Discharge by performance, agreement, breach and/or frustration

Question 1

Ways in which a contract might be discharged

Answer 1

(a) Performance
(b) Agreement
(c) Breach
(d) Frustration

Question 2

Discharge by performance - the entire obligations rule

Answer 2

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 3

Exceptions to the entire obligations rule

Answer 3

(a) Acceptance of partial performance
(b) Substantial performance
(c) Divisible obligations
(d) Wrongful prevention of performance

Question 4

Acceptance of partial performance

Answer 4

• Possible that the innocent party might accept part of the performance.
• If the innocent party voluntarily accepts partial performance, then the party in default will be entitled to payment on a quantum meirut basis (‘as much as he deserves’)
• the court will assess a quantum meirut award on an objective basis
• Sumpter v Hedges: there had not been voluntary acceptance of patrial performance because the court felt that the innocent party had no choice but to complete the work.

Question 5

Substantial performance

Answer 5

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.’

• The court considers the nature and extent of the defect, by measuring the cost of remedying the defect against the contract price.
• If the defect is too serious, the party who rendered the defective performance will not be entitled to recover money.

Question 6

Divisible obligations

Answer 6

• Some contracts are clearly intended to be divided into parts, e.g. a fixed contract of employment
• If this is the case, then the performing party is entitled to payment for each part when it is performed
• The question as to whether a contract is divisible or entire depends upon the intention of the parties

Question 7

Wrongful prevention of performance

Answer 7

Where one party performs part of the agreed obligation, and is then prevented from completing the rest by some fault of the other party, he will be entitled to payment (Planche v Colborn)

The innocent party has two options:

(1) sue for damages for breach of contract
(2) claim a quantum meirut

Question 8

Defences to allegations of a failure to perform

Answer 8

• Tender of performance: The promisor must show that he unconditionally offered to perform his obligations in accordance with the terms of the contract, but the promisee refused to accept such performance e.g. if the seller delivered goods but the purchaser refused to accept delivery
• Performance by a third party: It is possible that the service can be provided by a third party, but this is not always the case. Robson v Drummond: a person had agreed to keep a carriage in repair for five years by the court but was not entitled to delegate performance as this was seen as a contract of personal service. British Waggon v Lea: permissible for a contract to let out railway wagons and to keep them in repair to be performed by someone else. It did not matter to the hirer who kept the wagons in repair.

Question 9

Two ways to discharge by agreement

Answer 9

(a) By a subsequent binding contract between the parties;

(b) By operation of a term of the original contract

Question 10

Discharge by subsequent binding contract

Answer 10

Where both parties have obligations which remain unperformed, the contract may be discharged by mutual waiver. This is a new contract by which each party agrees to waive their rights under the old contract in consideration for being released from their obligations under the old contract. (Wilson)

Question 11

Elements required for discharge by subsequent binding contract

Answer 11

(1) Accord (agreement to release obligation)
(2) Satisfaction (consideration for the promise)

This can raise difficulties where one party has performed his obligations but something remains to be done by the other. This may be resolved by releasing the other party by subsequent agreement under deed instead, or offering something different as consideration.

Question 12

Discharge by operation of a term in the contract

Answer 12

Such a term may be either a condition precedent or a condition subsequent.

Question 13

Condition precedent

Answer 13

• A condition which must be satisfied before any rights come into existence.
• Where until a specific event occurs, the remaining rights and obligations in the contract are not binding.

Question 14

Condition subsequent

Answer 14

A term providing for the termination of the contract an discharge of outstanding obligations in the event of something specific happening (Head v Tattersall)

e.g. when a particular date occurs

Question 15

Discharge for breach

Answer 15

• Usual remedy for breach of contract is an award of compensatory damages
• In certain circumstances, the innocent party may treat the contract as terminated for repudiatory breach. This is where one party has breached a term which is either a condition or innominate term to be treated as a condition (Bettini v Gye)

Question 16

Party’s choice

Answer 16

Generally, where there has been a repudiatory breach, a party has a choice as to whether to terminate or affirm. The choice is not entirely unrestricted.

