breach.

(d) 
The innocent party has the right of election between terminating and affirming the contract and the right to claim damages.

Answer 8

(d) 
The innocent party has the right of election between terminating and affirming the contract and the right to claim damages.

Question 9

Which of the following statements is correct regarding termination following a repudiatory breach?

(a) 
The innocent party can claim damages arising from the specific breach as well as the loss of the contract caused by the termination of the contract as a whole
(b) 
The innocent party can sue for the loss of the contract caused by the termination of the contract as a whole and he is not required to mitigate the loss

(c) 
Any rights and obligations which accrued before termination are brought to an end and are not enforceable

(d) 
The primary obligations of both parties that have not been performed remain unchanged and enforceable

Answer 9

(a) 
The innocent party can claim damages arising from the specific breach as well as the loss of the contract caused by the termination of the contract as a whole

The usual remedy for breach of contract is an award of compensatory damages. However, where the breach is repudiatory in nature, the innocent party can treat the contract as terminated and sue for damages for the loss of the contract as a whole


Question 9

Which of the following situations is unlikely to make performance of the contract radically different from that contracted for?

(a) 
Performance of the contract is impossible

(b) 
Performance of the contract is illegal

(c) 
Performance of the contract is more expensive

(d) The common purpose of the contract can no longer be carried out

Answer 9

(c) 
Performance of the contract is more expensive


Question 10

A dressmaker agrees to sew a wedding dress for a bride for a wedding in 3 months. The bride pays the dressmaker the full contract price and the dressmaker starts sewing the dress. However, when the dressmaker has sewn half the dress, she falls down the stairs and breaks both her arms. The dressmaker is unable to sew with broken arms and her arms will take at least six months to mend. The bride sues the dressmaker for breach of contract. What is the dressmaker’s best response to the action?

(a) 
The dressmaker should defend the action on the ground that the contract has been frustrated as performance of the contract is illegal

(b) 
The dressmaker should defend the action on the ground that the contract has been frustrated as it is more onerous to perform

(c) Defend the action on the ground that the contract has become frustrated as performance is impossible
(d) 
The dressmaker should defend the action on the ground that the common purpose of the contract has been frustrated

Answer 10

(c) Defend the action on the ground that the contract has become frustrated as performance is impossible

Frustration due to impossibility can extend to illness and other reasons. In Condor v Barron Knights, the contract was frustrated when the drummer in a pop group was taken ill and only capable of performing 3 or 4 nights a week. The dressmaker should therefore run frustration as a defence to the action


Question 11

Which of the following is not a limitation on the doctrine of frustration?

(a) 
An event whose occurrence the parties have made express provision for in their contract

(b) 
An event which was within the contemplation of the parties at the time they entered into the contract

(c) 
An event which is brought about through a party’s own conduct

(d) 
An act which has been declared illegal

Answer 11

(d) 
An act which has been declared illegal

Question 12

Which of the statements below regarding the consequences of frustration is correct?

(a) 
The Law Reform (Frustrated Contracts) Act 1943 deals with obligations arising prior to the frustrating event
(b) 
The Law Reform (Frustrated Contracts) Act 1943 deals with the situations that will lead to a contract becoming frustrated

(c) 
Under s 1(2) Law Reform (Frustrated Contracts) Act 1943 if the supplier has expenses exceeding the amount of the advance payment it may still recover them.

(d) 
The recovery of advance payments under s.1(2) Law Reform (Frustrated Contracts) Act 1943 requires that money that should have been paid before the frustrating event should still be paid.

Answer 12

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

Regarding the other options, it is important to note that the 1943 Act deals with the consequences of frustration only. It does not deal with the situations that will lead to a contract becoming frustrated – that is dealt with under the common law rules.

Question 13

Which of the following provides the best summary of the decision in Gamerco SA v ICM/Fair Warning (Agency) Ltd?

(a) 
The decision clarified that the task of the court when applying s 1(2) is firstly to identify and value the benefit conferred and then secondly to assess the just sum that should be awarded.

(b) The decision clarified the meaning of ‘benefit’ under s 1(3) Law Reform (Frustrated Contracts) Act 1943 .

(c) 
The decision clarified that when determining how much to allow the payee to retain or recover to account for his expenses under s 1(2) Law Reform (Frustrated Contracts) Act 1943, the amount will not be limited to the actual expenses incurred or the sums paid or payable under the contract

(d) 
The decision clarified that the court has a broad discretion under s 1(2) Law Reform (Frustrated Contracts) Act 1943 to order such retention or recovery of money as it thinks just in all the circumstances to account for expenses incurred by the payee.


Answer 13

(d) 
The decision clarified that the court has a broad discretion under s 1(2) Law Reform (Frustrated Contracts) Act 1943 to order such retention or recovery of money as it thinks just in all the circumstances to account for expenses incurred by the payee.


