Discharge and frustration

Question 1

What are the ways in which a contract can be discharged?

Answer 1

• By performance
• By expiry
• By agreement
• By breach
• By frustration

Question 2

What is discharge by expiry?

Answer 2

A contract will expire when it is completed according to its own terms. Contract expiration is often by date or can expire based on the occurrence of an event (eg on delivery)

Question 3

What is discharge by performance?

Answer 3

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.

Question 4

What is the entire obligations rule?

Answer 4

The party to the contract has to entirely complete their performance to be entitled to the entire payment. Cutter v Powell: man died at sea halfway through journey and widow tried to claim part of his agreed contract price - as the contract had not been completely performed, court held was not entitled.

Exceptions to the entire obligations rule:
- Acceptance of partial performance
- Substantial performance
- Divisible obligations; and
- Wrongful prevention of performance

Question 5

What is acceptance of partial performance?

Answer 5

Where one party has only completed part of its obligation, it’s possible the innocent party rather than reject the work done, might accept that part of the performance.

Acceptance of the partial performance is at the discretion of the innocent party, if voluntarily accepts then party in default will be entitled to payment on a quantum meruit basis:

A remedy whereby the claimant may be able to claim a reasonable sum so that the defendant is not unjustly enriched. Will be assessed on an objective basis i.e. usual market price.

Note: where someone has no choice but to complete the work this will not be voluntary acceptance.

Question 6

What is substantial performance?

Answer 6

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’.

Court will consider whether the defect goes to the ‘root of the contract’.
If it does not - entitled to the contract price less a deduction for the defects.

Question 7

What are divisible obligations?

Answer 7

Some contracts are clearly intended to be divided into parts, eg payment of a salary under a fixed contract of employment.

Question as to whether a contract is divisible depends on the intentions of the parties.

Question 8

What is wrongful prevention of performance?

Answer 8

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. Innocent party has two options:

a) sue for damages for breach of contract; or

b) claim a quantum meruit.

Question 9

Defences to allegations of failure to perform

Answer 9

Tender of performance: 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.

E.g. if seller delivered goods but purchaser refused to accept delivery, seller would be relieved of liability for failure to deliver.
In instances of debt it would not relieve the debt but would of interest and damages

Question 10

How can discharge by agreement occur?

Answer 10

• By a subsequent binding contract between the parties;
  or
• Alternatively, by operation of a term of the original contract

Question 11

What is discharge by subsequent binding contract?

Answer 11

Formation of a new contract:

E.g. Discharge by mutual waiver, new contract by which parties agree to waive their rights under the old contract in consideration for being released from their obligations under the old contract.

For discharge to be effective you need accord and satisfaction - must be agreement that the obligation will be released and must be consideration for the promise to release.

Can lead to difficulties where one party has performed all its obligations but the other has not. Solution: Deed! - will avoid the need for consideration
Or maybe provide something else like payment in instalments

Question 12

What is accord and satisfaction?

Answer 12

For discharge to be effective you need accord and satisfaction - must be agreement that the obligation will be released and must be consideration for the promise to release.

Question 13

What is a condition precedent?

Answer 13

A condition which must be satisfied before any rights come into existence. The coming into existence of a contract is subject to the occurrence of a specific event - contract is suspended until the condition is satisfied.

If condition never happens - the rights and obligations never come into existence.

E..g this contract is conditional on the shareholders granting their approval

Question 14

What is a condition subsequent?

Answer 14

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.

E.g. a term providing for the right to give notice to end or a clause which entitles another party to terminate the contract if the other party commits a breach of contract of a specified seriousness.

Question 15

What is a repudiatory breach?

Answer 15

Where one party has breached a condition or an innominate term which is to be treated as a condition. This give the innocent party a right to damages and a right to terminate the contract.

Question 16

What is an anticipatory breach?

Answer 16

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 they do not intend to perform their part of the contract is said to have ‘renounced’ the contract - innocent party has an immediate right to accept the renunciation and to treat the contract as terminated.

Note: an indication of non performance in only a minor regard will not give rise to a right to terminate.

Question 17

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

Answer 17

Will put an end to all primary obligations of both parties remaining unperformed. This is prospective only - any rights and obligations which have accrued before termination remain enforceable (eg any fees owed).

Innocent party can claim damages not only arising from the breach but also the loss of the contract caused by the termination of the contract as a whole.

Question 18

What are the risks of terminating a contract for repudiatory breach?

Answer 18

The risk is that it is not a repudiatory breach only a breach of warranty.

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 as repudiating the contract. - meaning A is now the party actually in repudiatory breach.

As a result parties will usually explicitly agree a list of breaches which will give rise to a right to terminate.

Question 19

The right to election

Answer 19

The innocent party has the right to decide if the contract is terminated of to affirm the contract. Usually this will depend on financial decisions. For affirmation there must be an unequivocal commitment to continue.