Question 17

Anticipatory breach

Answer 17

• Where a party indicates he will not perform his contractual obligations in advance of the date for performance.
• A party who, by words or conduct, leads a reasonable person to conclude that he does not intend to perform his part of the contract is said to have ‘renounced’ the contract.
• The innocent party has an immediate right to accept the renunciation and treat the contract as terminated.
• Hochster v De la Tour: An indication that a party will only not perform his contractual obligations in a minor regard will not give rise to the right to terminate. If a party wants to rely on an anticipatory breach to terminate, then it will need to demonstrate that had the breach occurred at the time the performance was due, it would have been repudiatory.

Question 18

The effect of terminating a contract for repudiatory breach

Answer 18

• Where a contract is terminated for a repudiatory breach this puts an end to all primary obligations of both parties remaining unperformed.
• The innocent party can claim damages arising from the breach but also the loss of the contract
• available only in exceptional cases: the Hong Kong Fir test, the breach should ‘deprive the injured party substantially of the whole benefit of the contract.’
• any rights and obligations which have accrued before termination remain enforceable.

Question 19

The risk of wrongful termination

Answer 19

• Termination of a commercial contract for repudiatory breach involves a high degree of risk
• If a court later finds out it was a breach of warranty and the party had no right to terminate, it will be that party who is actually now in repudiatory breach

Question 20

The right of election

Answer 20

Where there has been a repudiatory breach, the contract is terminated only if the aggrieved party makes the election to treat the breach as repudiating the contract. The innocent party must make its decision to terminate the contract known to the party in default (Vitol v Norelf)

When a party makes a choice whether to affirm or terminate, he will only be bound by the choice if he was aware of all the facts giving rise to the right to elect, and of the fact that the right to elect existed (Peyman v Lanjani)

The innocent party is allowed a period of time in which to decide.

Question 21

Benefits of affirmation

Answer 21

• the contract survives and the rights of the innocent party are preserved
• might be a simpler choice if it relates to a major project rather than finding a new contractor
• the values of a damage claim is uncertain so might be financially wiser
• where a party has indicated an intention not to perform its obligations, the innocent party can still affirm, perform its own obligations and claim the sum due under the contract (although damages would of course only be for breach and not for the loss of the contract as a whole) (White v McGregor)

Question 22

How a contract is affirmed

Answer 22

• must be evidence of a clear and unequivocal commitment to continuing with the contract (Yukong v Rendsburg)

Question 23

Limits on affirmation

Answer 23

A claimant would not be entitled to affirm and would be confined to a claim in damages if:

(a) The co-operation of the breaching party is required for continued performance of the contract;
(b) The innocent party has no ‘legitimate interest, financial or otherwise’ in affirming the contract

In relation to (a), if the innocent party requires co-operation of the breaching party, this will also prevent the innocent party claiming the contract price.

Question 24

When will the innocent party not have legitimate interest in affirming the contract?

Answer 24

• only in extreme cases where:
• (a) the burden is on the contract breaker to show that the innocent party has no legitimate interest in performing the contract rather than claiming damages;
• (b) This burden is not discharged by merely showing that the benefit to the other party is small in comparison to the loss to the contract breaker;
• (c) applies only in extreme cases, where damages would be an adequate remedy and where an election to keep the contract alive would be unreasonable

Question 25

Discharge by frustration

Answer 25

‘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.’ (Davis Contractors v Fareham)

Question 26

Things that are not a frustrating event

Answer 26

(a) If it is caused by the default of a party
(b) If it is provided for in the contract
(c) If it is merely an increase in expense or onerousness
(d) If it is something which the parties could reasonably have contemplated.

Question 27

What happens when a contract is frustrated?

Answer 27

If a contract is frustrated, it is brought to an end automatically. Frustration may be raised as a defence to an action for breach of contract.

Question 28

What might render performance radically different

Answer 28

(a) Performance being impossible
(b) Performance being illegal or prevented by government intervention
(c) The common purpose of the contract being frustrated.

Question 29

Performance is impossible - examples

Answer 29

Taylor v Caldwell: contract to use a music hall for a series of concerts. Before the first concert, the Hall was destroyed by fire. No provision was made for this risk in the contract. Destruction was without the fault of either party, and the concerts could not be given as intended.

Condor v The Barron Knights: the drummer in a music group was taken ill. The contract was frustrated because the drummer was not capable of performing the contract in the way intended.