Question 14

What are the five ways through which a contract can be discharged?

Answer 14

1. Performance
2. Expiry
3. Agreement
4. Breach
5. Frustration

Question 15

When does discharge occur by expiry?

Answer 15

Contract will expire when it is completed according to its own terms

Often by date ie parties incorporate term in contract which stipulates when contract comes to end eg contract provides that contract will expire 12 months after commencement date

Contract can also expire based on occurrence of event eg contract may include term that supplier is to deliver goods to buyer within given time frame and upon delivery contract comes to end

Question 16

When does discharge by performance occur and what is entire obligations rule?

Answer 16

Contractual obligation is discharged by complete performance of obligation - promisee is entitled to benefit of complete performance exactly according to promisor ‘undertaking’

Promisor who only performs part of obligation is not discharged from that obligation

Question 17

What are the exceptions to the entire obligations rule?

Answer 17

1. Acceptance of partial performance: Where one party has only given partial performance of contractual obligations, it is possible that innocent party, rather than reject work done, might accept that part of performance - at their discretion and then quantum merit basis
2. Substantial performance: Where contract has been substantially performed, it may be possible for party who rendered such substantial performance to obtain contract price subject to deduction to reflect cost of remedying ‘defect’ ie aspect which has not been performed - if defect too serious, party who rendered defective performance will not be entitled to recover any money
3. Divisible obligations: Some contracts clearly intended to be divided into parts eg payment of salary under fixed contract of employment -
   If this is case, then performing party is entitled to payment for each part which is performed
4. Wrongful prevention of performance: Where one party performs part of agreed obligation, and is then prevented from completing rest by some fault of other party, they will be entitled to payment despite not having completed rest of obligation - innocent party can sue for damages for breach or claim quantum meruit

Question 18

What defence is available to allegations of tender to perform

Answer 18

In action for breach of contract for failing to perform obligation, it is good defence for D to show that they tendered performance

Promisor must show that they unconditionally offered to perform obligations in accordance with terms of contract, but that promisee refused to accept such performance

In relation to payment of debt, plea of tender does not discharge debt - however, it would prevent creditor from claiming interest or damages on that debt subsequent to tender of performance

Question 19

What are the two ways for agreement to be discharged by agreement?

Answer 19

1. By subsequent binding contract between parties or
2. Alternatively, by operation of term of original contract

Question 20

What is needed for a discharge to occur by subsequent binding contract and how can consideration issues be resolved?

Answer 20

Needs:
1. Accord: there must be agreement that obligation will be released eg A agrees to release B from its obligations under old contract and
2. Satisfaction: there must be consideration for promise to release party from obligation eg B agrees to release A from its obligations under old contract

Consideration can be resolved:
1. One way of resolving this is that party to whom obligation is owed may release other party by subsequent agreement under deed - avoids need for consideration altogether bc gratuitous promise (ie one without consideration) is enforceable if made in contract in form of deed
2. party to whom obligation is owed may provide consideration by agreeing with other party to accept smth different in place of former obligation eg accelerated payment of sum payable in instalments

Question 21

What are the two terms through which a contract can be discharged (discharge by operation of term in contract?

Answer 21

1. Condition precedent:
   - Condition which must be satisfied before any rights come into existence - where coming into existence of contract is subject to occurrence of specific event, contract is said to be subject to condition precedent
   - Contract suspended until condition satisfied
   - Where not fulfilled, there is no true discharge bc rights and obligations under contract were contingent upon event which did not occur ie rights and obligations never came into existence in first place
2. Condition subsequent: Term providing for termination of contract and discharge of obligations outstanding under contract, in event of specified occurrence - In appropriate cases, court will even imply term to empower party to determine contract on giving reasonable notice to other party

Question 22

What is the difference between repudiatory and anticipatory breach?

Answer 22

Repudiatory breach: where one party has breached term of contract which is either condition or innominate term which is to be treated as condition - party has right to election (choice as to whether to terminate contract or to affirm it) plus damages

Anticipatory breach: Party who, by words or conduct, leads reasonable person to conclude that they do not intend to perform their part of contract is said to have ‘renounced’ contract - Innocent party has immediate right to accept renunciation and to treat contract as terminated - if party wants to rely on anticipatory breach to terminate then it will need to demonstrate that if breach occurred at time performance was due, it would have been repudiatory

Question 23

What is the effect of terminating contract for repudiatory breach?

Answer 23

This puts end to all primary obligations of both parties remaining unperformed - innocent party can claim damages arising not only from specific breach but also loss of contract caused by termination of contract as whole

Discharge from remaining rights and obligations is prospective only - ie any rights and obligations which have accrued before termination remain enforceable

Question 24

What are risks involved with terminating for repudiatory breach?