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

Note: if the party does affirm a contract the innocent party will retain a claim for damages arising from the breach but it cannot terminate as a result of it - so the damages will not include a compensation for the loss of contract as a whole.

Question 20

What are the limits on the innocent party’s right to affirm the contract?

Answer 20

(a) The co-operation of the breaching party is required for continued performance of the contract; or

(b) The innocent party has no ‘legitimate interest, financial or otherwise’ in affirming the contract and continuing with performance.

In rel to (a) - should be uncontroversial - if the cooperation of the breaching party is required under the contract this will prevent the innocent party claiming the contract price.

In rel to (b) it is only in extreme cases where 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 21

What is frustration?

Answer 21

Frustration is where 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.

Radically different because:
- performance is impossible
- performance is illegal
- common purpose is frustrated

It is NOT:
- merely an increase in expense/onerous
- caused by the default of a party
- which the parties could have contemplated
- provided for in the contract

Question 22

What is the effect of frustration?

Answer 22

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 23

Frustration: impossibility and unavailability

Answer 23

Where the contract becomes impossible due to the total or partial destruction of some object necessary to the performance of the contract.

• licence to use music hall was frustrated after music hall was destroyed (and nothing for this in the contract)
• contract to install and maintain machinery in a factory was frustrated when the factory was destroyed (note factory was not subject matter but frustration still operated)
• a person becomes ill (a drummer could only work 3-4 nights a week and the contract was for 7 nights and so was frustrated)
• contract for a charter of a ship was frustrated when it was requisitioned for 5 of 12 months (making contract substantially different)

Question 24

What factors will the court consider for impossibility/unavailability (frustration)?

Answer 24

• Terms of the contract itself
• Its matrix or context
• The parties knowledge, expectations, contemplations and assumptions (in particular as to risk, as at the time of contract
• Nature of the supervening event
• Parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances

Question 25

Frustration: performance is illegal

Answer 25

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

e.g. shipping machinery to a port in Poland occupied by Nazis in WWII. Contract was frustrated as it would be illegal.

Question 26

Frustration of purpose

Answer 26

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 it is still possible to carry out the contract.

Must be the joint purpose of the parties, not enough that it is the purpose of just one party.

Krell v Henry: a contract to hire a room on pall mall to watch the coronation procession which would pass along the street was found frustrated when the procession was cancelled even though no express mention was made of this in the contract. - Found as the rooms were only hired for the event and both parties understood the purpose was only to have a view of the procession.

Contrast: a steamboat hired for viewing the naval review and for a days cruise’ was not frustrated when the naval review was cancelled.

In canary wharf v European Medicines Agency: found having to relocate because of Brexit was not a frustration - they had bargained on the possibility of EMA not fulfilling the full term.

Question 27

Frustration: contracts that become more difficult or expensive to perform

Answer 27

VERY unlikely that a contract will be frustrated merely because an event has occurred which renders that contracted for by one party worth less than he anticipated, or where an unexpected event merely makes the contract more expensive to perform.

Question 28

Self-induced frustration

Answer 28

Frustration will not apply where the event was induced by one of the parties i.e. because the even 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 defendant will be in breach of contract.

E.g. where decide to use one boat to fulfil a contract and then enter to use the other boat in another contract but the original boat sinks so you cannot fulfil the first contract - this is self-induced because it was their choice to allocate the boats.

Question 29

Foreseeable events

Answer 29

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.

e.g. civil unrest and economic crisis in Greece was not frustration because signs of unrest had already started when the contract was made and so could have been foreseen and would have assessed the risk before entering into the contract

Question 30

Express contractual provision

Answer 30

Doctrine of frustration cannot override express and unambiguous contractural provision for the frustrating event.

Often contracts will contain a force majeure clause: provide for ‘act of God’ or terrorism

Question 31

What are the consequences of frustration?

Answer 31

All future obligations are automatically discharged by the common law.

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

• money paid before 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.

Question 32

How does the court determine what expenses can be recovered by the payee?

Answer 32

Court has 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.

Expenses incurred by the payee must be directly related to an attempt to perform the contract. 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.

If exceeds amount of advance payments/invoices can’t claim them back - if nothing was paid or payable before the frustrating event - the party will not be able to get any expenses at all.

Question 33

What if one party gained a benefit before the frustration?

Answer 33

Where the benefit conferred before frustration is a non-monetary benefit, the act provides that a party may required to pay a just sum for it.

Court will assess value of benefit and the sum which should be awarded - the sum cannot exceed the value of the benefit obtained.

Note: where the value of the benefit (eg development of oil fields) has been reduced by the frustrating event (eg Libyan government seizing it) this will have an effect on claim - if benefit is reduced to nil - the provider of the benefit has no claim.

Question 34

Who is the burden of proof on to show whether a party has a legitimate interest in performing the contract?

Answer 34

The burden of proof is on the contract breaker to show that the innocent party did not have a legitimate interest in affirming. It is only in exceptional circumstances that the party in breach of condition will be able to discharge this burden and fetter the innocent party’s right to affirm.