Question 30

Difficulties establishing whether performance is impossible

Answer 30

Tamplin SS Co v Anglo-Mexican Petroleum: the court had to decide whether the requisitioning of a ship for the purposes of war in Feb 1915 frustrated a 5 year charterparty which was to last until Dec 1917. The court held that it did not, on the basis that war would soon be over and a considerable proportion of the charterparty would remain.

However, amount of time left is only one consideration in establishing frustration. Factors to be considered too: the terms of the contract, its content, the parties’ knowledge, expectations, contemplations as to risk at the time of the contract

Question 31

Performance is illegal/prevented by government intervention

Answer 31

1. Change in the law = e.g. where war breaks out, and to continue performance would be trading with the enemy (Fibrosa Spolka v Fairbairn)
2. Government intervention = e.g. contractors required by government order to stop work and sell the plant (Dick Kerr v Met Water Board)

Question 32

Common purpose is frustrated

Answer 32

Krell v Henry: defendant hired a room to view the coronation procession. The processions did not take place on the days appointed. The contract was frustrated it was recognised by both parties that the foundation of the contract was to view the procession.

Herne Bay Steamboat v Hutton: steamboat company contracted to lend their steamboat to the defendant ‘for the purpose of viewing the Naval Review and for a day’s cruise around the fleet.’ Held that the defendant was not discharged from contractual obligations because (a) the object of hiring the vessel was the defendant’s alone and no concern to the plaintiff, and (b) the viewing of the Naval Review was not the foundation of the contract as they could have still cruised around the fleet.

Question 33

Merely an increase in expense/onerousness

Answer 33

Very rare for a contract to be held to have been frustrated by an event which leaves it possible to perform but simply makes it more onerous to one party.

Question 34

Caused by the default of a party

Answer 34

The party alleging self-induced frustration must prove that the other party is at fault.

Question 35

Which the parties could reasonably have contemplated

Answer 35

• 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.
• Flying Music Company v Theater Entertainment: the negative effect of civil unrest in Greece and the economic crisis could not amount to frustration because at the time the contract concluded there were already signs of unrest. The parties had the opportunity to deal with the risk in the contract.
• Canary Wharf v European Medicines: 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 would not be relevant.

Question 36

Provided for in the contract

Answer 36

• The doctrine of frustration cannot override express and unambiguous contractual provision for the frustrating event
• Commercial contracts often contain a force majeure clause, which states what will happen should a set of circumstances materialise
• Force majeure clauses often refer to acts of terrorism, war and acts of God.

Question 37

Consequences of frustration

Answer 37

• common law set out consequences, but the common law was significantly altered by the Law Reform (Frustrated Contracts) Act 1943
• The Act will govern most instances of frustrated contract but the common law remains important for 2 reasons:
• (1) where the contract contains provisions dealing with the consequences of frustration, the Act will only apply to the extent that it is consistent with the contract - so it is possible for contracting parties to exclude the Act by prior agreement
• (2) certain types of contract are not governed by the Act and so still subject to the common law

Question 38

Consequences of frustration at common law

Answer 38

• The contract is terminated at the date of the frustrating event
• Any rights which accrued before the frustrating event are enforceable (e.g. services performed but not yet paid for) but the parties are discharged from future obligations.
• Issue arises where there has been an advance payment such that the customer has paid for services which have not yet been performed

Question 39

Issue with advance payments

Answer 39

• where there has been a total failure of consideration, money already paid could be recovered and money due and payable need not be paid (Fibrosa Spolka)

Question 40

Consequences under statute - the Law Reform (Frustrated Contracts) Act 1943

Answer 40

• does not apply to future obligations. If a frustrating event occurs, future obligations are automatically discharged by the common law. The Act deals with obligations arising prior to the frustrating event.
• Section 1(2) - money paid can be recovered, even though the failure of consideration may only be partial. Money payable will cease to be payable
• also gives the court discretionary power to order retention or recovery of money as it thinks JUST in all the circumstances to account for expenses incurred by the payee
• the amount retained or recovered is capped and cannot exceed (i) the actual expenses incurred and (ii the amount paid or payable prior to the frustrating event.
• s 1(3) - a party who has gained valuable benefit under the contract before the frustrating event may be required to pay a just sum for it.
• ‘benefit’ means the end product of the claimant’s services, not the services themselves.
• where the value of the benefit has been reduced to nil by the frustrating event, the provider of the ‘benefit’ has no claim.