Discharge and frustration

Question 1

How can a contract be discharged by expiry?

Answer 1

A contract will expire when it is completed according to its own terms. This is often by date but can also expire based on the occurrence of an event.

Question 2

What is the entire obligations rule?

Answer 2

The entire obligations rule states that a contract is only discharged when all contractual obligations have been fulfilled. Generally, a promisor who only partially performs their obligation is not discharged from that obligation.

Question 3

What are the exceptions to the entire obligations rule?

Answer 3

1. Acceptance of partial performance-If the innocent party voluntarily accepts partial performance, then the party in default will be entitled to payment on a quantum meruit basis (as much as it deserved): Sumpter v Hedges (1898).
2. Substantial performance-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. Does the defect go ‘to the root of the contract’?
3. Divisible obligations-some contracts are clearly intended to be divided into parts e.g. payment of a salary under a fixed contract of employment.
4. Wrongful prevention of performance-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 sue for damages or to claim a quantum meruit.

Question 4

What is required to raise the defence of tendered performance to allegations of failure to perform?

Answer 4

For this to be successful, the promisor must show:

-that they unconditionally offered to perform their obligations in accordance with the terms of the contract;
-but the promisee refused to accept such performance.

Question 5

In what two ways can a contract be discharged by agreement?

Answer 5

1. By a subsequent binding contract between the parties-for this to be effective, there must be agreement that the obligation will be released (accord) and there must be consideration for the promise to release a party from the obligation (satisfaction).
2. By operation of a term of the original contract-a condition precedent or condition subsequent.

Question 6

What is a repudiatory breach of contract at common law?

Answer 6

This is where one party has breached a condition of the contract, entitling the other party to treat the contract as terminated.

Question 7

What is an anticipatory breach and what right does an innocent party have when this is committed?

Answer 7

This is where a party indicates they will not perform their contractual obligations in advance of the date for performance. The innocent party has an immediate right to ‘accept’ the renunciation and treat the contract as terminated.

Question 8

What is the right of election?

Answer 8

Where there has been a repudiatory breach of the contract, the innocent party has the right to elect to affirm the contract and claim damages or repudiate the contract and claim damages.

The innocent party must make this known to the defaulting party.

Question 9

Why may an innocent party choose to affirm the contract after a repudiatory breach?

Answer 9

Because the contract survives and the rights of the innocent party are preserved-this is helpful in major commercial projects.

To affirm a contract, there must be evidence of a very clear and unequivocal commitment to continuing with the contract.

Question 10

What are the two limitations on an innocent party’s right to affirm the contract in response to a repudiatory breach?

Answer 10

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

b) The innocent party must have a legitimate interest, financial or otherwise, in affirming the contract and continuing with performance

Question 11

What is the definition of frustration as set out in Davis Contractors v Fareham Urban District Council (1956)?

Answer 11

Frustration occurs whenever the law recognises that, without default of either party, a contractual obligation has become incapable of being performed because the circumstances in which the performance is called for would render it a thing radically different from that which was undertaken by the contract.

Question 12

What is the effect of frustration on a contract?

Answer 12

The effect of frustration is to automatically relieve a party from all 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. It may be raised as a defence to an action for breach of contract.

Question 13

In what three ways may a contract be frustrated?

Answer 13

1. Performance is impossible e.g. the subject matter of the contract is destroyed or a party to the contract is ill/dead.
2. Performance is illegal-a change in the law or state intervention may render performance of the contract illegal.
3. Common purpose is frustrated-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.

Question 14

Will a contract become frustrated if it becomes more difficult or expensive to perform, refer to Davis Contractors v Fareham Urban District Council (1956)?

Answer 14

No, it is very rare for a contract to be frustrated in these circumstances as performance will still be possible just more onerous to one party.

Davis Contractors v Fareham Urban District Council (1956): the C incurred an additional cost of £17,600 on top of the £92,400 contract price for building houses for the D due to lack of skilled labour, materials and weather conditions. They sought to claim the additional cost from the D. The contract was not frustrated as there had been no default of either party.

Question 15

Will a contract become frustrated if it is via self-induced frustration, refer to J Lauritzen AS v Wijsmuller BV (Super Servant Two) (1990)?

Answer 15

No, frustration will not apply in these circumstances.

J Lauritzen AS v Wijsmuller BV (Super Servant Two) (1990): the D agreed to transport Cs oil rig using one of their barges, SS1 or SS2. The D elected to use SS2 for this contract and before the date of performance entered into other contracts to use SS1. SS2 sank and the D could not use SS1 as it was needed to perform other contracts. It was held that it was the Ds choice to allocate SS1 to other contracts making it impossible to perform their contract with the Cs-it was self-induced frustration.

Question 16

Will a foreseeable event render a contract frustrated and what is the test for whether an event was foreseeable?

Answer 16

No, the doctrine of frustration is a means of allocating unforeseen risks. If the event was foreseeable, the doctrine of frustration will be less likely to apply.

The key test is whether the event would have informed the manner in which the parties assessed the risk of entering into the contract. Highly theoretical risks which the parties would not have taken into account are irrelevant.

Question 17

Can the doctrine of frustration override express contractual provisions?

Answer 17

No, it cannot. Force majeure clauses are often included in commercial contracts and enable the parties to allocate risk in relation to these events at the outset.

Question 18

What does the Law Reform (Frustrated Contracts) Act 1943 deal with?

Answer 18

This Act deals with obligations arising prior to the frustrating event.

Question 19

Under S1(2) Law Reform (Frustrated Contracts) Act 1943, what can be recovered from the payor in the event a contract is frustrated?

Answer 19

S1(2) makes the following provision:

-Money paid before the 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 can be recovered out of the total sum paid/payable before the event.

Question 20

What does S1(3) Law Reform (Frustrated Contracts) Act 1943 provide for in respect of non-monetary benefits?

Answer 20

S1(3) provides that where a party receives a non-monetary benefit prior to the frustrating event, the Court must a. identify and value the benefit conferred; and b. make an assessment of a just sum to be paid by that party for the benefit.