Answer 24

Terminating commercial contract for repudiatory breach often involves high degree of risk for client, in particular with regard to risks of wrongful termination

If court later finds that breach was of warranty then A had no right to terminate and its notice was wrongful - A’s wrongful notice will be regarded as renunciation of future performance of contract and/or serious breach of contract and may be accepted by other party, B as repudiating contract

By serving notice without justification for doing so, A has turned what it thought was termination on grounds of breach by B into damages claim against it on basis that A is party actually in repudiatory breach

Generally no excuse that aggrieved party, A to plead that they acted in good faith, believing that B’s breach justified remedial action that was taken

Uncertainty in Hong Kong test combined with risks described above often leads commercial parties to inject certainty into contracts by explicitly agreeing list of breaches which will give rise to right to terminate

Question 25

What does the right of election entail?

Answer 25

Where there has been repudiatory breach, contract is terminated only if aggrieved party makes election (choice) to treat breach as repudiating contract, ie putting end to all unperformed primary obligations

Innocent party allowed period of time in order to decide between two alternatives:
1. Elect to affirm
2. Elect to terminate

Question 26

What are the benefits of affirming contract?

Answer 26

f innocent party elects to affirm contract, contract survives and rights of innocent party preserved

Innocent party may calculate that if contract can be performed such that right to charge contractual charges as debt will arise, then it will put itself in better/more certain financial position than if it terminates contract and brings claim for unliquidated damages - bc value of damages claim is uncertain

Where party has indicated intention not to perform obligations, innocent party can still affirm contract, perform its own obligations and claim sum under contract in debt action

If party doesn’t affirm contract, innocent party will retain claim for damages resulting from breach but cannot terminate as result of it - damages would not include compensation for loss of performance of contract as whole

Election is between accepting contract as discharged or continuing - election is not waiver of damages from relevant breach

Question 27

How is a contract affirmed?

Answer 27

1. Must be unequivocal commitment to continue
2. Contractual obligations remain
3. Entitled to damages
4. Must mitigate loss

Question 28

What are the limits to affirmation?

Answer 28

1. Co-operation of breaching party is required for continued performance of contract but C must not be the one to require it - qualification should be uncontroversial: if innocent party requires co-operation of other contracting party in order to fulfil obligations under contract, this will prevent innocent party claiming contract price
2. Innocent party has to have ‘legitimate interest, financial or otherwise’ in affirming contract and continuing with performance - it is only in extreme cases that innocent party will not have legitimate interest in affirmation and will only operate if D can show that:
   (a) Damages would be adequate remedy for C and
   (b) Election to keep contract alive would be unreasonable
   (so limitation but not severe)

Question 29

Where does frustration occur

Answer 29

Events that are beyond control of either party,
That occur after formation of contract and
Which render performance radically different from that which was agreed to at time contract formed

Question 30

What might render performance radically different?

Answer 30

1. Performance is impossible or unavailable bc of partial destruction of some object necessary to performance of contract or death/illness of parties when needed for services - consider terms, context, parties knowledge…
2. Performance is illegal: Frustration may also occur where change in law or state intervention renders performance illegal
3. Common purpose of contract frustrated: Where common purpose for which contract was entered into can no longer be carried out bc of some supervening event, contract may be frustrated despite fact that it is still physically possible to carry out contract

Question 31

What will not amount to frustration?

Answer 31

1. Merely increase in expense/onerousness: [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.
2. Caused by default of party: Frustration will not apply where event was induced by one of parties, ie bc even was their fault or choice - for party alleging self-induced frustration to prove it is
3. Which parties could have reasonably contemplated: frustration is means of allocating unforeseen risks - if you could have foreseen event, but failed to make provision for it in contract, doctrine of frustration will be less likely to apply
4. Provided for in contract : frustration cannot override express and unambiguous contractual provision for frustrating event eg force majeure

Question 32

What are the consequences of frustration?

Answer 32

If contract frustrated, it is brought to end automatically - parties have no choice in matter

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

Question 33

What provisions does the LRFCA make as regard as to obligations arising prior to frustrating event?

Answer 33

s. 1(2) makes following provisions:
1. Money paid before frustrating event can be recovered
2. Money that should have been paid before frustrating event no longer needs to be paid
3. Expenses incurred by payee (usually supplier) can be recovered out of total sum paid/payable before event - recovery of expenses is at discretion of court

Amount retained/recovered is capped and cannot exceed
(a) Actual expenses incurred and
(b) Amount paid/payable prior to frustrating event

If supplier has expenses exceeding amount of advanced payments actually paid or invoiced then they cannot claim then back - if nothing was paid or payable before frustrating event, party will not be liable to get any expenses at all

Where there is non-monetary benefit, court must:
1. Identify and value benefit conferred and
2. To make assessment of just sum that should be awarded
** Amount cannot exceed value of benefit obtained
** where the value of the benefit has been reduced to nil by the frustrating event, the provider of the ‘benefit’ has no claim